When trying to find a professional tax preparer, consumers face an alphabet soup of choices.
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Most people turn to the two well-known groups of licensed tax professionals: certified public accountants (CPA) and enrolled agents (EA). No matter the acronym after their name, the first step in your decision-making process is to make sure the person is licensed.
"If they're able to answer your questions and you understand, that's when you want to continue to work with them," says Alan Pinck, an enrolled agent with A. Pinck & Associates in San Jose, Calif. "Communication is key. It shouldn't be an intimidating situation. We have enough intimidating situations in our lives. When mistakes happen, it doesn't hurt to get a second opinion."
Here's a breakdown of the two professions:
An EA is authorized by the U.S. Department of the Treasury to represent taxpayers before the IRS for audits, collections, and appeals, according to the National Association of Enrolled Agents (NAEA). EAs advise, represent and prepare tax returns for individuals, partnerships, corporations, estates, trusts and any entities with tax-reporting requirements.
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EA’s only tend to focus on preparing taxes, and many specialize in tax resolution. In addition to an IRS-administered testing and application process, enrolled agents must complete at least 72 hours of continuing education every three years.
A CPA's bread and butter tends to be performing tax, accounting and financial services to businesses. Not a ll specialize in taxation, and some specialize in more than one service. Most states/jurisdictions require at least a bachelor's degree, two years public accounting experience and a passing score on the CPA exam to obtain a license. The IRS does not require attorneys and certified public accountants to complete continuing education, but some state licensing offices have added additional requirements. In Massachussetts, for example, CPAs need 80 hours of continuing education every two years.
Starting in 2013, the IRS will require tax preparers to pass a tax exam and obtain 15 hours of continuing education every year.
To sum it up simply, "Taxes are laws, and accounting is numbers," Pinck says. The price for preparing a return may even be comparable between a CPA and a EA.
So how do you choose which type of professional is right for you? It's not always black and white and requires an evaluation by each individual, but here are some general guidelines from the experts:
Choose an EA:
When you have out-of-state returns. Enrolled agents are the only taxpayer representatives who receive their unlimited right to practice from the federal government (CPAs and attorneys are licensed by the states). That means if you need to file in more than one state and eventually need representation before that state in an audit or resolution case, the same EA can do it, Pinck says.
When you need help resolving an IRS dispute or expect to owe. People who don't have the resources to pursue a taxation attorney often hire EAs instead for civil resolution cases, according to David Miles, an enrolled agent with 20/20 Tax Resolutionin Broomfield, Co. Not only do EAs rates tend to be more affordable, they can their tax law expertise to represent clients in tax proceedings, audit hearings and appeals.
EAs help ensure clients are treated appropriately by the IRS, work out payment plans on the best possible terms, and ensure the IRS follows laws that protect taxpayers, Miles says.
Choose a CPA when:
A little accounting guidance wouldn't hurt. If you own a small business, hiring a CPA with a bookkeeping and reporting background can help you get organized and on track for the next year. “When you have a couple million dollars in business, some of the accounting can get complicated. We make sure everything is in the right bucket,” says Irene Wachsler, a CPA with Tobolsky & Wachsler CPAs in Massachussetts.
An audit of your business deductions, expenses and income is in order. A CPA’s main differentiator is the ability to attest an audit, which means it affirms to the IRS that financial statements are truthful, says Theodore Flynn, CEO and president of the Massachusetts Society of CPAs. To do that, a CPA will request bank statements and other proof, which limits the possibility of mistakes, Wachsler says. But make sure any professional you hire will guarantee their work on your returns, she adds. That means they agree to represent you later pro bono if there's a problem with the return.