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.
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.
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:
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- Individual taxes
- Small business (Sole
Proprietorship) taxes
- Farm taxes
- Partnership taxes
- Corporate taxes
- Subchapter S corporate taxation
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Trust taxes
Estate taxes
Tax-exempt (non-profit) taxes
Payroll taxation
Representation
Ethics including penalty rules
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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).
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.
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.
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