This subject has been discussed on many other blogs, online media, in print and elsewhere but I thought I’d add my two cents on this one.
First, let’s look at the different types of tax professionals. They come in many different varieties -there are Certified Public Accountants (CPAs), lawyers, Enrolled Agents (EAs), other designations not recognized by the IRS or any state tax authority (i.e. Accredited Tax Preparer, Accredited Tax Advisor), and those who prepare tax returns with no formal license or designation at all.
CPAs: Many people typically think of them first. But a majority of CPAs do not actually specialize in tax-related work. The CPA designation is best distinguished by their ability to issue an official opinion on the accuracy of financial statements issued by a publicly traded company for its investors, or for a privately-held business that seeks a bank loan or other investment. CPAs are licensed by the state boards of accountancy in the states they practice.
Lawyers and law firms: They may also offer tax return preparation as a service to their clients. They more typically represent clients in formal matters before the IRS, either informally or in courtroom proceedings, and also advise clients on tax-related issues associated with transactions. Lawyers are licensed by the state judicial branch, also known as the “state bar”.
Enrolled Agents (EAs): They are licensed by the IRS and are known for specializing in all tax-related matters – preparation of returns, representation of clients before the IRS or state tax agency in an audit, formal tax assessment, or negotiating a plan to pay past due taxes, and advising clients on the tax consequences of a transaction. EAs must pass an IRS-administered exam on topics about individual, business and formal representation on tax matters, and must take 24 hours of continuing education every year, solely related to tax matters.
There are also individuals designated as Accredited Tax Preparer, Accredited Tax Adviser and others which are administered by private organizations. They usually require the passing of an exam and continuing education to acquire and maintain. Individuals with these designations are not recognized by any state or federal authority as having any special competency to prepare tax returns. The designations also do not allow anyone to represent clients before the IRS or any state tax agency. Since they are not regulated by the states or IRS, I would personally exercise caution in using a tax professional with one of these and no other designation.
Finally, there are tax professionals with no formal licensing or designation at all who simply prepare tax returns. While caution should be used in selecting someone without any state or IRS-administered license, there are many unlicensed tax preparers who have prepared and filed returns for their clients for literally decades without a problem. Also, many unlicensed tax preparers obtain the Annual Filing Season Program (AFSP) certificate, which requires 18 hours of continuing education on tax issues annually, including a federal tax law refresher course.
The bottom line here is that there is no “one size fits all” in selecting a tax professional. While I think an EA makes the most sense for most individuals and small businesses (the type of clientele I serve), I am obviously biased on this subject. You need to select a tax professional like you would a doctor or an auto mechanic – go to someone you trust and with whom you feel comfortable knowing your information. Unless you are single, have one job with little or no investment income, and the only tax-related document you receive every year is a W-2 statement, tax return preparation and tax planning are not “commodity services” where all providers are the same. You need to find someone who understands your situation and possibly already has a number of clientele in a similar situation as you, and can readily adjust their services to fit your situation as it changes over the years. Choose wisely!