Make sure they can certify your tax returns and have the right credentials
Tax season looms, but who will prepare your return? If you don’t do your own, then make sure your preparer has the right professional designation.
Two warning signs:
- If the person who prepares your return does not sign it, certifying that it is complete and accurate to the best of their knowledge; or,
- 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, certified public accountant, or enrolled agent 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?
In 1999, 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 they 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 and receive compensation. A fourth designation, Registered Tax Return Preparer, was enmeshed in legal controversy and you should proceed with caution.
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.
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 state rules. The state determines 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 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 wanted to prepare other people’s taxes but do not have either of the three licenses listed above. RTRPs got their license after passing a basic competency test on individual taxation. It required 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.
So, if someone is suggesting that the RFRP designation is all they need, think again.
Make Sure You Ask Questions
So, as you decide whom to hire as your tax preparer, use this information to make an informed decision on who you entrust with this task.
And if you need more help, then go to irs.gov to review the public directory compiled by the IRS to confirm preparer credentials and qualifications. Additionally, we at Patriot know a number of CPAs that we have worked with over the years. If you would like a recommendation, contact us.
As with all things financial related: trust, but verify.