Who’s Filling Out Your Taxes?
Tax season looms, but who will prepare your return? If you don’t do your own, then make sure your preparer has one of four professional designations.
Two warning signs: 1) If the person who prepares your return does not sign it, certifying that it is complete and accurate to the best of his knowledge. Or 2) The preparer does not have one of the right credentials. Either way, beware.
You may be signing an incorrect return and setting yourself up for penalties if you are selected for an audit. You may also have to engage an attorney, CPA or EA to assist you with resolving the issues the Internal Revenue Service wants to discuss with you. If a preparer is not willing to sign a return that they prepare, they are not likely to stand by you when the IRS comes knocking.
What are the right credentials?
Several years ago, the IRS started a Preparer Tax Identification Number (PTIN) program to replace the Social Security Number of the tax preparer for security purposes. In 2011, the IRS required anyone paid to fill out tax returns to have a PTIN and to sign the returns that prepare. All paid preparers were also required to be licensed, pass a basic competency test and take continuing education classes.
Today, one must be certified or licensed as either an attorney, certified public accountant or enrolled agent to legally prepare a tax return. A fourth designation, Registered Tax Return Preparer, is enmeshed in a legal controversy but should be OK to use.
Each of these groups has different requirements for maintaining their license to practice. They also have different requirements with respect to keeping abreast of the tax laws and ethics of preparing tax returns.
So let’s look at each category of preparer.
- Attorneys. They get their licenses from each individual state. The rules for maintaining a license are different in every state. The IRS allows them to prepare and sign tax returns by virtue of their state license, but they still need a PTIN to file tax returns. Their continuing education requirements are designated by their state to keep their license. A lawyer may represent a tax client before the IRS for any tax matter for any year as well as represent that client before state tax authorities.
- Certified Public Accountants (CPA). CPAs also receive and maintain their licenses under different state’s rules. The states determine the amount and type of continuing education that each CPA must have each year. They also need a PTIN to prepare and file a tax return. A CPA can represent you in a case with the IRS or state tax authorities on tax matters for any year even if the CPA did not prepare the original return.
- Enrolled Agents (EA). An EA is federally licensed by the IRS and has unlimited practice rights to represent any clients before the agency on any tax matter. Like the attorney and the CPA, the EA can represent the client for any year no matter who prepared the original tax return. The EA obtains this license by taking a comprehensive three-part exam on individual tax, corporate tax and regulation. Some get an EA license through work experience with the IRS in certain job areas. An EA must have 72 hours of continuing education on tax matters every three years and a minimum of 16 hours, including two hours of ethics training, in any one year to keep the designation.
- Registered Tax Return Preparer (RTRP). The IRS established this new category in 2011 for folks who want to prepare other people’s taxes but do not have either of the three licenses listed above. RTRPs get their license after passing a basic competency test on individual taxation. It requires at least 15 hours of continuing education every year including two hours of ethics training.
This RTRP license is limited when it comes to representing clients. They can’t represent you on a return that they didn’t prepare themselves or any collection activities that you might become subject to if your return is audited.
Here’s the problem: A U.S. district court judge, in Washington, D.C., shut down the RTRP program, reasoning that the IRS had no authority to license tax preparers. That means that anyone can legally prepare your taxes. The IRS promptly filed to get an injunction on the judge’s ruling, pending an appeal.
My advice is that you may still consider using a RTRP because this preparer passed the certification process.
When the RTRP designation was established in 2011, anyone who wished to prepare tax returns could register. Assuming the IRS gets its injunction, that group has until the end of 2013 to pass a basic test on preparing a Form 1040 tax return. They had to complete the 15 hours of continuing education and re-register their PTIN number by Dec. 31, 2012 to keep the RTRP into 2013.
So as you decide whom to hire as your tax preparer, use this information to have an informed discussion with the person you are considering entrusting with this task.
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Francis St. Onge, CFP, EA, is the president of Total Financial Planning LLC. He provides tax planning, tax preparation and financial planning services to his clients in Brighton, Mich., and surrounding communities. Currently, he is also the president of the Michigan Society of Enrolled Agents.
The preceding content was originally published on the Financial Planning Association website.
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