Friday, July 31, 2009


Let us look at the different categories of “enrolled” and “unenrolled” practitioners and their individual and specific qualifications as they apply to the practice of preparing 1040s.

An Enrolled Retirement Plan Agent and an Enrolled Actuary have absolutely nothing whatsoever to do with the preparation of a 1040. Such “enrolled” practitioners do not prepare 1040s, although that is not to say that a person who is either an Enrolled Retirement Plan Agent or an Enrolled Actuary may not also prepare 1040s. When looking for someone to prepare your 1040 you should not be looking at these types of “enrolled” practitioners.

Even their ability to “Practice Before the IRS” is “limited to certain Internal Revenue Code sections that relate to their area of expertise, principally those sections governing employee retirement plans.”


While tax returns deal in numbers, the practice of tax is in reality the study and application of a specialized Law (the Tax Code) and not Accounting. Just because a person can add and subtract, or is highly proficient in keeping books and preparing financial statements, does not mean he/she knows a thing about tax law.

An attorney is “enrolled” to “Practice Before the IRS” by virtue of passing the bar exam. Just because a person has passed the Bar does not mean that he/she is proficient in the specialized field of 1040 Tax Law.

Regarding 1040 preparation and the Bar exam, I have been informed by a tax attorney –

Tax is not a subject on the MBE (which is the national multiple choice portion) but can be included on the individual state essay exam. PA does include tax on its essay portion as a general rule (which is why most PA law schools suggest you take a tax course). There were sample tax questions on the 2009 model Q&A for PA {these involved business organization and estates and trusts and one item on taxation of scholarships – rdf}. I don't believe NJ or NY test on tax, though.”

As there are specializations in the field of medicine there are also specializations in law - labor law, divorce law, transportation law, criminal law, corporate law, etc. Proficiency requires additional specialized education and experience in the chosen area of practice.

I had a 1040 client who was a labor lawyer. He was excellent in representing labor unions and their members in arbitration and other related areas, but felt he was ignorant when it came to preparing his own 1040, let alone the 1040s of his clients.

It has been proven time and again that there exist divorce lawyers, highly proficient in the legal aspects of the divorce process, who are totally ignorant to the tax implications of divorce.

One does not need a JD to be proficient in the study of the Tax Code. Real estate sales involves knowledge and application of real estate law, but a real estate broker or agent does not have to have a JD. And one does not need a JD in order to prepare a 1040.

I am sure no one will dispute that an Attorney would be the most expensive of all categories of tax practitioners. Do you know of any lawyer who does not charge at the very least $200.00 per hour plus expenses!

As a general rule attorneys do not offer tax season preparation services to the public. A tax attorney would more likely come into play in the area of “problem resolution” and when one needs representation before the IRS after a tax issue has gone far beyond the basic audit process.

One should seek out a tax attorney for 1040 preparation only in extremely unique, complicated and involved situations that involve the application of extremely unique, complicated, involved and highly interpretive aspects of 1040 tax law. Attorneys may need to be involved when it comes to more complicated estate, trust, partnership and corporate preparation issues.


Just what is a CPA?

According to Wikepedia – “Certified Public Accountant (CPA) is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA”.

Merrian Webster defines a CPA as “an accountant who has met the requirements of a state law and has been granted a certificate”. And the free online dictionary says a CPA is “public accountant who has been certified by a state examining board as having met the state's legal requirements”.

The Investor Glossary gets more to the point (the highlight is mine) – “A Certified Public Accountant (CPA) is a person licensed by a state board of accountancy to practice public accounting. The primary distinction between a Certified Public Accountant and all other accountants is that only a Certified Public Accountant can issue an opinion on audited financial statements.”

In order to become a CPA one must pass a difficult and lengthy exam. There are also certain education and “apprenticeship” requirements, and a CPA must earn a minimum amount of CPE credits each year to maintain his/her initials, although there is no specific requirement that any of these CPE credits be in the area of 1040 preparation. The individual education, apprenticeship and CPE requirements may vary from state to state.

As seen above, basically the only thing that a CPA is authorized to do that a non-certified Public Accountant, or an unenrolled practitioner, is not is to “certify” the audit of financial statements. The CPA designation has nothing whatsoever to do with 1040 preparation.

Because numbers are involved many accountants, CPAs included, are drawn into tax practice, although, as I have said above, tax preparation is the application of “Law” (the Tax Code) and not “Accounting”. FYI, in my case I became an accountant - by practice and not by "designation" (also self-taught, except for basic ACC 101 in college) - because of preparing tax returns.

A Certified Public Accountant is “enrolled” to “Practice Before the IRS” by virtue of passing the CPA exam at the very beginning of his/her career. I can’t seem to find a CPA who can remember what percentage of the exam they took involved 1040 preparation – so it couldn’t have been significant.

The general public has the misconception, however erroneous, that the initials CPA are synonymous with tax expert. The AICPA is well aware of this public misconception and encourages it.

Fellow tax blogger Marilyn Lawver, who just happens to be a CPA, wrote the following in a blog post (the highlight is mine) –

Robert {meaning me–RDF} is correct that a CPA is not specifically licensed for tax preparation, rather ‘a CPA is a licensed accountant, authorized to certify audits of financial statements’. Just a couple of months ago, I was pondering this exact issue. I was thinking about all the fancy credentials the AICPA offers for CPAs in other specialties - financial planning, fraud examination, business valuation - and wondering how to become a certified tax expert.

So I emailed the AICPA asking about it. Here's the exact wording of the response I received:

’We do not offer a credential in taxation. In general, our approach has been not to develop credential programs around areas for which the public already believes CPAs to 'own'. In addition, we do not endorse a particular tax credential.’

The public misconception is perpetuated by uninformed print and online journalists who when writing on a 1040 topic will say “see your CPA” or “check with your CPA” or “consult a CPA” when, instead, they should be saying “see your tax professional” or “check with your tax professional” or “consult a tax professional”.

As we discussed with Attorneys, CPAs also “specialize”. 1040 preparation is one of many areas of specialization that a CPA may choose to practice. Many CPAs specialize in audits or other areas, as mentioned by the CPA blogger above, and have no interest in keeping current on how to prepare 1040s.

I have said it before and I will say it until the day that I go to my final audit – the mere existence of the initials CPA after an individual’s name does not mean, nor should it automatically suggest, that the individual is proficient or current or competent or even knowledgeable in the specialized area of applying and interpreting the US Tax Code in the preparation of 1040s.

In my 38 tax-season tenure I have come across more errors on 1040s made by individuals with the initials CPA then by any other category of tax preparer, including individuals who have prepared their own return and employees of the fast food tax preparation chains!

A specific individual with the initials CPA after his/her name may indeed be an excellent 1040 preparer (and during my years in the business I have come across quite a few that indeed are 1040 experts) - but only because of the specific education, training, and experience of that specific individual. It has absolutely nothing to do with the existence of the initials.

During my business life I have also been an accountant, both private and public, and even worked for a brief period of time many, many, many years ago for one of the then “big eight” international CPA firms. I have never had any desire to audit financial statements, so there was never any reason for me to attempt to acquire the initials CPA.

It is common knowledge that CPAs charge more for their services than non-CPAs, especially in the area of tax preparation. The larger the CPA firm the greater the fees. In the area of tax preparation the statement “you get what you pay for” is not always true. Higher fees do not necessarily mean better service or more accurate returns.

According to the 2008 NATP Tax Professional Fee Study, “CPAs and PAs typically charge the highest minimum fees for tax preparation”. The study indicated that the minimum fee charged for preparation by an EA was a little less than 2/3 of that charged by a CPA or PA, and the minimum fee of an “unenrolled” practitioner was only slightly more than half of the CPA/PA charge.

Many years ago a student in one of the tax classes I taught at local adult schools asked me what was the difference between a 1040 prepared by someone like myself (“unenrolled”) and a return prepared by a CPA. My answer at the time was, “about $100.00”. That answer needs to be seriously adjusted for inflation.

With regards to a Schedule C filer, as I have said in an “add on” to a post at the taxguy blog –

Depending on the size and nature of your business you may also need the year-round services and guidance of a public accountant, or perhaps just an experienced bookkeeper. Obviously there is a big difference in the costs involved with a public accountant vs that of a bookkeeper or bookkeeping service. Many tax professionals offer year-round bookkeeping, accounting and payroll services for their small business clients, while others do not. You should look for a tax professional, and/or an accountant or bookkeeper, with experience in your specific type of business.

If you feel you need an accountant be aware that you do not “need” to use a “CPA”, although there are many qualified public accountants specializing in small business that happen to be “certified”, and there may be situations where a bank or creditor may require financial statements prepared by a CPA (in which case you can hire one for the specific “engagement”).

A qualified and experienced “non-certified” public accountant may be better depending on your individual situation and needs. Many states require the licensing of “non-certified” public accountants. (As a general rule, CPA firms tend to charge a higher fee than a “non-CPA” firm, sometimes substantial, and a small “non-certified” firm may provide more personalized or individualized service.)

You should make your decision on which firm or individual to use based on your specific needs and the specific training and experience of the firm or individual, and not make any false assumptions based on initials or lack thereof

The more involved your business, and if it goes from a Schedule C operation to more complicated entities, the more likely you will need the year-round services of a Public Accountant, and maybe even a CPA. CPAs are more likely to be experienced in 1120 preparation then in 1040 preparation, although, again, the initials mean nothing special in this area.

The same advice I provided for the Schedule C filer may also apply to a taxpayer with involved investments and Schedule D activity – such a taxpayer may need the year-round services of an accountant. Again, you do not “need” a CPA.

And I should point out that, as with the CPA, just because a person is a practicing Public Accountant does not automatically mean that he/she is knowledgeable or competent or proficient or current in 1040 preparation.


Ah, now we finally get to initials that actually mean something when it comes to 1040 preparation. One can be relatively assured that if a person has the initials EA after his/her name then he/she is knowledgeable and current, and presumably competent and proficient, when it comes to preparing 1040s.

Because of the name the public also has some misconceptions about the EA. An Enrolled Agent is not an agent, employee or representative of the Internal Revenue Service. An Enrolled Agent is an independent, private tax professional who is “enrolled” to act as a taxpayer’s “agent” in proceedings with the IRS.

An Enrolled Agent is “enrolled” to “Practice Before the IRS” by virtue of taking the Special Enrollment Examination and maintaining a required amount of CPE credits in the specific area of taxation (and 2 hours per year in ethics).

According to fellow tax blogger, and Enrolled Agent, Trish McIntire the Special Enrollment Examination is – “a comprehensive 3 part test that covers all areas of federal tax and IRS representation (that includes corporations and estates.) All three parts have to been passed within a specific time frame and then the applicant undergoes a background check.”

As I stated in the initial post in the series I do not offer “client representation” services and do not wish to get involved in direct dealings with the IRS regarding returns I have not personally prepared, and therefore have no reason to become an “Enrolled Agent”.

It is also possible to become an Enrolled Agent by virtue of past service and technical experience within the IRS. Such a person must possess the specific years of past service and technical experience identified in Circular 230.


And so we are left with the “unenrolled” practioners – or basically everyone else. To be fair it is true that the basic definition of an “unenrolled” practitioner is a person who prepares tax returns for a fee who is not an Attorney, CPA, or Enrolled Agent (or Enrolled Retirement Plan Agent or Enrolled Actuary).

I like to break down the “unenrolled” practitioner into two sub-categories – the independent practitioner and the employee of a “fast food” commercial tax preparation chain.

1. The Independent Practitioner

There exist hundreds of thousands of knowledgeable, experienced, proficient, current, competent and ethical independent tax preparers who have chosen not to add initials after their names. In terms of 1040 preparation I believe a majority of these independent "unenrolled" practitioners are equal to those who have elected to take the IRS Special Enrollment Exam and become an EA - and also that a majority might be superior in tax knowledge and experience to a great many individuals with other initials or designations. For reasons that may or may not be similar to mine they have just decided there was no reason for them to get any “initials”.

There also exist a very small percentage of “unenrolled” practitioners who are not knowledgeable, experienced, proficient, current, competent, or ethical when it comes to preparing 1040s - just as there are individuals with initials who are not proficient, current, competent, or ethical when it comes to preparing 1040s, preparing or certifying financial statements, or practicing law. Every profession, and "sub-profession", has its share of hacks, crooks and incompetents. Hey, it wasn't an "unenrolled" practitioner who prepared the tax returns for Enron!

Unfortunately there is currently no easy method to tell a “good” independent “unenrolled” practitioner from a “bad” one. If the regulation of “unenrolled” practitioners ever does come to pass, and the process is done reasonably and properly, it should become a little easier.

2. Commercial Tax Preparation Chains

And now we have come to the bottom of the barrel – the “fast food” commercial tax preparation chains. You know full well about whom I am speaking – Henry + Richard, Jackson Hewitt, and Liberty Tax Service. This category of preparer is clearly the worst value for your money in the tax preparation business!

A couple of years ago the Government Accountability Office (GAO) conducted a study which resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors”. The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains, including H+R Block, in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors.

A similar undercover operation was conducted last February and March by the office of the Treasury Inspector General for Tax Administration (TIGTA) with similar results, although the TIGTA scam did include some small independent practitioners along with commercial chains as test subjects.

Earlier this year another undercover "sting" operation that found employees of Henry and Richard and Jackson Hewitt were less than competent and possibly unethical was conducted in Alabama by an independent non-profit organization called Impact America.

In addition to multiple preparation errors the Alabama operation reported that (highlights are mine) - "Simple tax returns with no itemization took only 40 minutes but often cost $400 or more”, and “they were often accompanied by offers of advance payment on refunds. Those advances are actually loans bearing an annual interest rate that can top 800 percent."

You can see that there has been much documentation to suggest that employees of H+R Block and the other commercial chains are neither competent nor ethical.

And, as I have said many times before, Henry and Richard ain’t cheap. When my mentor and I first got a hold of the H+R Block fee schedule, back in the mid 1980s, we were in shock.

You pay fine restaurant prices for fast food service. Actually I should apologize for comparing these chains to fast food operations – I have often gotten good service and received good value at Burger King and McDonalds.

The TIGTA undercover operation among both commercial chain and independent preparers that I mentioned above found that the average price paid to the commercial chain was $100+ more than the average fee paid to the independents.

Plus Henry + Richard aggressively push auxiliary “products” on their clients – usurious Refund Anticipation Loans, additional (and unnecessary) “audit protection” fees, fee-laden debit cards, IRA investments that are guaranteed to lose money, and so on and so on – that can substantially increase one’s “out of pocket”.

While, like anything else, the market affects the price of tax preparation, the major factor affecting the fees charged is overhead. Let’s look at the overhead of these chains.

Because the storefronts where these chains are located are usually in high traffic commercial areas, and often shopping malls, the rent is generally very high. And an important factor – H+R and Liberty and Jackson Hewitt storefronts are only open during the tax filing season, yet they must pay rent on the property for the entire year.

These chains have excessive advertising budgets during the season, spending millions of dollars on constant tv and radio spots as well as print advertising telling you not that they competently prepare accurate tax returns but simply to come into their office and walk out with a check. Hey, doesn’t H+R advertise during the Super Bowl.

H+R Block et al are corporations, and have highly compensated upper level corporate officers and employees with generous employee benefits. The Associated Press recently reported that “H&R Block Inc. CEO Russell Smyth received compensation valued at $5.3 million in fiscal 2009, the year he took over leadership of the nation's largest tax preparer”.

And, most notable of all, Henry + Richard, Jackson Hewitt and Liberty need millions of dollars for legal fees and the settlement payments for the many, many lawsuits for deceptive advertising and other unethical business practices, most of which result from their usurious Refund Anticipation Loan offerings.

With commercial preparation chains I would expect that the actual cost of preparing the return - salaries paid to the seasonal preparers and the training of these preparers - is one of the least expensive items in the budget.

Clearly one should never use the services of a commercial tax preparation chain such as Henry + Richard to prepare a 1040A or 1040 or any tax return. Your chances of getting the return prepared properly are very slim, you will most certainly pay much more then you would pay elsewhere for better and more competent service, and you will be pressured to buy a high fee tax-related “product” that you do not need.

While the fee charged for preparing your return should certainly be a concern, especially in this economy, it should not be the only, or even the major, criteria for choosing a tax professional. However value is important – why should you pay someone $250.00 for a service that can be performed just as competently, and with perhaps more personalized attention, for $125.00.

In my opinion the best way to choose a tax practitioner is by getting referrals from trusted friends, relatives or colleagues. You want to find someone who is experienced in preparing returns for those in your particular trade, profession or type of business.

It is important to end by acknowledging that it may actually be possible that the best tax preparer, at the best price, for your unique particular situation is either an attorney or a CPA, or even an H+R Block, Jackson Hewitt or Liberty employee. But this is only because of the education, experience, ability, temperament, fee structure and other factors that are specific to the individual preparer and nothing whatsoever to do with his/her designation or employer.

‘Nuff said!



Kelly said...

Thanks for a thorough review.

I agree that we often assume that tax attorneys (like myself) and CPAs are the "best" when it comes to tax services. I think the reason is because there is at least the feeling that they have additional education to support their practices - whether that education is adequate is altogether another question. But I think that's one of the reasons that we might be leaning towards "certification" - so that the public at least feels that the preparer knows something (anything?) about taxes.

I would also add to your statements that I think an ongoing relationship with your tax preparer is best - this tends to be the reason why many folks discourage use of commercial chain tax preparers. As a tax pro, I don't think you can look at tax in a vacuum - there are facts and circumstances in the lives of each taxpayer that can affect your tax preparation advice. Divorce, children, buying a home, changing your immigration status - these are all things that have black and white tax answers individually but are bigger than that when taken in context.

Good series!

Robert D Flach said...


Two good points.

I always tell clients they should email me before getting married, taking money from a pension plan, deciding to conceive, etc.


auditing consulting firm said...

Yes this statement is absolutely right i am searching for this "The primary distinction between a Certified Public Accountant and all other accountants is that only a Certified Public Accountant can issue an opinion on audited financial statements"