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Sorting Out Tax Preparer Credentials

While in most states anyone can call themself a professional tax preparer and sell their services in tax preparation, California and Oregon have required a license for some time. Maryland just established a law requiring a license but grandfathers anyone who has prepared taxes for over 15 years, exempting those preparers from needing to demonstrate any compentency. (Congress continues to evaluate making a license required nationally.)

These notes refer to California.

There are four different credentials that permit a person to prepare, for a fee, a tax return for someone else. These are a CTEC Registerd Tax Preparer, Enrolled Agent (EA), Certified Public Accountant (CPA), or attorney.

CTEC Registered Tax Preparer

This license is issused by the California Tax Education Council. The requirements for this license is to pass a 60-hour course on tax preparation including a final exam. The class covers most issues commonly found on an individual's tax return. The course does not cover partnerships, corporations, trusts, non-profits, etc. (It generally does cover briefly Sole Proprietorships.) Furthermore, in order to renew this license the preparer must complete a minimum of 20 hours each year of continuing education on tax issues. (Generally the requirement for completing these courses is attendence, not demonstrated proficiency.)

Note that different documents refer to this as CTEC Registered Tax Preparer or CTEC Licensed Tax Preparer. Thus the two titles seem to be interchangable.

Should the IRS have a few questions about your return, a CTEC Registerd Tax Preparer may assist you in an "examination." (This is the first stage of the audit process. The second stage is called an "appeal." Level three is "collections" and the final stage is Tax Court.) However, their assistance is limited to returns that they signed -- they cannot assist you on a return prepared by someone else.

Most tax professionals in California are licensed at this level. For a simple individual return this is normally adequate, and in some cases may save you on the cost of the preparation. Many of these professionals also prepare the more complicated returns for partnerships, S-corps, trusts, estates, etc.

Enrolled Agent (EA)

Established by Congress in 1884, this is currently the only credential issued by the IRS. Put another way, an Enrolled Agent is the only position that is tested, licensed, and regulated by the IRS for tax preparation and representation. It permits the person to prepare a United States federal tax return or represent a taxpayer before the US government regardless of where (e.g., any state or foreign country) the taxpayer is located. Currently all states recognize an EA for similar practice within the state on state tax issues.

To qualify to become an Enrolled Agent one can either pass a rigorous exam, or have over 5 years as an auditor (or similar position) at the IRS.

The examination requirement was historically four independent exams on individual taxation (3-hour exam), small business taxation including partnerships and farms (3-hour exam), corporate taxation plus estates and trusts (3-hour exam), and ethics plus tax exempt organizations (2-hour exam). Beginning in 2006 the second and third tests were combined.

Regardless of the path followed, to become an Enrolled Agent one must demonstrate competency in the following areas:

  • Individual taxes
  • Small business (Sole Proprietorship) taxes
  • Farm taxes
  • Partnership taxes
  • Corporate taxes
  • Subchapter S corporate taxation
  • Trust taxes
  • Estate taxes
  • Tax-exempt (non-profit) taxes
  • Payroll taxation
  • Representation
  • Ethics including penalty rules
  • Technically this is a license to represent before the IRS. (The permission to prepare tax returns is secondary.) An EA may represent you before the IRS on a tax issue in the examination stage, under an appeal, through collections, and to the pre-trail phase for the final state - Tax Court. They are not restricted to representing people only on returns that they prepared. They are also not restricted to income tax issues.

    To maintain this license continuing education is also required with a minimum of 72 hours every three years, including 2 hours of ethics each year. (Generally the requirement for completing these courses is attendence, not demonstrated proficiency.) Sadly, like any other credential, the person must only demonstrate proficency when first obtaining the license.

    If you desire to verify that an Enrolled Agent is in good standing with the IRS, you can contact the IRS at either opr@irs.gov or specifically the Enrolled Practitioner Program Unit at either 313-234-1280 or epp@irs.gov. To locate an EA, or verify that they have committed to the higher standards of the National Association of Enrolled Agents, go to their web site and click on "Find an Enrolled Agent" (in the gold box on the left).

    Certified Public Accountant (CPA)

    A CPA is recognized for their training and proficency in accounting issues, including financial statement preparation, auditing, public accounting, business valuations, and general taxation. (Usually the CPA undergraduate course work includes only one class on taxes and the exam has only 10% to 12% on taxation, and that covers only very general items.) The risk with using a CPA is that they may be working outside their expertise. This is similar to working with a medical doctor. If you are having heart problems, then your Ear, Nose and Throat doctor is probably not your first choice of whom to see. Before having a CPA prepare your taxes it is best to understand their area of specialization. Even then you may be purchasing more service than you require.

    That said, some CPAs are very good at tax issues. It is a matter of their specialization.

    CPAs also have annual continuing education requirements that will vary from state to state. This education obviously does not have to focus on taxation, but on any accounting subject.

    Attorney

    While attorneys can legally prepare tax returns, there are issues to be concerned about. Certainly the first may be the hourly fee that you are paying - in all likelihood well more than what you will pay to a tax professional. In estate issues the expertise that an estate attorney offers is very good and needed. In other areas, such as family law, the track record on tax issues is often less than desired. It is not uncommon for attorneys to structure divorce decrees, or for a judge to rule accordingly in such a manner as to contradict federal tax law. In these situations the federal tax law prevails and the individulas are left with court-ordered instructions that are not accepted by the IRS. Their only recourse is additional litigation to resolve their divorce decrees in a way that is within federal tax law. (Typical situations are the definition of alimony, or a statement of filing status such as Head of Household. It is not uncommon for a decree to stipulate these things in contradiction to the law.) Obviously there are many exceptions to this, and attorneys prepare proper returns all the time. But the difficulty is for an individual to properly evaluate the tax competency of any professional.

    There is an obvious exception to this, and that is the tax attorney. These people should be very competent in tax preparation, although they will be expensive. This is practically the only person who can represent you through IRS issues all the way to the Tax Court and beyond through the court appeal process. (Yes, tax issues do sometimes go to the US Supreme Court.)

    One final consideration is if you are being investigated in relation to a felony tax issue. This is apparent if you are visited by a person from the Criminal Investigation Division (CID) of the IRS. In these cases it is very important that you hire a tax attorney to represent you. Only an attorney has the required levels of "privilege" that you will need when your case goes to court.

    "Tax software is no substitute for tax knowledge."

    Any views expressed herein are based on our best information. The content of this web site was written as general information without specific individual information and thus may not apply in all situations. This material was not written, and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

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    Janelle Ogg, EA
    Richard Ogg, EA