A. IRS PTIN Registration & Electronic Filing (e-File) Mandate

Under federal tax law, anyone who prepares or assists in preparing federal tax returns, claims for refund, or information returns for compensation must register with the IRS and obtain an active Preparer Tax Identification Number (PTIN). The PTIN must be renewed annually before the start of each tax filing season. A paid preparer must enter their PTIN and sign the Paid Preparer declaration on every return filed.

Additionally, under the IRS e-file mandate, tax preparers who expect to prepare and file 10 or more individual or business tax returns during a calendar year must register as an Authorized IRS e-file Provider and electronically file all client returns. Filing paper returns on behalf of clients without an approved IRS hardship waiver (Form 8944) exposes preparers to administrative penalties.

Ghost preparing (preparing returns for money but refusing to sign or enter a PTIN) is a severe federal offense strictly targeted by IRS Criminal Investigation enforcement.

B. Form 8867 Due Diligence Requirements for Credits & Head of Household

The IRS holds tax preparers to strict due diligence standards when claiming specific high-risk refundable credits and filing statuses. Under Treasury Regulation § 1.6695-2, paid preparers must complete and submit Form 8867 (Paid Preparer’s Due Diligence Checklist) whenever preparing returns claiming the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), Credit for Other Dependents (ODC), American Opportunity Tax Credit (AOTC), or Head of Household (HOH) filing status.

To fulfill the four core due diligence requirements, a tax preparer must:

1. Complete and Submit Form 8867: File Form 8867 electronically alongside Form 1040.
2. Compute the Credit Correctly: Complete the applicable credit worksheets or equivalent tax software computations.
3. Satisfy the Knowledge Requirement: Ask the client reasonable, probing questions when provided information appears incomplete, inconsistent, or incorrect, and document the client’s answers in writing.
4. Retain Records for 3 Years: Keep copies of Form 8867, credit worksheets, client-provided documents (Form W-2, 1099, birth certificates, school records), and notes of interviews for 3 years from the filing deadline.

Failure to meet due diligence standards results in an automatic IRS penalty of $600+ per failure per credit under IRC § 6695(g).

C. Client Confidentiality (IRC § 7216) & FTC Safeguards Data Security

Tax preparers possess sensitive personal identifiable information (PII) including Social Security Numbers, bank account numbers, dependent details, and income records. Under Internal Revenue Code § 7216, it is a federal crime for a paid tax preparer to disclose or use any tax return information without explicit written consent signed by the taxpayer (Section 7216 Consent Form).

Furthermore, under the revised Federal Trade Commission (FTC) Safeguards Rule, professional tax preparation firms are classified as financial institutions. Tax practices must implement a written Information Security Plan (WISP) featuring multi-factor authentication (MFA), end-to-end data encryption, employee security training, and secure cloud storage protocols to prevent data breaches and identity theft extortion.

D. Treasury Circular 230 Ethics & Penalties for Unreasonable Positions

Credentialed tax practitioners operating before the IRS are governed by Treasury Department Circular 230. Circular 230 sets strict professional standards requiring competence, prompt disposition of pending IRS matters, accurate advice, and complete avoidance of unconscionable fees or conflicts of interest.

Under IRC § 6694, penalties are assessed against tax preparers who take “unreasonable tax positions” on a return that lack substantial authority or reasonable basis. Penalties start at $1,000 or 50% of the income derived for understatements due to unreasonable positions, escalating to $5,000 or 75% of income derived for willful, reckless, or intentional disregard of tax rules and regulations.

E. Recordkeeping Requirements & Form 8879 Sign-off Procedures

A paid preparer must provide a complete, signed copy of the tax return to the client no later than the time the return is presented for signature. Taxpayers must sign Form 8879 (IRS e-file Signature Authorization) before the preparer transmits the electronic return to the IRS.

Tax preparers must retain a copy of every return prepared or maintain a master list containing client names, TINs, tax years, and return types for a minimum of 3 years following the close of the tax period, available for IRS inspection upon request.