In IRS Information Letter 2021-0029[1] the agency addresses an issue that CPAs employed as a controller in small, closely held businesses with various related businesses run into. If they are asked to prepare a number of returns for individuals and other related entities that aren’t their employer, at what point does the controller become a paid preparer with regard to some or all of those returns.

The letter addresses this specific concern of the party to whom the letter is addressed:

As we understand the facts provided, you prepare a number of income tax returns for your employer, an S-Corporation, for whom you have been employed for over seven years. The entities you prepare returns for include partnerships and individuals. You state that these partnerships are Limited Liability Companies related to your employer, and that these individuals are employed by the taxpayer. You ask whether you are required to sign these returns as a tax preparer.[2]

The letter first addresses the general rule governing such situations:

The definition of “tax return preparer” found in section 7701(a)(36)(A) of the Internal Revenue Code (Code) includes any person who prepares a return for compensation. Section 7701(a)(36)(B) of the Code states that a person is not a preparer merely because they prepare returns for an employer for whom they are continuously employed. This exception includes persons who prepare returns for officers and other employees of the employer.[3]

The letter then provides detailed information on how the party to whom the letter is addressed can resolve his/her situation:

Treasury Regulation § 301.7701-15(f)(1)(ix) states that individuals preparing returns for an employer, including returns prepared for an officer, general partner, member, shareholder, or employee, are not considered tax return preparers.

Thus, if the individuals for whom the controller is preparing a return fits one of those categories, the controller is not a paid preparer for that return. But if an individual does not fit into one of those categories, then the controller would be a paid preparer for that return.

The letter continues to look at related corporations where an employee of one will be considered an employee of the other:

Treasury Regulation § 301.7701-15(f)(4) further states that the employee of a corporation owning more than 50 percent of the voting power of another corporation, or the employee of a corporation more than 50 percent of the voting power of which is owned by another corporation, is considered the employee of the other corporation as well. Treasury Regulation § 301.7701-15(f)(1)(ix) therefore applies to an employee preparing a return for an entity described in Treasury Regulation § 301.7701-15(f)(4) as well.[4]

As noted above, Treasury Regulation § 301.7701-15(f)(1)(ix) would allow preparing returns for an officer, general partner, member, shareholder, or employee of those organizations as well. But note that the regulation only refers to related corporations. This would appear to make the limited liability companies taxed as partnerships entities not covered by this exception, making the controller a paid preparer with regard to returns for those entities under the general rule found at Treasury Regulation § 301.7701-15(a) which states:

A tax return preparer is any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax under the Internal Revenue Code (Code).[5]

[1] INFO 2021-0029, December 30, 2021, https://www.irs.gov/pub/irs-wd/21-0029.pdf (retrieved January 7, 2022)

[2] INFO 2021-0029, December 30, 2021

[3] INFO 2021-0029, December 30, 2021

[4] INFO 2021-0029, December 30, 2021

[5] Treasury Regulation §301.7701-15(a)