As tax season quickly approaches, one of the many decisions to be made is: who will prepare my tax return? Whether you’re in the market for a professional tax preparer or have an established relationship with one, you should know what the various designations mean. Currently, the most common designations are the Enrolled Agent (EA) and the Certified Public Accountant (CPA).
First, a little history.
Prior to 2011, anyone could prepare a return and sign it as a “paid preparer.” But along came the IRS Return Preparer Initiative with the goals of regulating the tax preparation industry, improving taxpayer compliance, and setting professional standards. Under the Initiative, anyone that was paid to prepare a tax return had to register with the IRS and obtain a Preparer Tax Identification Number (PTIN).
Registered Tax Return Preparer
Taking it a step further, the IRS phased in a new designation: Registered Tax Return Preparer (RTRP). To be an RTRP, a preparer had to pass a 2.5-hour competency test consisting of 120 questions pertaining to tax law, individual (Form 1040) tax prep, and ethics. Each year, an RTRP had to complete 15 hours of continuing education to include 10 hours of general federal tax law, 3 hours of tax law updates, and 2 hours of ethics.
Once these hurdles were complete, a preparer was rewarded with only limited representation rights. Meaning, they could only represent clients before the IRS for whom they had prepared and signed tax returns. In other words, they could defend their own work but not the work of others.
The first RTRP certificates were issued in March 2012 but the program was suspended, not even a year later, on January 18, 2013 due to a court ruling that the IRS lacked the authority to mandate competency testing.
PTIN Holders
You will no longer see the RTRP designation when searching for a tax preparer (if you do, just know that it is no longer valid) but the PTIN still exists. In fact, the PTIN has been around since the year 2000. From 2000-2010, the PTIN was used as a way to protect the privacy of tax return preparers. Prior to the PTIN, a preparer was required to report their own social security number in the signature section of the tax return. It is now a requirement that all tax return preparers obtain a PTIN regardless of the preparer’s credentials. A PTIN holder with no other credentials may only prepare and sign tax returns. Further, as of January 1, 2016, they have no representation rights and are unable to represent a client before the IRS for any reason.
Annual Filing Season Program Participant
On the heels of the RTRP program’s demise, the IRS developed the Annual Filing Season Program in June 2014. Participation is voluntary for tax return preparers who hold no other credentials. The program’s purpose is to encourage education, tax season readiness, and a higher level of professionalism. The only requirements to receive this IRS Certification is 18 hours of continuing education, including a 6-hour federal tax law refresher course, and a PTIN. Participants gain only limited representation rights before the IRS, or the right to defend their own work.
Enrolled Agents
The Enrolled Agent program was developed by the IRS as a way of providing credentials to tax return preparers who are not CPAs. The Enrolled Agent designation has been around for some time but gained in popularity when the IRS began regulating the tax preparation field, around 2011, and especially in 2016 when PTIN representation rights were restricted.
To become an Enrolled Agent, a preparer must have experience as a former IRS employee or pass a 3.5-hour, 3-part exam consisting of individual tax issues, business tax issues, and representation/practices and procedures. In addition, the preparer must pass a suitability check, including tax compliance and a criminal background check, adhere to ethical standards, and follow rules of professional conduct (honesty, integrity, and objectivity). To remain an Enrolled Agent, 72 hours of continuing education is to be completed every 3 years (with a minimum of 16 hours each year), including 2 hours of ethics each year.
Enrolled Agent is strictly an IRS designation and applies only to tax return preparation. This credential allows for full representation of taxpayers before the IRS.
Certified Public Accountant
The CPA designation is the hardest to obtain. This is a license awarded by the State and each State has their own requirements that need to be fulfilled, not only to receive licensing, but also to retain licensing. CPAs generally have more education and experience in a wider variety of areas.
“Back in my day,” CPA candidates would convene at the Elks Lodge in Montpelier, VT to sit for a 2.5-day exam consisting of five sections in the areas of tax, business law, auditing, accounting theory, and accounting practice. All five parts were to be taken at the same time. It was grueling! Along with passing the Uniform CPA exam, requirements included the equivalent of a Bachelor’s Degree, an ethics course, and 2 years of accounting/auditing experience.
These days, additional education (typically, a master’s degree) can be swapped for one year of experience. The exam has been shortened to four sections (auditing and attestation, business environment and concepts, financial accounting and reporting, and regulation) which can be taken one at a time but must be passed within a certain time frame. According to Pearson testing, the Uniform CPA exam is “…the toughest final exam one can face… slightly less than 40% of those that take the test actually pass it the first time.” (Compared to the Enrolled Agent exam, which has a pass rate of 71%, according to Gleim Exam Prep.)
Once licensed in Vermont, a CPA must take 80 hours of continuing education over 2 years, including 8 hours of accounting/auditing and 4 hours of ethics. CPAs have full representation rights before the IRS.
A CPA is held to the strictest rules of professional conduct in terms of independence, integrity, and objectivity. If a violation is reported, the CPA must stand before the State Board of Professional Regulations and risks having their license suspended or revoked.
Because of the strict licensing requirements, when compared to an Enrolled Agent, you would think a CPA would charge higher fees because, well… they’ve earned it! However, you should find that the fees for tax preparation are very similar. A CPA will, typically, offer a wider range of services outside of tax return preparation.
So, there you have it! Now you can make an informed decision about the type of tax preparer you want to work with. Choosing a CPA over an Enrolled Agent, or vice versa, isn’t wrong. It all comes down to finding a good fit for your current and future needs. If you are involved in a business with complicated bookkeeping, going through complications in your personal life (such as needing an expert witness for divorce court), or want to discuss financial aspects of your future (such as investment planning, retirement planning, and budgeting), a CPA is your best option.
At Angolano & Company, we pride ourselves on our CPA designations, our level of experience, and the education we obtain every year. But we also value the human connections we establish as well as meeting the needs of every client we come into contact with. If you’d like us to be part of your financial team, we’d love to meet you!