Although tax accounting is a significant specialty within the general field of accounting, not all tax preparers need the advanced education or professional credentials typically associated with tax accountants. In fact, the Bureau of Labor Statistics defines a tax preparer as someone who prepares tax returns for individuals or small businesses, but who does not necessarily have the same level of responsibility or educational background that licensed, registered or certified public accountants have.
The Internal Revenue Service (IRS) uses the term ‘paid tax return preparer’ as a broad reference to anyone who receives compensation for preparing income tax returns. This broad classification includes proprietors of independent tax preparation firms, employees working for walk-in tax preparation offices, public accountants, licensed or registered public accountants, and even CPAs.
Historically, the tax preparation industry has been virtually unregulated, bu that’s changed quite a bit in recent years as the IRS Enrolled Agent program and designation has caught on.
New IRS Regulations: PTIN
The IRS now requires that all paid tax return preparers apply for a Preparer Tax Identification Number (PTIN) before preparing any federal income tax returns. Paid tax return preparers use this nine-digit number, which they’ll be required to re-register each year, on all tax returns or claims for refund. With the new PTIN system in effect, all paid tax preparers are required to register with the IRS and have a PTIN in order to legally prepare tax returns, even if a supervisor ultimately reviews and signs off on the documents.
Tax preparers found in violation will be notified by the IRS, and could face fines and criminal penalties for failure to either comply or desist.
Registered Tax Return Preparers: Testing and Continuing Education
The IRS will require that all tax preparers pass a competency test to officially become registered tax return preparers. Although the IRS has not released the implementation date, there’s been a buzz circulating that suggests it could happen as early as mid-2011.
All new tax return preparers must pass the competency test before they will be issued a PTIN.
The IRS is also planning to require that registered tax return preparers complete continuing professional education (CPE) each year, although they have not yet set a start date for when this will be put into effect. The 15-hour yearly requirement will include ten education hours of general federal tax law, three hours specific to recent updates in federal tax law, and two hours of ethics. When this requirement begins, affected preparers will have twelve months to meet their first year’s continuing education requirement.
There will be certain exceptions made to exam and CPE requirements for individuals who have either limited involvement in the preparation of returns or who have recognized credentials that already require CPE that well surpasses the IRS’ base requirements.
Tax preparers that are exempt from competency testing and CPE requirements include:
- Attorneys, CPAs, and enrolled agents
- LPAs from jurisdictions that give them the same rights and privileges as CPAs
- Specified supervised preparers who do not sign tax returns
- Tax preparers who do not prepare any Form 1040 series returns
Although enrolled agents, enrolled actuaries, and enrolled retirement plan agents will be required to test for competency, because their certification requirements already include CPE, they’ll be exempt form further CPE requirements.
These new regulations came about partly because of an investigation conducted by the Government Accountability Office (GAO). GAO staff members went undercover to get returns prepared through some of the big tax preparation chains. The investigation found that some preparers made significant errors in preparing returns, leading the GAO to impose stricter regulations.
Types of Tax Preparers
National and local tax preparation companies are a major player in the tax preparation industry. H&R Block is the largest national tax preparation company, followed by Jackson Hewitt Tax Service, Liberty Tax and Tax Centers of America.
These companies may have licensed, registered, or certified public accountants on staff, but the tax preparers who interact with the public often have an education at the associate’s degree level, or have received training either through company-sponsored programs or independent tax training courses.
These companies offer a low-cost option for people who have simple tax returns. However, for more complex tax returns and tax planning, other accounting professionals offer services that draw from advanced education and years of experience.
Certified Public Accountants (CPAs) are often thought of when it comes time to prepare taxes, and some CPAs are, indeed, tax professionals. Each state has its own requirements for CPA licensure, including minimum education, experience, and testing requirements. CPAs can specialize in any number of areas, taxation being one. CPAs who choose to have a tax practice need to stay up-to-date on all tax matters, either through self-study or continuing education classes. CPAs specializing in tax services can prepare any type of tax return, from simple individual tax returns to complex returns for large businesses.
Public accountants can also prepare taxes. In some jurisdictions, registered or licensed public accountants (LPA) have the same rights and practice privileges as CPAs and can practice before the IRS just as CPAs can. However, licensed or registered public accountants in the majority of jurisdictions that do not grant these same rights and practice privileges will need to pass the IRS’s tax return preparer exam as well as meet the IRS’ continued professional education requirements once these take affect.
Enrolled Agents are tax professionals licensed by the U.S. Department of the Treasury to represent taxpayers before the IRS on all tax-related issues. There’s two paths to becoming an enrolled agent: Either by passing a comprehensive exam that covers all aspects of the tax code or by having five years of experience working for the IRS as an Internal Revenue Agent or Appeals Officer, which already involves regularly interpreting and applying the tax code and its regulations.
Tax attorneys have an in-depth knowledge of the tax code combined with an understanding of accounting. Tax lawyers tend to handle complex tax situations and some offer only consulting and legal services in tax matters but do not actually prepare tax returns.
Under the provisions of Treasury Circular 230, tax attorneys, enrolled agents, and CPAs can represent taxpayers before the IRS in any audit, collection action, or appeal. Other tax preparers can only represent a taxpayer in the audit of a return that they prepared and signed themselves.
Other financial professionals that offer tax preparation services include:
- Certified Financial Planners (CFPs) who have met the education, examination, and experience requirements of the Certified Financial Planner Board of Standards
- Enrolled Actuaries who are approved to perform actuarial services defined under the Employee Retirement Income Security Act of 1974 (ERISA)
- Enrolled Retirement Plan Agents who have been approved by the IRS to practice before the IRS on certain retirement plan issues.
Tax Preparer Accreditation
Tax preparers have the option of obtaining accreditation from the Accreditation Council for Accountancy and Taxation:
- The Accredited Tax Preparer® (ATP) designation requires passing an exam of 100 multiple-choice questions that tests proficiency in preparing individual tax returns, knowledge of Form 1040 issues, and ethics.
- The Accredited Tax Advisor® (ATA) designation is for tax preparers who handle complex tax planning issues, such as those involving owners of closely held businesses, highly paid individuals, retirement planning, and estate taxation. In addition to passing a 100-question exam, becoming an ATA requires five years of experience in tax preparation, compliance, tax planning, and consulting. Forty percent of the experience must be in tax planning and consulting.
These accreditations don’t require meeting a specific educational standard, but do require a demonstrating knowledge of tax code, as well as the specific experience requirement.
For those who want more than a basic tax preparation course, an associate’s degree or certificate program in accounting can provide a basic grounding in accounting principles specific to taxation and tax preparation.
For people looking for an education in taxation beyond a bachelor’s degree, a number of graduate degrees are available, including:
- Post Graduate Certificate in Taxation
- Master’s degree in accounting with a taxation track
- Master of Science in Taxation
- Taxation MBA
- Master of Laws (LLM) in Taxation
- JD-LLM Joint Degree in Taxation
Continuing education is also available for all levels of tax professionals. Frequent and substantial changes to tax laws make staying up-to-date especially important in the area of tax preparation.
National associations that support tax professionals include:
- AICPA Tax Section
- American Taxation Association (ATA) is the tax section of the American Accounting Association.
- National Association of Tax Consultants is a professional association for tax professionals.
- National Association of Tax Professionals provides support, education, products, and services for tax professionals.
- National Association of Registered Tax Preparers offers resources tax preparers need to provide professional tax services.
- National Tax Association promotes the study and discussion of complex and controversial issues in tax theory, practice and policy, and other areas of public finance.
- National Society of Accountants bills itself as the “Association for ‘Main Street’ Tax and Accounting Professionals.”
- American Bar Association Section of Taxation