Tax preparers play an essential role in today’s business world. But did you know there are 5 different types of tax preparers? This article will discuss each type and how they differ. I’ll also explain why you might pursue one credential over another based on your unique career goals.
Categories of Tax Preparers
According to the IRS, any tax preparer with a PTIN (Preparer Tax Identification Number) can legally prepare federal tax returns for compensation. However, their levels of experience, expertise, and education can vary.
Their ability to represent clients in IRS cases also varies. The IRS refers to these differences as “representation rights.” Tax attorneys, CPAs, and EAs are the only professionals with unlimited representation rights. That is, they can represent any client in any matter before any IRS office. These matters could include federal tax issues as diverse as audits, appeals, and tax payment issues.
The 5 types of tax preparer are:
- An undesignated preparer with a PTIN, or preparer tax identification number
- A preparer in the IRS AFSP program (Annual Filing Season Program)
- EA, or Enrolled Agent
- CPA, or Certified Public Accountant
- Tax Attorney
Anyone with a PTIN can prepare federal tax returns for compensation. Especially during the busy tax filing season, there is a need for undesignated return preparers.
With a few exceptions, the IRS requires all paid preparers of tax returns, including claims for federal tax refunds, to have a PTIN. No matter what state you work in, your PTIN will be valid since the IRS provides it.
The most significant benefit of becoming an undesignated tax return preparer is accepting employment as a preparer with very low entry barriers. Therefore, regardless of your education or previous job experience, you can apply for a PTIN and tax preparer positions. However, pay for undesignated tax preparers isn’t much higher than minimum wage, and hours may be unattractive (e.g., evenings and weekends). So, I don’t recommend pursuing the undesignated tax preparer path.
If you plan to prepare tax documents for compensation, the most basic requirement is to have a PTIN. The PTIN applicationis available online from the IRS and only takes about 15 minutes to complete. And even better, you don’t have to pay any fees to get a PTIN.
Certain tax preparers are required to get a PTIN, including all Enrolled Agents. If you plan to prepare tax forms for pay (except for this short list of federal forms from the IRS), you need a PTIN.
The IRS’s AFSP (Annual Filing Season Program) recognizes un-credentialed tax return preparers who want to reach more advanced proficiency levels. The IRS created the program to encourage ongoing education and to better prepare professionals for filing season. AFSP holders are rarely CPAs, EAs, or tax attorneys.
The AFSP requirements are relatively straightforward:
- Obtain 18 hours of continuing education (CE) from an IRS-approved provider. At least 6 of these hours must be a refresher course with a final test in federal tax law updates. Ten CE hours must be in other issues in federal tax law. Plus, candidates need 2 CE hours in ethics.
- Have and maintain a PTIN.
- Agree to certain obligations in IRS Circular 230, Subpart B, Section 10.51. These standards list forbidden conduct for AFSP candidates, including federal convictions related to tax law offenses and dishonest behaviors.
Once candidates meet these requirements, the IRS adds them to a public list of tax return preparers called the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. The list includes all AFSP holders plus other tax preparers like tax attorneys and CPAs.
Is the AFSP right for you?
Professionals with the AFSP credential are listed in the IRS’s public database of return preparers. So if you want to be included in this searchable database to increase your career profile, you should consider this credential.
However, AFSP holders have limited practice rights for federal returns that were prepared after December 31, 2015. If they prepared and signed a client’s return, they can represent that client. However, they can only do so before specific IRS agents.
The EA, or enrolled agent credential, is the highest tax return agent designation granted by the IRS. An EA tax preparer has demonstrated expertise in federal taxation. EAs are federal tax experts with high levels of knowledge in tax collection matters, appeals, and audits.
Enrolled Agents can represent their clients in cases with the IRS. Clients know that they can trust EAs because they have the highest level of tax expertise. They also have unlimited practice rights, just like tax attorneys and CPAs.
To get the EA tax certification, candidates must meet these requirements:
- Get and maintain a PTIN
- Pass a 3–part examfrom the IRS called the Special Enrollment Exam (SEE). It covers complex topics related to individual and business federal tax returns. Candidates must also demonstrate skills in tax planning and representing clients in cases before the IRS.
- Adhere to ethical standards outlined by the IRS.
- Get at least 72 hours of CE every 3 years.
However, some employees who have worked for the IRS for at least 5 years can skip the exam. These select employees interpret the federal tax code on a regular basis. So, they don’t have to meet this EA requirement because their jobs already require them to have a high level of federal tax law knowledge.
Is the EA right for you?
If you want to represent any type of federal taxpayer, regarding any issue, and with any IRS office, you may want to consider the EA. You should also note that unlike the CPA designation, you don’t have to meet any specific education requirements to become an EA.
EAs can also practice in any US state or territory. In contrast, the licenses for CPAs and attorneys are granted at the state level, so if you hold a license in one state you might not be able to practice in other states. However, since the IRS grants the EA at the federal level, the EA credential is valid all over the United States.
The Certified Public Accountant credential is granted by 55 Boards of Accountancy (one in each US state and territory). CPAs perform a range of accounting services in public or private settings.
CPAs can experience many professional benefits, including:
- Higher pay than their uncredentialled peers. In fact, CPAs are among the highest-paid accountants.
- Many CPAs leverage their knowledge into business positions like CFO, Corporate Controller, Cost Accountant Manager, and even Vice President.
- CPA positions are usually stable because companies consistently need the services which they provide.
Each Board of Accountancy establishes the guidelines to become a CPA in their jurisdiction. However, in general, CPAs must meet the requirements, called the 3E’s: education, exam, and experience:
- Education: Almost all jurisdictions require 150 hours of education, which is equal to a master’s degree at most universities
- Exam: Pass the 4-part CPA Exam, a difficult exam with low global pass ratesthat hover around 50%
- Experience: Depending on the jurisdiction, have 1 or more years of qualified experience working in the public accounting field
Is the CPA right for you?
The CPA credential is flexible in terms of what types of work you can do. CPAs can sign audit reports, prepare financial statements, provide attestation services clients, and give tax advice.
However, CPA tax specialists can also do tax preparation and tax planning. And they have unlimited representation rights in their clients’ cases in front of the IRS. So, if you want a credential that has some professional flexibility, you could consider the CPA.
But keep in mind that the CPA is a license granted at the state level. If you want to work in multiple states that don’t have reciprocity agreements, you’ll have to get the license in each jurisdiction.
The role of an Enrolled Agent vs. tax attorney can be similar. Tax attorneys can prepare tax returns, advise clients on tax matters, and represent clients with the IRS.
Tax attorneys have unlimited representation rights before the IRS. That means they can help an extensive range of clients. Plus, only tax attorneys can represent clients in Tax Court. That fact alone gives them an advantage over other types of tax preparers, including Enrolled Agents and CPAs.
Tax attorneys are licensed by state courts or their designees, like state bars. In general, attorneys must
- Score high on the LSAT·Have a law degree.
- Pass the Uniform Bar Examination before licensure.
Is becoming a tax attorney right for you?
Becoming a tax attorney has certain advantages. First, tax attorneys can provide many services for their clients, including tax preparation and planning. They can work in private practice, for a law firm, or even as the in-house tax expert for a large company.
Unlike the other tax preparers listed in this article, attorneys are the only ones representing their clients in Tax Court. Some professionals enjoy the challenge of proving cases in court, and there is undoubtedly a need for competent tax attorneys. So if the time and money involved in going to law schooland passing the Bar is worth it to you, I suggest you do some additional research into becoming a tax attorney.
What kind of return preparer is right for you?
As we’ve already reviewed, some kinds of tax return preparers require a significant dedication in terms of education and expense, but others do not. Before you go down the wrong path, consider your end career goals.
If your only goal is to prepare returns for compensation, you could start by applying for a PTIN. The application process is easy, fast, and free.
If you’re looking for a tax preparer certification that will give you more notoriety and you get listed in the IRS’s database, consider the AFSPprogram.
If you want to spend your career solely working with tax returns but with a high level of skill, look at the EA.
In contrast, if you want flexibility in your career to work with tax returns, audits, and more, the CPA might be the way to go.
Or, do you want unlimited representations rights for your clients? In that case, the tax attorney, CPA, or EA options might be best for you.
How much do tax preparers make?
Although money isn’t the only consideration when choosing a career, tax preparers’ salaries can vary. It’s a little hard to gather salary data since different sources analyze categories of accountants and tax preparers differently. But I can give you some generalizations.
According to the US Bureau of Labor Statistics, undesignated tax preparers make about $49K per year. Payscale.com gives a lower annual salary of about $44K. These sources don’t distinguish their data for AFSP holders, so it would be difficult for me to provide you with an accurate AFSP salary range.
How much do enrolled agents make? Well, they usually start around $42K as entry-level employees. They can move up to the mid-$50K range by mid-career. And by their late career, they can expect to earn about $60K-$75K depending on their location and years of experience. In fact, just getting your EA credential could give your salary a boost of $7,000 more per year.
The average CPA salaryis higher than EAs at $66,287. Plus, CPAs who specialize in tax services can make much more as their careers progress. For example, according to the 2020 Robert Half Salary Guide, entry-level accountants in tax services make $40K to over $75K. And CPAs who make their way up to director of tax services could expect to earn up to $216K.
Tax attorney salariesvary based on their location, caseload, and clients. But in general, tax attorneys earn a low of $58K to as much as $194K. However, when you factor in bonuses and profit-sharing, attorneys can make even more.
How to become a tax preparer
Depending on the type of tax preparation you want to do, you could consider many career paths. Before choosing one, I suggest that you weigh the pros and cons versus the costs and time commitments.
If you are interested in learning more about the EA, in particular, I recommend signing up for my free Enrolled Agent course. It covers everything you need to know to start your journey to becoming a tax preparer EA.
About Stephanie: Stephanie Ng is the Executive Committee member responsible for Finance at New Sight Eye Care, a charity registered in the United Kingdom and Hong Kong. She oversees the financial aspect of New Sight in Hong Kong, including accounting, taxation, financial management, and compliance.
She began her career as an investment banker at Lehman Brothers in New York and Morgan Stanley in Hong Kong before joining her client to work in the Group Finance Department, where she spent five years specializing in corporate finance, mergers and acquisitions, and debt refinancing. She also extended her role to management accounting and financial accounting and obtained her US CPA qualification.
Stephanie also is a published author of the book How to Pass the CPA Exam. Additionally, she created I Pass the CPA Exam, the first CPA help site in 2010. Her guidance and mentorship have helped hundreds of thousands of candidates pass their exams.
LinkedIn: https://www.linkedin.com/in/stephanieyng/ and https://www.linkedin.com/company/i-pass-the-cpa-exam/