Friday, January 23, 2015

How to Choose a Tax Preparer Amid All the Alphabet Soup

Robert D. Flach for Main Street writes: There are a variety of professional credentials or licensing designations that appear as initials after a person’s name to identify his area of expertise - AIA, CFP, CPA, CLU, DVM, EMT, JD, LPA, MD, PE, PhD, RN.
When it comes to preparing Form 1040s, the only initials that indicate the individuals who possess them have proven that they are competent, via testing, and/or remain up-to-date ,via annual required continued professional education (CPE), in Form 1040 preparation are -

AFSP - Annual Filing Season Program

This is a voluntary tax preparation credential administered by the Internal Revenue Service.
The IRS does not issue to participants an actual identifiable credential or initialed designation. Those who meet the program requirements will be issued a “Record of Completion” certificate and be added to a database on “to help taxpayers determine return preparer qualifications.”
In order to receive a Record of Completion, currently unenrolled preparers must complete 18 hours of CPE in taxes annually. The CPE must include:
  • six hours of a federal tax filing season refresher course,
  • two hours of ethics, and
  • ten hours of other federal tax law topics.
The program does not require an initial competency test, but participants must pass a comprehension test upon completion of the filing season refresher course each year.
Preparers who have previously passed the RTRP competency exam (see below), are state licensed and passed an exam covering federal tax matters; have passed an examination “covering federal tax matters administered by an entity recognized by the IRS as an eligible entity,” like the tests required for the Accreditation Council for Accountancy and Taxation credentials (see below); or have passed Part 1 of the EA exam in the last two years are not be required to take the annual six-hour refresher course (they must instead take three hours per year in tax “updates”) or pass the annual comprehension test

ATP - Accredited Tax Preparer and ATA – Accredited Tax Advisor

The Accreditation Council for Accountancy and Taxation (ACAT) is a non-profit independent testing, accrediting and monitoring organization established in 1973 by the National Society of Accountants. It offers two credentials in taxation – the Accredited Tax Preparer (ATP) and Accredited Tax Advisor (ATA).
To become an ATP you must have three years (a tax-season - January through April - is considered one year) of work experience in tax preparation, two of which may be satisfied through college credit, and pass a competency exam. An ATP must maintain 72 hours of CPE in taxation during each three-year cycle or 24 CPE hours per year, similar to the EA.
The ATA credential identifies preparers who handle sophisticated tax planning issues, including planning for owners of closely held businesses, planning for the highly compensated, choosing qualified retirement plans and performing estate tax planning. The designation covers tax returns for individuals, business entities, fiduciaries, trusts and estates. To become an ATA you must have five years (again a tax filing season = one year) of experience in tax preparation, compliance, tax planning, and consulting, of which 40% must be in tax planning and consulting, and pass a competency exam. An ATA must maintain 90 hours of CPE during each three-year cycle, or 30 CPE hours per year.
Both credentials require adherence to the Council's Code of Ethics and Rules of Professional Conduct. And both require 4 hours of CPE in “ethics” per three-year cycle.

EA – Enrolled Agent

The Internal Revenue Service tells us – “An Enrolled Agent is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee. Enrolled agent status is the highest credential the IRS awards. Individuals who obtain this elite status must adhere to ethical standards and complete 72 hours of continuing education courses every three years.”
The three parts of the EA exam – known as the Special Enrollment Examination – are
  • Part 1 - Individual
  • Part 2 - Business
  • Part 3 - Representation, Practice and Procedures
Required CPE includes two hours per year of “ethics.”
An Enrolled Agent is not an agent or employee of the Internal Revenue Service. While the EA credential is administered by the IRS, an Enrolled Agent is an independent tax professional who is “enrolled” to act as a taxpayer’s “agent” in proceedings with the IRS.
Enrolled agents have unlimited right to “practice” before the IRS. This means there is no restriction to the type of taxpayers they can represent, what types of tax matters they can handle, and before which IRS offices they can represent clients.

RTRP – Registered Tax Return Preparer

In 2010 the Internal Revenue Service initiated a mandatory regulation regime for all individuals who prepared federal tax returns for compensation. Tax preparers, except for EAs, CPAs, attorneys and certain supervised employees thereof, were required to become a “Registered Tax Return Preparer” by the end of 2013 by passing a basic “open book” competency test covering tax law issues, individual tax return preparation and ethics. To maintain the designation, a Registered Tax Return Preparer was required to complete 15 hours of CPE in taxation each year.
In January of 2013, this mandatory regulation regime was shut down by the court in Loving v IRS. The court felt that the IRS did not have the statutory authority to regulate tax preparers. The IRS appealed the decision and lost.
Prior to the court decision, many previously unenrolled paid tax preparers took and passed the basic competency test and were granted the designation of RTRP. According to the IRS, a person who received an RTRP certificate can continue to use the designation, but the IRS does not recognize it for any purpose other than the requirements of the new voluntary AFSP program.
A person claiming to be an RTRP has proven basic competence in tax preparation by passing the IRS test, but is no longer required to maintain required annual CPE in taxation. This credential is no indication that the holder remains up-to-date on tax preparation issues.

NO INITIALS - The Unenrolled Preparer

You should not limit your search for a tax professional to those with the above initials. Just because a tax preparer does not possess one of the recognized tax credentials or designations I have identified above does not mean that he/she is not competent and current in 1040 preparation.
There exist thousands of knowledgeable, experienced, competent, current, and ethical independent tax preparers who have chosen not to add initials after their names. They belong to tax preparer membership organizations, like the National Association of Tax Professionals and the National Society of Accountants, and maintain many hours of CPE in taxation each year, even though not required, to remain up-to-date on 1040 tax law.
And while the initials CPA have absolutely nothing to do with competence and currency in the preparation of 1040s, and you should not assume that a CPA is automatically a Form 1040 expert, there are many CPAs who are competent and knowledgeable in 1040 preparation. However, this is because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer and has nothing to do with the initials CPA.


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