Question: Sandy, the custodian of her 12-year-old granddaughter Sharon, passed away in May 2024. After Sandy’s death, Sharon moved in with her aunt. If Sandy had not passed away, she would have been eligible to claim the earned income credit (EIC) with Sharon as her qualifying child, assuming all other EIC requirements were met. Who is eligible to claim EIC with Sharon as a qualifying child: Sandy on her final return, or Sharon’s aunt?

Answer: Either Sandy (on her final return) or Sharon’s aunt could claim EIC with Sharon as a qualifying child if all other EIC requirements are met. A key requirement for a qualifying child is that the child must live with the taxpayer for more than half the year (§ 32(c)(3)).

When Sandy passed away in May 2024, her tax year became a short tax year (January to May), meaning Sharon lived with Sandy for her entire tax year. As a result, Sharon qualifies as a qualifying child for EIC on Sandy’s final return. If Sharon subsequently moved in with her aunt, she could potentially claim EIC for Sharon, assuming all other requirements are met.

However, only one taxpayer can claim EIC with Sharon as a qualifying child. If Sandy’s personal representative and Sharon’s aunt cannot agree on who will claim Sharon, the IRS tie-breaker rules will apply (§ 32(c)(1)(A)). The tie-breaker rules prioritize parents; since Sharon did not live with either parent during the tax year, both would be ineligible to claim Sharon as a qualifying child. Sharon lived with both her grandmother and aunt for more than half of their respective tax years, so the custodian with the higher adjusted gross income (AGI) will be entitled to claim EIC (§ 32(c)(1)(B)). The fact that Sandy passed away does not prevent her personal representative from claiming EIC for her on Sandy’s final return if all other requirements are satisfied (§32).

On Dec. 20, the IRS and Treasury Department issued proposed regulations that would update the rules governing tax practice before the IRS for the first time in more than a decade. The rules are included in Treasury Department Circular No. 230 and apply to interactions specified practitioners have with the IRS concerning the tax matters of their clients.

The following is a list of the most notable changes the proposed regulations would make to Circular 230.

1. Eliminate references to registered tax return preparers. In June of 2011, the Treasury Department and IRS established the qualifications for registered tax return preparers who were subject to Circular 230. However, the IRS stopped using the designation in 2014 after a federal court found that preparing tax returns did not constitute practice before the IRS and barred the agency from using the designation. The proposed regulations would remove the references to registered tax return preparers that remain in Circular 230.

2. More actions would qualify as disreputable conduct. A practitioner who engages in disreputable conduct, as defined in Circular 230, can be disbarred or suspended from practice before the IRS.

   • Failing to inform client of noncompliance. Under the proposed regulations, knowingly failing to inform a client of noncompliance, error or omission would constitute disreputable conduct because it causes the practitioner to perpetuate false or misleading information to the IRS and potentially exposes the client to adverse consequences. The obligation to notify clients would only apply to returns prepared, approved or submitted during the representation of a client. The proposed regulations also instruct practitioners that they must consider whether they can continue meeting their obligation to exercise diligence as to the accuracy of a return if the client refuses to take corrective action.

   • Contingent fees for refund or credit claims. The proposed regulations would move the prohibition on preparers charging contingency fees for refund or credit claims from the section of Circular 230 governing refund claims to the section on disreputable conduct. Following the change, the charging of contingency fees for the filing or preparation of an original tax return or a claim for a refund or credit would be defined as disreputable conduct. The change was made in response to a federal court ruling that found the IRC can’t prohibit the charging of contingent fees for ordinary refund claims under its authority to regulate practice before the agency.

   • Failure to follow tax laws. The proposed regulations would classify a practitioner’s willful failure to follow any federal tax law as disreputable conduct because it reflects a lack of due regard for those laws.

3. Broaden the prohibition on negotiating client checks. Under the current version of Circular 230, practitioners are barred from endorsing or negotiating checks issued to their clients with respect to their federal tax liability. The proposed regulations would broaden the prohibition to apply to all electronic payments to clients with respect to a tax liability, including prepaid debit cards, phone or mobile payments, or forms of electronic payments. This prohibition would apply to payment methods not currently used by the Treasury Department.

4. Add to Circular 230’s list of best practices. The proposed regulations would revise Circular 230s best practices section to add the following practices:

   • Create a data security policy to maintain safeguards with respect to client information and establish a plan and procedures for responding to data breaches. This best practice would likely be satisfied through a written information security plan (WISP), which is required for tax practices.

   • Identify, evaluate and address any mental impairment that could adversely impact a practitioner’s ability to effectively represent a client before the IRS. This would include mental impairments arising out of, or related to, age, substance abuse, a physical or mental health condition, or some other circumstance.

   • Establish a business continuity and succession plan that includes procedures and safeguards related to the cessation of a practice or the occurrence of an outside event, such as a natural disaster or cyberattack.

5. Duty to maintain technological competence. Practitioners would be required to have the appropriate level of knowledge, skill, thoroughness and preparation necessary for the tax matter in which they are engaged.

6. Sanctions for actions outside of tax practice. The proposed regulations would allow the IRS to sanction practitioners for conduct related to their overall fitness to practice. Sanctions would not be limited to the actions practitioners take while representing clients before the agency.

7. IRS can still investigate suspended practitioners. A federal court ruled in 2017 that the Treasury Department and IRS lacked the jurisdiction to investigate whether suspended practitioners violated the terms of their suspension because they were no longer practitioners under the terms of Circular 230. The proposed regulations would specify that the IRS has the jurisdiction to investigate suspended practitioners under 31 U.S.C. §330(c), which provides the agency with the authority to suspend, disbar or censure practitioners under Circular 230. They would also specify that suspended practitioners remain practitioners under Circular 230 for the purposes of investigating and acting on any violation of a suspension or violation of the law or regulations while they are suspended.

NATP is gathering comments from the tax preparer community about the proposed changes. The Government Relations team will review all submissions and include relevant feedback in our comments for the public hearing on March 6.

Question: Jim, age 60 and single, receives a Form W-2, Wage and Tax Statement, reporting Box 1 income of $45,000. He also files Schedule C (Form 1040), Profit or Loss From Business, reporting net profit of $80,701. Jim has no other income and his Schedule 1 (Form 1040), Additional Income and Adjustments to Income, initially reports $5,701 in deductible self-employment tax. Jim does not contribute to a 401(k) plan with his employer. For 2024, can Jim contribute to both a SEP-IRA and a Roth IRA, assuming he satisfies the contribution deadlines and meets the requirements to establish the SEP-IRA?

Answer: Yes, he can contribute to both. For 2024 Jim can contribute $15,000 to a SEP-IRA and $8,000 to a Roth IRA.

Self-employed persons can adopt a SEP plan, and the contribution limit is generally the lesser of 25% of an employee’s compensation (limited to $345,000) or $69,000. In general, for plans that have a 25% plan contribution rate, the recalculated maximum rate of 20% applies to a self-employed owner. In Jim’s case, the contribution rate is the lower of $15,000 [($80,701 - $5,701) = $75,000) x .20)] or $69,000. Therefore, $15,000 is his maximum deduction. The $15,000 will be reported on his Schedule 1.

The SEP-IRA contribution will not affect his eligibility to make a Roth IRA contribution, assuming his modified adjusted gross income (MAGI) stays within the Roth IRA contribution limits.

Jim can contribute $8,000 (including the catch-up amount) to a Roth IRA, provided his MAGI is less than $146,000. If his MAGI is $146,000 or more, but less than $161,000, his contribution is reduced. At a MAGI of $161,000 or more, no contribution is allowed. For Roth contributions, Jim’s MAGI is $105,000 [($45,000 + $80,701 = $125,701) - ($5,701 + $15,000 = $20,701)]. Because his MAGI is below $146,000, he can contribute the maximum amount to his Roth IRA.