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California is one of two states that regulates persons preparing tax returns for compensation. Beginning in 2011 the Federal Government will also start regulating unlicensed tax preparers. If you are paying for tax help, you will want to be sure your accountant has met both state and federal requirements. There are basically four types of tax professionals recognized by the State of California.
What is an Enrolled Agent?
An Enrolled Agent (EA) is a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals.
What does the term “Enrolled Agent” mean?
“Enrolled” means to be licensed to practice by the federal government, and “Agent” means authorized to appear in the place of the taxpayer at the IRS. Only Enrolled Agents, attorneys, and CPAs may represent taxpayers before the IRS. The Enrolled Agent profession dates back to 1884 when, after questionable claims had been presented for Civil War losses, Congress acted to regulate persons who represented citizens in their dealings with the U.S. Treasury Department.
How does one become an Enrolled Agent?
The license is earned in one of two ways, by passing a comprehensive examination which covers all aspects of the tax code, or having worked at the IRS for five years in a position which regularly interpreted and applied the tax code and its regulations. All candidates are subjected to a rigorous background check conducted by the IRS.
How can Enrolled Agent help me?
Enrolled Agents advise, represent, and prepare tax returns for individuals, partnerships, corporations, estates, trusts, and any entities with tax-reporting requirements. Enrolled Agents’ expertise in the continually changing field of taxation enables them to effectively represent taxpayers audited by the IRS.
Privilege and the Enrolled Agent
The IRS Restructuring and Reform Act of 1998 allow federally authorized practitioners (those bound by the Department of Treasury’s Circular 230 regulations) a limited client privilege. This privilege allows confidentiality between the taxpayer and the Enrolled Agent under certain conditions. The privilege applies to situations in which the taxpayer is being represented in cases involving audits and collection matters. It is not applicable to the preparation and filing of a tax return. This privilege does not apply to state tax matters, although a number of states have an accountant-client privilege.
Are Enrolled Agents required to take continuing professional education?
In addition to the stringent testing and application process, the IRS requires Enrolled Agents to complete 72 hours of continuing professional education, reported every three years, to maintain their Enrolled Agent status. NAEA members are obligated to complete 90 hours per three year reporting period. Because of the knowledge necessary to become an Enrolled Agent and the requirements to maintain the license, there are only about 46,000 practicing Enrolled Agents.
What are the differences between Enrolled Agents and other tax professionals?
Only Enrolled Agents are required to demonstrate to the IRS their competence in matters of taxation before they may represent a taxpayer before the IRS. Unlike attorneys and CPAs, who may or may not choose to specialize in taxes, all Enrolled Agents specialize in taxation. Enrolled Agents are the only taxpayer representatives who receive their right to practice from the U.S. government (CPAs and attorneys are licensed by the states).
Are Enrolled Agents bound by any ethical standards?
Enrolled Agents are required to abide by the provisions of the Department of Treasury’s Circular 230, which provides the regulations governing the practice of Enrolled Agents before the IRS. NAEA members are also bound by a Code of Ethics and Rules of Professional Conduct of the Association.
Certified Public Accountants, who are licensed by the state where they practice, have passed an accounting test known as the CPA Exam. The exam is not focused on taxation. CPAs are the only category of accounting professional permitted to examine financial statements (and related books and records) and make a written statement as to their accuracy. "Financial accounting" is what CPAs have studied in order to "attest" to the accuracy of financial statements presented by their clients to third parties.
When CPAs attest to the accuracy of financial statements they are following accounting principles which are not the same as tax accounting principles. Annual CPA audits are required by corporations that are publicly traded on stock exchanges. Sometimes privately owned companies must have certified financial statements in order to meet conditions of financing.
What is misunderstood is that CPAs are heavily trained in this socalled "attest function" and do not automatically have proficiency in taxation. Many have acquired proficiency in taxation, but this is due to additional training and on the job experience. Most small businesses do not require audited financial statements and therefore are able to utilize less costly, non-CPA services.
A third group allowed to prepare tax returns in California are tax attorneys. Most tax attorneys limit their tax preparation services to Estate Tax Returns and Trusts. Tax attorneys are usually involved in tax litigation and tax research. Few seem to practice tax accounting or general tax preparation, most likely because attorneys have much higher billing rates for legal matters than accountants have for tax work.
The final category of California tax practitioner is a CTEC tax service provider. These individuals have taken a tax course, posted a $500 bond, and been approved by the California Tax Education Council. This is the minimum bar a California tax preparer must meet in order to operate in the state. Most tax preparers in the chain firms (i.e., H & R Block, Liberty, Jackson Hewett) are CTEC preparers.
So in terms of "credentials" there are EAs, CPAs, Lawyers and CTECs. One can hold any of these qualifications without a college degree, although in some instances a college degree will reduce other requirements for obtaining a license.
Finding a professional with credentials, abilities and qualifications is often not that easy. For this reason, most successful tax professionals acquire many of their clients through referrals from other satisfied clients. But what do you do if you are new in town and don't know who to ask?
There are some basic questions you should ask any tax professional you are considering. First, what is their operating credential? What educational background do they have? How many years have they worked in taxation? Do they specialize in any areas of taxation? What bookkeeping and accounting experience do they have? Do they guarantee their work? What is the cost? Are they accepting new clients?
At Desert Tax Accounting we specialize in Individual and Small Business taxation as well as bookkeeping. Both our tax experts possess over 20 years of full time tax accounting experience, an accounting background in college, and are Enrolled Agents. The only area of accounting we do not practice is financial accounting. When this is required, we refer our clients to CPAs that are experienced in conducting financial audits.
Whether you need personal tax preparation assistance or a full range of business services, we are happy to meet with you and discuss your needs. Prospective clients are offered a complimentary 30-minute initial consultation to determine if they will be a good match for our services.
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