How to Become a Tax Preparer was originally published on Forage.
A tax preparer organizes, prepares, and files tax returns on behalf of another person. Figuring out how to become a tax preparer requires deciding between a few paths: You can become a tax preparer by registering with the Internal Revenue Service, becoming an accountant, or even by going to law school.
In this guide, we’ll cover:
- What Is a Tax Preparer?
- Types of Tax Preparers
- Paths to Becoming a Tax Preparer
- Tax Preparer Salaries
- Pros and Cons of Tax Preparation Careers
What Is a Tax Preparer?
At the most basic level, tax preparers prepare taxes — if you do your taxes each spring, you are a tax preparer (just not a professional one). Professional tax preparers can be individuals who have registered with the Internal Revenue Service (IRS), accountants who specialize in tax, or lawyers who focus on representing clients to the IRS and state tax agencies.
The role of a tax preparer is generally the same regardless of what type of professional they are: help clients calculate and file tax returns. But the responsibilities beyond basic tax filing can vary: A tax lawyer may provide different services to their clients than a registered tax preparer.
For example, tax lawyers “apply [their] knowledge of tax law to help clients take advantage of incentives available to them,” says Amanda D. Scott, Esq. of Anchin accounting firm.
Lawyers specializing in tax and tax preparation also take on advisory roles, guiding clients through complex or confusing tax situations.
“I answer questions like ‘What is the best type of entity to open, given my current company structure?’ and ‘What happens if I move to the Netherlands and work for a foreign company as a U.S. citizen?’” says Scott.
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Types of Tax Preparers
One main difference between some types of tax preparers is whether or not they have representation rights. Representation rights are the ability to represent someone in their dealings with the IRS requires more credentials than simple registration, as this role carries a lot of weight.
When a tax preparer represents someone to the IRS, they make decisions on their client’s behalf. The representative is given a “power of attorney” to interact with, provide explanations to, and enter into agreements with the IRS on their client’s behalf. Because of this added responsibility, only enrolled agents, CPAs, and tax attorneys have full representation rights.
Registered Tax Professionals
Registered tax preparers are individuals who have registered with the IRS to get a preparer tax identification number (PTIN) and passed a suitability check. The suitability check looks for any unpaid taxes or criminal activity that would disqualify someone from becoming a tax preparer. However, tax preparers who only carry this registration have limited abilities: They can prepare and file taxes on behalf of others but cannot represent others to the IRS.
An enrolled agent is a tax professional who has registered with the IRS and has passed a three-part exam called the Special Enrollment Examination (SEE). This exam covers tax regulations, ethics, and the rules surrounding representation. Licensed enrolled agents have full representation rights with the IRS.
Certified Public Accountants
Certified public accountants (CPAs) are tax professionals who have two years of relevant work experience and have completed four exams centered on auditing, ethics, regulation, and tax. The American Institute of Certified Public Accountants (AICPA) administers the exam, though each state’s Board of Accountancy governs the licenses. CPAs have full representation rights with the IRS.
It is important to remember that a CPA is not just a tax preparer. A CPA is an accountant, first and foremost, and may specialize in areas outside of tax, such as management accounting or auditing.
A tax attorney is a lawyer who specializes in tax law. Attorneys must pass the bar exam to legally practice law. These tests differ slightly depending on the state but are intended to prove high-level knowledge of the law and legal proceedings. Tax attorneys have full representation rights with the IRS.
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Paths to Becoming a Tax Preparer
There are four ways to become a tax preparer:
- Register with the IRS and receive a preparer tax identification number (PTIN)
- Become an enrolled agent through the IRS
- Gain a certified public accountant (CPA) license
- Become a tax attorney
All tax preparers, including attorneys and CPAs, need a PTIN to file taxes with the IRS. This number identifies the tax preparer so the IRS can quickly determine who is responsible for a tax filing if there are questions or concerns. Getting a preparer tax identification number (PTIN) with IRS doesn’t require any licensing. The only requirement is passing a suitability check and renewing the registration annually.
Online tax filing has made the process easier for the IRS but has opened more avenues for fraud and risk. So, tax preparers who intend to file more than ten tax returns in one year must file all returns online, but they also need to go through an added layer of security by submitting an official copy of their fingerprints and getting an electronic filing identification number (EIFN).
Education and Licensure
Registered Tax Professionals
Registering with the IRS to get a PTIN has no education requirements. Tax preparation can be complicated, so understanding how to analyze an individual’s financial situation, sort through their documents, and determine what tax benefits they may qualify for comes with practice. However, having a background in finance, accounting, or tax can give you a stronger foundation of knowledge to work from.
Certain states also require registered tax professionals to get a license. For example, California, New York, Connecticut, Illinois, Maryland, Nevada, and Oregon require all tax preparers to be licensed with the state’s tax agency. These states typically require tax preparers to pass an exam covering tax regulations and ethics and to log continuing education hours periodically.
Enrolled agents don’t have any specific education requirements. However, since enrolled agents must pass the three-part SEE exam on tax regulations and ethics, prior experience in accounting, tax law, finance, or a related field can help. Additionally, enrolled agents must take 72 hours of continuing education every three years to maintain their licenses.
Certified Public Accountants
CPAs must have at least a bachelor’s degree with 120+ credit hours. Because the CPA licensing exam is very rigorous, prospective accountants can benefit from a degree in accounting or finance. CPAs typically have continuing education requirements to maintain their license with their state and to continue their membership with AICPA. Additionally, accountants may have the opportunity to take tax classes while in college.
“Tax classes are a very accurate representation of what tax professionals do on a daily basis,” says Scott. “We are given client scenarios, and we use the tax code to give the client an answer.”
Tax attorneys have significantly more education requirements than the other paths: bachelor’s degree, law school, and passing the bar exam. However, for those pursuing law, trying out some tax classes can be a great way to see if they enjoy the field. Additionally, attorneys may have continuing education requirements depending on their jurisdiction, and they must renew their bar registration periodically.
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Internships and Experiences
Seeking experiences and internships outside the classroom can be a great way to determine if tax preparation is the right career for you.
“The biggest tragedy I see is people that get their degree or certification before working in the field, just to get there and in six months realize that it’s not for them,” says Romeo Razi, CPA and owner of Taxed Right.
Internships and extracurricular programs can also provide significant inroads to entry-level roles after graduation and help you learn how these tax processes work in the real world.
“My law school had a volunteer program that provided tax assistance to people who were low income or elderly,” says Scott. “Volunteer programs like this are a great way to get some experience and learn more about compliance and some basic income tax laws.”
The most important skill when preparing and filing tax returns is attention to detail. “If you’re not a detailed-oriented person, this is not the profession for you,” says Razi.
Other vital soft skills tax professionals use in their day-to-day jobs are:
- Analytical thinking
Hard or Technical Skills
The required technical skills will differ depending on the type of tax preparer. For example, tax attorneys need a much deeper understanding of legal proceedings than CPAs. On the other hand, a CPA needs to know a broader range of accounting principles than an enrolled agent would.
However, the hard skills necessary for all tax professionals are:
- Data entry skills
- Knowledge of income tax and compliance laws, regulations, and ethics
- Familiarity with programs like QuickBooks and Microsoft Excel
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Tax preparers who only register with the IRS or become enrolled agents may not have a direct career advancement path. Ultimately, they can move up corporate ladders within tax preparation companies or open small businesses to serve their clients.
For CPAs and tax attorneys, the advancement process is more structured.
“The process is very similar to law firms,” says Razi. “After 10 years or so, you can become a partner.”
But there are still options for tax attorneys and accountants to move outside of large corporate firms. Ultimately, “the highest-ranking position in tax preparation is owning your own firm, like I do, or becoming a partner at a regional firm,” says Razi.
Tax professionals can also transition from tax preparation since skills like data entry and attention to detail are highly transferable. Some tax professionals may go into more advisory roles, suggests Scott. Tax preparers can also transition from working in an accounting firm to working in-house at a company, providing tax services to that company exclusively.
Tax Preparer Salaries
According to the U.S. Bureau of Labor Statistics (BLS), tax preparers (excluding accountants and auditors), make an average annual salary of $51,080. However, with more accreditations typically comes higher pay. For example, across all specializations, levels of experience, and locations, accountants have an average annual salary of $83,980, and lawyers are often paid more than six figures.
An individual tax professional who only files a few tax returns per year has flexibility in how they charge for their services. For example, they can charge a flat rate for each return or base the rates on individual services, like having simple tax returns at one rate and more complicated returns at a higher rate.
Enrolled agents, CPAs, and tax attorneys have less freedom in choosing how services are billed if they work for a larger firm or company. However, if they decide to start their own business, they also can control how much their tax services cost.
Tax professionals may receive overtime during the busy season, performance bonuses, stock shares, and perks during the slower parts of the year, such as four-day work weeks outside the primary tax season.
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Pros and Cons of Tax Preparation Careers
ProsConsRewarding Busy seasonStableMonotonous
Tax professionals build strong relationships with their clients, which can bring a lot of satisfaction. “You become your clients’ most trusted adviser,” says Razi.
While that comes with its own set of pressures, the job has immediate rewards: You can see how your expertise affects your clients in real-time and how helping them navigate complex tax situations provides instant relief. Taxes are frustrating for most people, so alleviating that stress for your clients is a rewarding experience.
Additionally, “it’s a job focused on problem-solving, which I find very interesting,” says Scott.
So, being a tax preparer has the added satisfaction of solving puzzles, except these puzzles come with the reward of helping clients through challenging situations.
And this career isn’t going anywhere anytime soon. As Benjamin Franklin once said, “nothing is certain except death and taxes” — as long as taxes exist, there will need to be professionals who understand tax deeply and can assist individuals and companies through the filing process.
Every career has some downsides, though. The big one for tax preparation is the busy season. With taxes due in mid-April, the months leading up to Tax Day involve long hours and a lot of stress.
“Busy season can get really hectic, but it’s cyclical,” says Scott. “You know when the busy season is coming.”
However, the cyclical nature of the work can become monotonous. For example, some clients may have very challenging and unique taxes, making the work feel new, but other clients may have straightforward returns, which can begin to feel tiring after a while if data entry isn’t your thing.
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The post How to Become a Tax Preparer appeared first on Forage.