The United States Tax Code is riddled with arcane rules, regulations, and deadlines. While not everyone is required to file a tax return, most people who earn money are required to do so once a year. If your financial situation is straightforward, you might be able to file your taxes on your own. On the other hand, many people will need the help of a trained tax professional, such as a Certified Public Accountant (CPA) or a licensed tax preparer. It can be difficult to determine which type of tax professional (if any) is best for you. Learn the differences between different tax preparers so you can choose the one that best suits your needs.
Important Points to Remember
- A CPA is a licensed professional with advanced education and training in many areas of accounting and business.
- For basic tax preparation, a licensed tax preparer does not need advanced degrees but must demonstrate competence through a formal exam or IRS employment.
- Filers and businesses with complex tax situations, as well as those seeking financial planning and consulting services, may benefit from the services of a CPA.
- If your tax situation is straightforward and you need assistance and peace of mind with filing, a licensed tax professional will be far less expensive than a CPA.
What is a Certified Public Accountant (CPA)?
Certified Public Accountants, or CPAs, are accounting professionals who have completed the four-part Uniform CPA Exam and have met the necessary educational and professional requirements. Because individual states grant the credential, the educational and professional requirements vary. Nonetheless, all CPAs must typically perform the following tasks: Complete 150 hours of postsecondary education with a focus on accounting and business. Acquire professional accounting knowledge (duration varies by state and jurisdiction, usually one to two years) To keep your credentials in the field, you must meet the continuing professional educational (CPE) requirements (the duration varies by state and jurisdiction, usually 40 hours per year) CPAs work in a variety of settings because they must demonstrate a broad understanding of finance to earn the designation. Some of the CPA's areas of expertise include auditing financial records, governmental accounting, financial planning and analysis, litigation services, and tax preparation. CPAs have the legal authority to represent any taxpaying individual or entity before the IRS in any tax matter (IRS). Important: CPAs frequently charge a higher fee when representing a taxpayer before the IRS. According to the National Society of Accountants, taxpayers paid an average of $282 on a 1040 tax return in 2021 when itemizing and $200 when not. In a phone interview with The Balance, Robert Premselaar, CPA and senior manager at Mach & Associates, explained, "CPAs compile, review, and audit financial statements in addition to conducting tax work." "In particular, business clients often prefer to entrust their tax returns to CPAs, who act as financial advisors and have a comprehensive understanding of their operations." In addition to filing their personal taxes, business owners must often file tax estimates for their designated business.What is the definition of a tax preparer who is licensed?
A CPA isn't the only person who can help you file taxes. Many individuals and businesses pay licensed tax preparers to represent them in front of the Internal Revenue Service. In order to represent a taxpayer, a licenced tax professional must pass a three-part Special Enrollment Examination (SEE) and complete 72 hours of continuing education every three years. Tax preparers earn the status of the enrolled agent (E.A.) after meeting all of the requirements. The IRS grants E.A. status as the highest honor. Because of their prior experience, some former IRS employees may be eligible for an examination waiver and thus become E.A.s. E.A.s, like CPAs, have unrestricted taxpayer representation rights. E.A.s' expertise is limited to tax matters, unlike CPAs, making them extremely knowledgeable in their field. E.A.s, on the other hand, lack the broad financial knowledge that CPAs possess. Some tax clients may prefer a more flexible approach to tax filing over a more specific approach, and vice versa. In a phone interview with The Balance, Roberto Done, EA, a tax accountant at D.E. Caribe Taxes in the Bronx, said, "Because I focus specifically on tax, I am always aware of emerging trends." "In fact, a number of my tax clients are CPAs themselves."Limited Representation Rights For Tax Preparers
Tax preparers have a variety of credentials and can be divided into two categories: those who have unlimited representation rights and those who have limited representation rights. Tax attorneys, CPAs, and E.A.s have unrestricted representation rights. CPAs, E.A.s, and tax attorneys can represent their clients in front of the IRS in a variety of situations, including audits, payment and collection issues, and appeals. Tax attorneys are lawyers who have graduated from an accredited law school, passed their state's bar exam, and specialize in complex tax issues. Some preparers have restricted practice rights and do not have any of the credentials mentioned above. These people can only represent clients whose tax returns they prepared and signed in front of revenue agents, customer service reps, and other IRS employees. They are also prohibited from representing clients in appeals or collection cases. Limited-rights tax preparers include: Participants in the Annual Filing Season Program: These individuals are graduates of a volunteer program that was created to help taxpayers prepare for tax season by providing educational opportunities. The IRS issues a certificate of completion to those who complete a certain number of hours of training. To keep their certificate, participants must complete 15 hours of continuing education every year. Holders of a Preparer Tax Identification Number (PTIN): Tax returns can be prepared by preparers who have an active PTIN but no credentials and are not enrolled in the Annual Filing Season Program. As of January 1, 2016, this is their only authority; they are no longer allowed to represent clients in front of the IRS (except on returns they prepared and filed prior to December 31, 2015). PTIN holders frequently work at tax preparers like H&R Block.CPAs vs. Tax Preparers
CPAs Tax Preparers Education A bachelor's degree and 150 credit hours are required to focus on accounting and business. There is no requirement for a college diploma. Examination Within 18 months, the four-part Uniform CPA exam was passed. The three-part Special Enrollment Examination (SEE) was passed within two years. Professional Experience A year or two (may vary by jurisdiction) There are no prerequisites, but five years of IRS experience can be substituted for the SEE exam. Continuing Education Approximately 40 hours per year are spent on average. Every three years, 72 hours are allotted. Licensing Body Individual states and jurisdictions, as well as the AICPA IRS Specialty Tax Best For Individuals or businesses seeking a broader range of accounting services than tax preparation, such as financial statement review and compilation Individuals or businesses who don't need anything other than tax preparation or IRS issues like collection or audit actions.Which Tax Professional Is the Best Fit for You?
In short, the type of tax preparer that best suits your needs is determined by your specific circumstances. The CPA designation is the gold standard in accounting credentials, and many taxpayers value the sense of security it provides. In addition to tax work, CPAs may be a better choice for individuals and businesses seeking a broader range of accounting services. Many CPAs offer tax clients and financial statements financial planning and consulting services. A licensed tax preparer's focus is narrower, but this may be a good option for taxpayers seeking only tax-filing services. Because the IRS directly issues the E.A. credential, they often have a unique perspective on dealing with complicated IRS issues. For cost-conscious taxpayers, an E.A. is often a better option than a CPA because the hourly rate is typically lower. You may not need to hire a professional if your tax situation is simple. On the other hand, CPAs and licensed tax preparers are excellent tax preparation options if your situation is complicated enough to warrant paying for assistance.