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5 Types of Tax Preparers
The business world needs the specialized expertise of tax preparers. But did you know that based on their credentials, tax preparers fall into 5 categories? In this article, I’ll review each type and explain their differences. I’ll also discuss the pros and cons of pursuing each according to your career goals.
Categories of Tax Preparers
The IRS allows anyone with a PTIN, or a Preparer Tax Identification Number, to prepare federal tax returns for compensation. But beyond that basic requirement, the categories of tax preparers vary according to experience, education, and overall level of expertise.
Tax preparers fall into 5 categories:
- Undesignated preparers with a PTIN
- AFSP preparers who are members of the IRS Annual Filing Season Program
- Enrolled Agents (EAs)
- Certified Public Accountants (CPAs)
- Tax attorneys
Different kinds of tax preparers have different abilities to represent their clients in front of the IRS, which are referred to as “representation rights.” The only tax preparers with unlimited representation rights are CPAs, Enrolled Agents, and tax attorneys. With unlimited rights, they can speak on any matter for their clients with any IRS office. So, they might deal with federal tax issues as diverse as audits and appeals to payment disputes.
Undesignated
If you have a PTIN, then legally, you are authorized to prepare federal individual or business tax returns for pay. Many taxpayers rely on these undesignated professionals during the annual filing season.
Although there are some exceptions, anyone who prepares tax returns or claims for refunds for compensation must have a PTIN. Since the IRS assigns PTINs, your number will be valid regardless of the state where you will work.
Benefits
Legally speaking, obtaining a PTIN is the only credential you need to become an undesignated tax return preparer, which can have very low entry barriers. So even without much education or previous accounting experience, you can apply for tax preparer positions after you’ve received your PTIN.
However, the hourly pay rate for these undesignated positions is usually not much more than the minimum wage. And, you might have to work a lot of evenings and weekends, especially during tax season. So, I recommend that for more job satisfaction, you look into one of the other tax preparer paths discussed in this article.
Requirements
If you want to prepare tax returns for pay, you’ll need to apply for a PTIN. The IRS has made the PTIN application available online. It’s easy to complete and only takes about 15 minutes. Plus, the application is free—the IRS doesn’t charge a fee to get a PTIN.
According to the IRS regulations, some tax preparers, including EAs, must register for a PTIN. There are a few exceptions of federal forms that do not have to be prepared by a PTIN-holder, which the IRS has outlined in this short list.
AFSP
The IRS started the Annual Filing Season Program (or AFSP) to encourage tax preparers to engage in continuing education (CE) and to be better prepared for the busy filing season. The program allows uncredentialled tax preparers to educate themselves through CE and reach higher levels of proficiency with tax forms and standards. CPAs, EAs, and tax attorneys rarely participate in the AFSP program.
Requirements
The IRS has made the AFSP requirements fairly simple with just 3 steps.
- Maintain an active PTIN.
- Engage in at least 18 CE hours from any of the IRS-approved CE providers. You’ll need at least 10 hours in issues related to federal tax law and 2 hours in ethics. Plus, you’ll have to take a 6-hour refresher course with updates about federal tax law.
- Agree to ethics standards as outlined by the IRS in Circular 230, Subpart B, Section 10.51. These standards forbid AFSP holders from federal convictions on tax law charges and other unethical behaviors.
Benefits
The IRS adds all AFSP holders to the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This public directory lists all tax return preparers with the AFSP credential plus tax attorneys and CPAs.
Is the AFSP right for you?
In addition to increased knowledge through continuing education, being listed the searchable IRS directory of federal tax preparers is one of the biggest benefits of the AFSP program. By pursuing this credential, you could increase your career standing. You’ll also signal potential employers that you took the initiative to become an AFSP holder.
However, you should note the limitations, too. AFSP holders only have limited rights to represent their clients for returns filed after December 31, 2015. An AFSP holder can represent their client if they prepared and signed their return, but only before certain IRS agents.
EA
The IRS grants the enrolled agent, or EA, credential. In fact, it is the highest designation that the IRS gives to tax return preparers. An EA has high levels of federal taxation expertise. They have a deep understanding of complex tax collection issues, audits, and processes for appeals.
Benefits
Enrolled agents must have high levels of tax expertise to pass the exam. Therefore, enrolled tax return agents are allowed to represent their clients before the IRS. And just like tax attorneys and CPAs, they have the privilege of unlimited practice rights.
Requirements
To become an EA tax preparer, all candidates must these basic requirements:
- Obtain and maintain a PTIN
- Agree to follow the IRS ethical standards
- Take 72 hours or more of CE every 3 years
Plus, tax preparer EA candidates must meet one of the following:
- Pass the 3-part IRS SEE, or Special Enrollment Exam. Through this exam, candidates must demonstrate deep knowledge of federal tax returns (individual and business), skills in tax planning, and the ability to represent clients in IRS cases.
OR
- Work for the IRS in certain positions that require employees to understand and apply the tax code on a daily basis. These candidates can get the EA tax certification without taking the exam because they’ve already demonstrated deep knowledge of the tested subjects through their work with the IRS.
Is the EA right for you?
The EA tax preparer certification could be right for you if want to expand your tax expertise. Plus, if you want unlimited representation rights before the IRS, you should also look into becoming an EA. And don’t forget that unlike the CPA designation, the EA credential doesn’t have any specific education requirements to meet.
And keep in mind that EAs have the right to work in any US state or territory. Since the IRS is a federal agency, your EA credential is good all over the country. That’s one of the major differences between an enrolled agent vs a tax attorney or a certified public accountant, whose licenses are granted at the state level.
CPA
Certified Public Accountants have high levels of accounting and finance knowledge. They can also prepare tax returns. Each US state and territory has a Board of Accountancy that grants the CPA credential.
Benefits
There are many benefits to becoming a CPA tax professional, including:
- Higher salaries than uncredentialled accountants. Most of the highest-paid accountants are CPAs.
- Stable careers. Since companies will always need CPAs’ expansion expertise, they enjoy relatively stable positions that can weather economic ups and downs.
- Greater potential to move up the corporate ladder. In fact, many CPAs go to on decision-making positions like Cost Accountant Manager, Corporate Controller, and even CFO and Vice-President.
Requirements
Since the CPA credential is granted at the state level, each Board of Accountancy institutes their own requirements to become a CPA. But in general, CPAs must meet the 3E’s of education, exam, and experience:
- Education: Most Boards require CPA candidates to have 150 hours of higher education (basically, a master’s degree)
- Exam: Pass the 4-part CPA Exam, which only has a pass rate of about 50%
- Experience: Some Boards require 1 year of qualified experience in the accounting field, but many want more.
Is the CPA right for you?
The CPA is a flexible credential. It allows you to enter diverse positions in accounting, auditing, and attestation. Plus, CPAs can also offer tax planning and tax preparation services. And the IRS has given them unlimited representation rights with the clients’ cases, and that gives you a lot of professional responsibilities.
However, if you want to travel or work in multiple states, remember that the CPA is granted by state-level authorities. So if you get your CPA license in one state, it might not be valid in another.
Tax Attorney
Tax attorneys are the fifth category of tax preparers. In addition to having unlimited representation rights with the IRS, they can also advise clients on diverse tax issues.
Benefits
If tax attorneys have unlimited representation rights like CPAs and EAs, what sets them apart? Tax attorneys can represent their clients in Tax Court; CPAs and EAs cannot. Therefore, tax attorneys are unique in that respect.
Requirements
To become a tax attorney, you apply for a license with your state court or its designee, like a state bar. The general requirements include:
- Get a high score on the LSAT
- Get a law degree
- Before applying for your license, you must also pass the “bar,” or the Uniform Bar Examination.
Is becoming a tax attorney right for you?
Tax attorneys enjoy many benefits and privileges. They can work in corporate environments or open their own law firms. Plus, they can prepare tax returns and help clients with tax planning.
And unlike other tax preparers like CPAs and EAs, they can sit alongside their clients in tax court. So if the challenges of law practice intrigue you, I suggest looking into becoming a tax attorney. Of course, going to law school is a major investment of time and money. But passing the Bar is the only path to a career as a tax attorney.
What kind of return preparer is right for you?
As I’ve outlined, there are several paths to becoming a professional tax preparer. Each requires a different level of commitment in terms of experience and education. I suggest writing out your own career goals and seeing where these 5 types of tax preparer credentials fit in.
Here are some considerations:
- If you want to prepare returns for compensation but don’t have bigger tax preparer aspirations, apply for a PTIN. The IRS has made the process quick, easy, and free.
- Consider the AFSP program for a certification that will gain you entry into the IRS’s directory and heighten your status as a tax preparer.
- Look into the EA credential if your goal is to have a high level of competency with tax returns and plan to only work in tax-related positions.
- The CPA gives you flexibility because you can work in diverse accounting and finance positions.
- But if you’re looking for unlimited IRS representation rights, weigh the pros and cons of becoming a tax attorney vs. a CPA or EA.
How much do tax preparers make?
Tax preparer salaries vary quite a bit based on their credentials, education, and clients. Although there are several sources for researching salaries, they lump tax professionals into different categories. But still, I can give you some estimates to help your career planning.
The US Bureau of Labor Statistics reports that undesignated tax preparers earn approximately $49K annually. According to payscale.com, that number is a little lower at $44K. Salary databases don’t differentiate for AFSP holders, so it’s hard for me to estimate how much your AFSP salary might increase once you have that credential in hand.
If you’re wondering how much do enrolled agents make in comparison to other preparers, they start around $42K when first entering the profession. By mid-career, they usually make somewhere in the mid-$50K range. Depending on their location and experience, they can expect to earn $60K-$75K by late career.
Most tax preparers find that just getting the EA credential yielded an annual increase of about $7,000. Imagine how that can add up over the course of a career.
CPAs usually make more than EAs with an average CPA salary at $66,287. But CPAs with tax experience tend to earn higher amounts as they move along in their career.
The 2020 Robert Half Salary Guide, the accounting industry’s guide to salary trends, reports that entry-level tax accountants make anywhere from $40K to $75+K. By the time they climb the ladder to director of tax services for their firm, CPAs could make as much as $216K
Tax attorney salaries can vary based on the size of their firm or practice, location, fees, clients, and caseloads. But most tax attorneys earn as low as $58K to $194K. But since attorneys often receive bonuses and many firms have profit-sharing programs, attorneys can make $200K or more.
How to become a tax preparer
There are many paths to becoming a tax preparer. Before you choose one, I suggest that you weigh the costs and time commitments compared to the potential benefits.
In particular, if you think the EA credential might be right for your career, I suggest enrolling in my free Enrolled Agent course. It will give you everything you need to start your EA career today.
About the Author Stephanie Ng
I am the author of How to Pass The CPA Exam (published by Wiley), and I also passed all 4 sections of the CPA Exam on my first try. Additionally, I have led webinars, such as for the Institute of Management Accountants, authored featured articles on websites like Going Concern and AccountingWeb, and I'm also the CFO for the charity New Sight. Finally, I have created other accounting certification websites to help mentor non-CPA candidates. I have already mentored thousands of CPA, CMA, CIA, EA, and CFA candidates, and I can help you too!
