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What Is a Tax Professional?

by Cheri Dohnal

Overview

We are often admonished by retail establishments to "ask your tax professional" about deducting the cost of a new purchase or the availability of a related tax credit. A true tax professional is someone who is intimately knowledgeable about tax law, has studied it extensively, and has experience with IRS audits and collection matters. However, you may be surprised to learn that the majority of U.S. tax preparers are unlicensed and therefore not required to meet any specific standard of expertise. It makes sense to make sure you get advice from a well-informed tax professional.
What the Licenses Mean

Only an Enrolled Agent (EA), Certified Public Accountant (CPA) or attorney can represent any taxpayer at all levels of an audit or collections proceeding before the IRS. These are the only three credentials recognized by the IRS. Attorneys and CPAs are licensed through a state Bar Association or Board of Accountancy, respectively, whereas EAs are licensed through the U.S. Treasury. Attorneys are educated in all areas of law but may choose to specialize in tax law; CPAs are schooled in both accounting and taxation but many concentrate their practices in matters of taxation. The EA credential is strictly granted based on an extensive knowledge of tax law, but many EAs also have accounting backgrounds. All three licenses require annual continuing education, but only the EA's education must be entirely in taxation.

Other Credentials

Other licenses and designations, such as a Certified Financial Planner (CFP) or Certified Management Accountant (CMA) generally require a short course in taxation but do not specialize in it. Neither the CFP nor the CMA is authorized to represent taxpayers at all levels of IRS audits and collections cases. California and Oregon require that tax preparers pass a written exam before they are allowed to be paid (licensed) preparers in those states. Passing an additional examination entitles the examinee to work without the oversight of a more experienced preparer.
Unlicensed Professionals

Despite their lack of formal credentials, there are many unlicensed tax preparers who are extremely knowledgeable about tax matters. Some have been preparing taxes and giving tax advice for a number of years and spend large amounts of time and money keeping up on changes in tax law. However, it is difficult to know with certainty just how well-informed they are or how carefully they keep up with the constantly changing tax laws. Any paid preparer, licensed or not, can represent a taxpayer in basic IRS audit proceedings if he prepared the tax return that is being audited. His powers are very limited, however, and few unlicensed preparers have enough experience in audit cases to do a respectable job of representation. If the audit goes beyond the very basics, you should seriously consider hiring an EA, CPA or attorney who specializes in representation work.
Other Considerations

Even if you never expect to be audited and will never owe back taxes to the IRS for any reason, you may still want to get tax advice only from those who have earned the right to argue cases before the IRS. These professionals are not only required to have a certain level of tax knowledge and maintain continuing education standards, but they also have a stake in providing correct tax information. In addition to IRS fines and penalties for tax preparation errors, EAs, CPAs and attorneys are subject to professional discipline by their licensing bodies for ethics and other violations. An egregious enough violation of professional standards can result in revocation of the license.
Specific IRS Rules

You may wish to review the IRS standards for licensed tax professionals, which apply only to the three licenses discussed above that are allowed full representation rights on behalf of taxpayers. The publication that outlines those standards and rights is Circular 230.