AICPA CONTINUES TO PROMOTE THE URBAN TAX MYTH

Fellow tax blogger Jason Dinesen, of DINESEN TAX TIMES, whose posts I reference often in the BUZZ, brought my attention to “AICPA Lays the Smackdown on Dear Abby” by Greg Kyte at GOING CONCERN.

The piece concerns a letter submitted to and published by “Dear Abby” as “Couple Deep in Tax Hole Need Helpin Climbing Out”.

Here is the text of the letter –

“DEAR ABBY: I have just learned that my sister's husband of 35 years (I'll call him George) hasn't filed their personal income taxes going back a number of years. This has caused a lot of stress and anxiety for my sister, who recently underwent breast cancer treatment. Apparently, he hasn't filed because of his inability to organize. (His family has denial issues.)

Their professional tax preparer has met with both of them and tried to work out a step-by-step program, but George consistently fails to meet the deadlines. I love my sister and want to be as supportive as possible, but I'm unsure what I can do. I have advised her to seek therapy. She has copies of business-related documents relating to the unfiled tax periods, but not enough information to file on her own.

On top of everything else, she has several relationship issues with her children that are causing her grief. What else can I do? -- HELPLESS BIG BROTHER”

And here is “Abby’s” response –

“DEAR BROTHER: Failure to file one's taxes is a federal crime that could land your brother-in-law and sister in the slammer. That's why you should urge your sister to do something she should have done years ago -- take over the family finances.

She and her husband may need more help than their CPA has been able to give them. A group that I have mentioned in my column before is the National Association of Enrolled Agents (NAEA). These are tax specialists -- some of whom are attorneys and CPAs -- who are specifically licensed by the Department of the Treasury. Tell your sister to contact an enrolled agent by visiting www.naea.org TODAY.”

My initial reaction -

(1)  The letter from Big Brother mentions a “professional tax preparer”, but I do not see any indication that this person is a CPA.  So Abby’s reference to “their CPA” in her response is odd. 

(2)  Abby is right to recommend an Enrolled Agent to any person who has tax troubles.  Enrolled Agents are indeed “tax specialists” who have proven competence and currency in 1040 taxation by passing a difficult test and maintaining annual required CPE (continuing professional education) in taxation.

(3)  The “professional tax preparer” – who may be a CPA, or an EA, or “unenrolled” – has done his/her job – trying to implement a detailed solution.  However no tax professional – EA, CPA or “unenrolled” - can force a client to act properly.

(4)  Abby’s advice to “take over the family finances” is a good one.  But the advice I would provide as a tax professional is that the wife should file separate tax returns for the unfiled years to at least cover her arse.  If the husband insists on being an idiot, and she cannot do anything about it, at least she has complied with the law and cannot be penalized.

The issue in the GOING CONCERN post concerns a letter sent to “Abby” in response to her advice to Helpless Big Brother from AICPA Tax Executive Committee Troy K Lewis –

“DEAR ABBY: As chairman of the American Institute of CPAs' Tax Executive Committee, may I offer some clarification to you and your readers about your answer in your July 13 column titled, "Couple Deep in Tax Hole Need Help in Climbing Out".

 

In fact, THREE groups of tax preparers have unlimited practice rights under Department of the Treasury regulations to represent their clients on any matters before the IRS -- certified public accountants, attorneys and enrolled agents.

None are more qualified than CPAs. CPAs are licensed by state regulators and must meet minimum education requirements to sit for their national licensing exam and then fulfill ongoing continuing education requirements, as well as abide by a code of professional ethics. Attorneys have a generally similar system.

Enrolled agents are often former IRS employees who are licensed by the IRS after passing an exam. Enrolled agents are competent and respected tax professionals, but the fact they are licensed by the IRS does not mean they are better qualified or superior in serving clients than are CPAs or attorneys.

IRS.gov has a page explaining the different types of tax return preparers and their qualifications, which may be helpful to your readers. -- TROY K. LEWIS, CPA”

Lewis is correct when he says “THREE groups of tax preparers have unlimited practice rights under Department of the Treasury regulations to represent their clients on any matters before the IRS -- certified public accountants, attorneys and enrolled agents.”  But that is not the issue here.

His statement “None are more qualified than CPAs” is an out and out lie.  There is absolutely nothing about possessing the initials CPA that in any way, shape, or form guarantees that the possessor knows his or her arse from a hole in the ground when it comes to 1040 preparation.    

It is true that “CPAs are licensed by state regulators and must meet minimum education requirements to sit for their national licensing exam and then fulfill ongoing continuing education requirements, as well as abide by a code of professional ethics.”  But their education requirements, national licensing exam, and ongoing continuing education requirements are in the area of accounting and auditing – and not taxation.  The education may include a basic course in federal taxation, and the national licensing exam may have a couple of questions on 1040 taxation.  But CPAs have absolutely no requirement to take even 1 CPE credit in taxation.

Of the three groups with “unlimited practice rights under Department of the Treasury regulations to represent their clients on any matters before the IRS” only Enrolled Agents have been tested and are required to take minimum annual CPE exclusively in federal taxation.

A specific CPA may indeed be a 1040 tax expert – and many are - but it is only because of the specific education, training, and experience of that individual and not because he/she has been granted the initials CPA.

The AICPA believes that they “own” tax return preparation, and publicly admit this, and continue to fight against more qualified tax professionals that threaten this assumed “ownership”.

And, to further respond to Mr Lewis’s misinformation, as Jason has correctly pointed out to me (highlight is mine) -

“The ‘former IRS employees’ thing is simply false. There are a few EAs who became EAs after working for the IRS, but it’s a small number.

I don’t know what the statistics are or how one would even find the statistics, but I feel confident in saying that the vast majority of EAs are NOT former IRS employees. In fact, of all the EAs I know, I can think of only 1 who became an EA after working for the IRS.

The rest of us are people who have passed the tests.”

 Unfortunately “Abby” gave in and replied –

“It was not my intention to imply that CPAs are less qualified than enrolled agents – and if I created that impression, I sincerely apologize.”

But “Abby”, and Mr Lewis, Enrolled Agents are indeed more qualified than CPAs when it comes to 1040 preparation and representation issues!

TTFN

MORE ON EA VS CPA

Fellow “twit” and tax blogger Stacie Clifford Kitts, CPA, of STACIE’S MORE TAX TIPS, has added her more than 2 cents to the online discussion of EA vs CPA that CPA Joe Arsenault dealt with in his post “CPA or EA? It’s Just a Designation” at CAFÉ TAX, which was brought to my attention in a “tweet”.  

Here is what she has said (the highlight is mine – I can resist it) -

 “I agree with Darren as the typical person thinks CPA = Tax Knowledge, which is not a correct assumption. The CPA title does not guarantee any tax knowledge and for those who practice in other areas such as audit, no continuing education in the tax field is required. And if you acquired your license many years ago, the CPA may not have seen any tax material since he/she studied for the exam.

With that said, the EA designation has some limitations as well. Although EA's are tax focused and from a pure compliance standpoint are quite qualified, to properly consult with a client regarding their tax needs, a broader knowledge of business in an overall sense is quite handy. CPA's generally acquire this knowledge through the normal course of growing up in a public accounting environment. The benefit of a CPA in a tax practice is not in the preparation of your tax return per se, it’s in our ability to help our clients make the choices that in a forward thinking environment will help them to retain the wealth they have worked hard to achieve.”

Let me respond to this portion of Stacie’s comments -

“Although EA's are tax focused and from a pure compliance standpoint are quite qualified, to properly consult with a client regarding their tax needs, a broader knowledge of business in an overall sense is quite handy. CPA's generally acquire this knowledge through the normal course of growing up in a public accounting environment.”

I agree somewhat with this statement, but only as it applies to business taxpayers.  And, of course, I would substitute the term “CPA” for “accountant”.  An EA is an excellent, and preferred, choice for 1040 return preparation and 1040 tax planning.

While many EAs, and previously unenrolled tax professionals who will soon be RTRPs (Registered Tax Return Preparer), also have general accounting training and experience (as I do), just as the initials CPA do not mean the person necessarily knows taxes (especially 1040 taxes), the initials EA, and RTRP, do not mean the person necessarily knows accounting. 

Obviously the best choice for a business taxpayer, especially an 1120 or 1065 filer, is a person with a combination of accounting and business and individual tax training, experience and currency.  This could be either an EA, or RTRP, or an accountant, depending on the individual qualifications of the person.

Or it could be an EA, or RTRP, and an accountant.  You may engage an accountant, experienced in your particular field or industry, to do the books and tax returns for your corporation or partnership, especially if the corporation has more than one stockholder, and an EA, or RTRP, to do your 1040.

I will always use the term “accountant” instead of CPA.  An accountant does not have to be a CPA to be knowledgeable or effective.  As I have said time and again, the only thing a CPA can do that a “plain” accountant cannot is certify an audit (and, I believe, in some states under the Uniform Accountancy Act, prepare uncertified financial statements for third parties such as banks).  The person you choose may well be a CPA, based on the individual qualifications of the professional.

I agree that a person with the initials CPA has proven knowledge and current in accounting and auditing via a very difficult initial proficiency test and annual required CPE (in accounting and audit topics and ethics), but, if initials are important to you as a verification of expertise, many states also have a PA (Public Accountant, not Certified) licensure designation.  It is my experience that, on average (and I will admit probably not always true), a CPA will charge a higher fee than a PA or “plain” accountant simply because of the existence of the initials.

Actual the question that started off the discussion was “EA vs. CPA? Which is the better designation and why?”.  I am not quite sure if the question comes from the point of view of a person choosing a career path or a potential client looking for a tax professional.

This is an unfair question, from both points of view.  They are apples and oranges.  As we have learned an EA is a tax expert, especially a 1040 expert, and a CPA is an accounting expert who can certify audits.  You become an EA because you want to represent taxpayers before the Internal Revenue Service, or because you want a designation that verifies your tax knowledge, experience and currency.  You become a CPA because you want to be a public accountant, audit financial statements, and certify these audits.  One has nothing to do with the other.  An EA can also do accounting work and a CPA can also prepare tax returns.

When choosing between the two as a career objective you must first identify your goals.  Do you want to prepare tax returns for a living and/or represent clients before the IRS, or do you want to be a public accountant and prepare and audit financial statements for businesses?  If you want to specialize in 1040 preparation there is absolutely no need to go through the process of becoming a CPA.  And, with the new RTRP designation, if you want to prepare tax returns for a living, but are not interested in representation (other than for clients whose 1040 you have prepared), you can become a RTRP.

And, in my personal opinion, if choosing between the two as a potential 1040 client pick the EA.  Whatever you do, don’t go to H+R.

TTFN

EA OR CPA? THAT IS THE QUESTION

Joe Arsenault, a CPA, has a great post in “CPA or EA? It’s Just a Designation” at his blog CAFÉ TAX. 

Joe’s post is a response to “an interesting conversation (that) has been taking place for a while in one of the CPA forums I follow. The conversation compares the Certified Public Accountant (CPA) and Enrolled Agent (EA) designation. The question that started it all was ‘what is the better designation to get?’.”

The post does a good job of describing the scope and requirements of each of these designations.

Everyone knows what a CPA is (Constant Pain in the Arse – just joking), but not everyone is familiar with the initials EA. As Joe points out above they stand for “Enrolled Agent”.  Many of those who have heard of the initials EA are confused about what they mean.

An Enrolled Agent is not an agent or employee of the Internal Revenue Service.  He/she is “enrolled” to act as a taxpayer’s “agent” when dealing with the IRS. Prior to the creation of the RTRP designation, EA was the only set of initials that indicated that its holder was knowledgeable, experienced, and current in federal individual income taxes.

For years it has been suggested that a better designation be found for the EA to avoid the confusion.  I do believe that in the course of the IRS institution of its preparer regulation regime EAs were given the chance to pick a new name for their designation, but they chose to keep it as Enrolled Agent.

I have been an accountant and tax preparer for about 40 years, yet I am neither a CPA nor an EA (although at one point early in my career I did work for one of the then “big eight” CPA firms).  Over the years I have investigated the various proposed non-EA tax preparer designations (i.e. several attempts at a CTP – Certified Tax Preparer) but none of these carried the same weight or credibility as EA, or actually lasted very long. 

The basic thing a CPA can do that a “just plain” accountant cannot is certify an audit.  And the thing an EA can do that I cannot is represent taxpayers before the IRS (without a Power of Attorney).  I have never had any desire to audit financial statements or to represent taxpayers, other than in audits of clients whose 1040s I have prepared, before the IRS.

In the course of his discussion Joe makes an excellent point -

“I want potential candidates to realize that their work and character will determine their level of success, not their designation.”

While I have said for years that having the initials CPA after one’s name does not mean the person knows his/her arse from a hole in the ground about taxes, I have also said – “While it may actually be possible that the best tax preparer, at the best price, for your particular situation is either a CPA or an H+R Block, or other fast-food chain, employee, this is only because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer.”

I wholeheartedly agree with Joe’s final assessment (the highlights are mine) -

“EAs focus on completely on taxes and CPAs may or may not focus on taxes. If you are someone who only wants to do tax work an EA may be the smart choice. CPAs are more involved in financial accounting, industry and other areas such as financial planning. I know many people who are CPAs but they can’t prepare their own tax return. Not all CPAs are tax professionals. There is nothing wrong with that.”

I would add that if a person wants to concentrate on taxes but also do accounting work, but not certify audits, for clients he/she does not need to become a CPA.  You can be a designated Public Accountant (PA), which may require registration and/or licensure in some states, or, like me, a “just plain” accountant.

As an aside, I like that Joe supports my position on exempting CPAs from the IRS competency test for tax preparers (again the highlight is mine) -

“I will also raise the point about designations and PTIN requirements and would suggest only exempting EAs from the testing requirements.”

FYI Joe used to publish a BUZZ-like weekly CAFÉ BEANS post, highlighting posts he felt would be of interest to his readers from other tax and personal finance bloggers.  He no longer publishes a separate BEANS post, but does reference such items at the end of each of his posts.  Thanks to Joe for frequently including TWTP posts, and for plugging my TWTP posts in his “tweets”.

TTFN