The U.S. Tax Code contains a slieu of confusing rules, regulations, and deadlines. While not every individual is required to file a tax return, most people who earn income need to file taxes annually. If your financial situation is uncomplicated, you may be fine filing taxes on your own. However, many people require the assistance of a trained tax professional like a Certified Public Accountant (CPA) or a licensed tax preparer.
Deciding what type of tax professional (if any) is best suited for you can be a challenge. Learn the differences between various tax preparers, so you can determine which one best suits your specific tax needs.
What Is a CPA?
Certified Public Accountants, or CPAs, are accounting professionals who have met education and professional requirements, and have passed the four-part Uniform CPA Exam. The credential is granted by states, so education and professional requirements vary accordingly. Nevertheless, all CPAs are typically required to do the following:
- Complete 150 hours of higher education with an accounting and business concentration
- Have one to two years of professional accounting experience
- Complete continuing professional educational (CPE) requirements to maintain credentials in the field, usually 40 hours per year
Because CPAs must demonstrate broad financial knowledge in order to earn the designation, they tend to work in a variety of settings. CPA specialties include auditing financial records, governmental accounting, financial planning and analysis, litigation services, and, of course, tax preparation. CPAs hold the right to represent any kind of taxpaying individual or entity, on any tax matter before the Internal Revenue Service (IRS).
CPAs often charge higher fees to represent a taxpaying individual before the IRS. In 2019, taxpayers paid an average of $294 on a 1040 tax return when they itemized, and $188 when they didn’t, according to the National Society of Accountants.
“CPAs compile, review, and audit financial statements in addition to conducting tax work,” Robert Premselaar, CPA and senior manager at Mach & Associates, told The Balance in a phone interview. “Business clients in particular often prefer to entrust their tax returns to CPAs, who serve as financial guides and have a holistic understanding of their business operations.”
Business owners often must file tax estimates for their designated business, in addition to filing their personal taxes.
What Is a Licensed Tax Preparer?
A CPA is not the only professional who can file taxes on your behalf. Many people and private businesses choose to pay licensed tax preparers to represent them before the IRS. In order to represent a taxpayer, licensed tax professionals must pass the three-part Special Enrollment Examination (SEE) and complete 72 CPE hours every three years. After completing all requirements, tax preparers are awarded enrolled agent (EA) status. EA status is the highest credential the IRS awards.
Some former IRS employees can earn an examination waiver, thus becoming an EA, by virtue of their prior experience.
Like CPAs, EAs are entitled to unrestricted taxpayer representation. Unlike CPAs, EAs’ expertise is limited to tax matters, making them extremely well-versed in their specialty. However, EAs tend to lack the broad financial knowledge that CPAs have. Some tax clients may prefer a more versatile approach to the tax-filing process, rather than the more-specific one, and vice-versa.
“Because I focus specifically on tax, I am always aware of emerging trends,” Roberto Done, EA, a tax accountant at D.E Caribe Taxes in the Bronx, told The Balance in a phone interview. “In fact, several of my tax clients are themselves CPAs.”
Tax Preparers With Limited Representation Rights
Tax preparers hold a variety of credentials and fall into one of two categories—preparers with unlimited representation rights and those with limited representation rights. CPAs and EAs, as well as tax attorneys, have unlimited representation rights. CPAs, EAs, and tax attorneys may represent their clients before the IRS on any matters including audits, payment or collection issues, and appeals.
Tax attorneys are those who have graduated from an accredited law school, passed their state’s bar exam, and specialize in complex tax matters.
There are some preparers who have limited practice rights, and do not hold any of the credentials mentioned above. These individuals can only represent clients whose tax returns they prepared and signed, but only in front of revenue agents, customer service representatives, and similar IRS employees. They also are barred from representing clients on matters of appeals or collection issues. Tax return preparers with limited rights include:
- Annual Filing Season Program participants: These individuals are graduated members of a volunteer program that was designed to prepare taxpayers for tax season through educational courses. Those who obtain a certain number of hours of training receive a certificate of completion by the IRS. To maintain the certificate, participants must complete 15 hours of continuing education each year.
- Preparer Tax Identification Number (PTIN) holders: Preparers who have an active PTIN, but no credentials and are not part of the Annual Filing Season Program, have the authority to prepare tax returns. As of Jan. 1, 2016, this is the only authority they have—they cannot represent clients before the IRS (except on returns they prepared and filed prior to Dec. 31, 2015). PTIN holders often work at tax stores such as H&R Block.
CPAs vs. Tax Preparers
|Education||Bachelor’s degree and 150 credit hours with a focus on accounting and business||No college degree required|
|Examination||Four-part Uniform CPA exam passed within an 18-month period||Three-part Special Enrollment Examination (SEE) passed within a two-year period|
|Professional Experience||One to two years||None required, but five years of experience working for the IRS can substitute for the SEE examination|
|Continuing Education||Typically 40 hours per year||72 hours every three years|
|Licensing Body||AICPA and individual states and jurisdictions||IRS|
|Specialty||Multiple areas, including but not limited to audit, litigation services, and tax||Tax|
|Best For||Individuals or businesses looking for a broader array of accounting services beyond tax preparation, like reviewing and compiling financial statements||Individuals or businesses who do not require services beyond tax preparation or IRS issues, such as collection and audit actions|
Which Type of Tax Professional Is Right for You?
In short, determining which type of tax preparer best suits your specific needs depends on your unique situation. The CPA is the gold standard of accounting credentials, and many taxpayers prefer the sense of security the designation provides. CPAs may also be a better choice for individuals and businesses seeking a broader array of accounting services, in addition to tax work. Many CPAs provide financial planning, consulting services, and issue financial statements for their tax clients.
A licensed tax preparer’s focus is narrower, but may be a great option for taxpayers seeking only tax-filing services. The EA credential is issued directly by the IRS, and so they often have unique insight into dealing with complex IRS issues. The hourly rate is typically lower with an EA than a CPA, so it’s often the better option for cost-conscious taxpayers.
Remember, if your tax situation is straightforward, you may not need to hire a professional at all. However, if your tax situation is complicated enough to warrant paying for help, both CPAs and licensed tax preparers make for great tax preparation options.