CPA vs. Unenrolled Preparer: Tax Code Requires Good Books and Records

CPA vs. Unenrolled Preparer: Tax Code Requires Good Books and Records

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Bill is the author of the tax and financial blog April15.Com.

The blog’s tag line is,

[P]roviding news and sometimes irreverent commentary on today’s tax and financial issues. 

I hate to drag Bill into the ongoing debate about whether and why CPAs are more suited than others to engage in quality tax return preparation, but I really have no choice. That’s because he has recently chosen to blog about a Tax Court case that is particularly relevant to the dispute.

Good accounting is required by the tax code

[Unenrolled tax preparer] Brian Symonette operated a tax preparation business [called The Tax Doctor].
Hopefully, he advised his clients to keep better records than he did himself.
In a Tax Court Opinion published yesterday, Brian lost $14,289 in deductions attributable to his Hummer for failure to keep adequate records of his mileage.

Bill quotes part of the Tax Court Judge’s opinion:

The necessity of keeping appropriate records — and the understanding of the sort of records that would be appropriate-to support so substantial a claim should have been reasonably clear to someone like Brian. After all, he held himself out as knowledgeable about tax matters, people paid him to do tax work for them or give tax advice to them, and he testified at trial as to why it was appropriate for him to insist on being called “Doctor”.
Brian testified he has a Ph.D. in education administration, a master’s degree in management information systems, and a bachelor’s degree in business administration. Yet on this major matter of dispute the major books and records item he offered — the Hummer log — was so much in conflict with what petitioners showed on their tax return that we doubted not only its reliability but even its existence at the time when, Brian testified, it was updated weekly. (Emphases Added)  
The Court said the following about the good Doctor’s failure to maintain proper accounting records: 
[The foregoing facts] lead us to conclude that petitioners failed to maintain books and records in accordance with the requirements of code section 6001 and the regulations authorized (and not challenged by petitioners) thereunder. (Emphasis Added) 

“CPA” is the highest designation for accountants 

All but the militantly nefarious and hopelessly deluded will concede that CPAs are experts at keeping books and records.
There simply is no higher accounting designation.
Thus, if the Internal Revenue Code imposes an affirmative duty on taxpayers to maintain good books and records, doesn’t that explain why CPAs are uniquely qualified to prepare tax returns and why many CPAs are drawn to the field of tax preparation?
Of course it does.
Good tax preparation is about numbers. It’s about keeping good books and records.
In short, it’s about good accounting.
In fact, what is a tax return if it’s not an accounting?
A tax return is simply a tax basis financial statement and CPAs have been licensed and regulated in the preparation of tax basis financial statements since Achilles slew Hektor.
So for anyone to suggest that CPAs are less qualified to prepare tax returns than are those who lack the designation is patently goofy.
Because good accounting skills are a critical part of good tax preparation, CPAs are uniquely qualified to be tax preparers.

Unenrolled preparers are not credentialled in accounting 

And what are the unique qualifications of an unenrolled preparer?
The silence is deafening because the answer is nil.
Zilch. Nada. Zip. None.
The unenrolled preparer’s lack of demonstrated qualifications is precisely why we call him an “unenrolled” preparer.
To put it more bluntly, a beauty school dropout with advanced dyslexia could this very instant become an unenrolled tax preparer merely by facting the announce.
Come to think of it, she could even start her own tax blog and spout to the gullible world that the possession of a CPA license actually diminishes rather than enhances one’s ability to prepare tax returns.
Robert Flach, an unenrolled preparer, has done just that.
He has on several occasions said that unenrolled tax preparers are ostensibly more competent to prepare tax returns than are their CPA counterparts.
Here’s an example: 
I would bet my life on a return prepared by an EA first, an unenrolled preparer 2nd, and a CPA third.  
The logical absurdity of this statement is beyond belief.
A CPA tax preparer is simply an unenrolled preparer with an accounting license.
Robert, then, obviously believes that being too good with numbers actually diminishes ones ability to prepare a tax return. 
On the other hand maybe he assumes that when a person takes a great number of accounting classes then studies for and passes a rigorous 3 day accounting examination he becomes stupider.
Let’s face it, the term “unenrolled preparer” is not a designation at all, but, rather, a phrase used to describe someone who lacks a designation. 
It’s a euphemism used to describe someone who is void of credentials and who is not held to any set of professional standards.

Unenrolled preparers are potentially dangerous 

The simple truth is that absent licensing and regulation taxpayers cannot be sure that an unenrolled preparer is even capable of adding two numbers together much less navigate his way through the ever-expanding minefield of federal tax law.
[Even Treasury Secretary Tim Geithner (an unenrolled preparer?) who now oversees the operation of the IRS, had difficulty preparing his return.]
The IRS and the Courts have found that the operations of many unenrolled preparers are so primeval that they don’t even employ the most basic modern technology in their tax preparation businesses.
And I’m not talking about extremely complicated gadgetry here, just the basic hardware and software that was carefully designed to ensure that mistakes are not made in calculating a taxpayer’s tax liability.
The failure to use all of the tools available to ensure the accurate filing of tax returns is probably malpractice if a CPA or attorney does it.
At a minimum, if a malpractice carrier spotted one of these technophobic, manual preparer types approaching he’d run like the circa 1984 Carl Lewis in the opposite direction.
Furthermore, with regard to electronic filing, the IRS has a stated goal of making all tax preparation completely paperless. This means that manual tax preparers are not positioning themselves for future compliance with IRS practice and procedure.
Some of these manual preparers even have the valor to justify their backwardness by suggesting that it’s actually better for their taxpayer clients that their returns are done by hand rather than by computer.
This is an obvious self-delusion. 
The truth is, these unlicensed preparers simply do not want to spend the money or the time to upgrade their operations, so they convince themselves that it’s actually better for their clients that they don’t.
Of course, that’s not to say they haven’t made any progress over the years: They now no longer claim their Cave Office Deductions by chiseling them on the wall.

Taxpayer Advocate calls for regulation of unenrolled preparers to raise compliance, reduce fraud 

CPAs have demonstrated the knowledge and ability to handle numbers and maintain proper books and records.
This knowledge of accounting is an essential ingredient of good tax preparation and unenrolled preparers generally lack it.
And should, in the rare case, one of them actually come to possess that accounting expertise, he or she should prove it by doing whatever is necessary to obtain the CPA designation.
(Unless, of course, like Mr. Flach he thinks that obtaining the CPA license will turn him into a drooling boob.)
Last week National Taxpayer Advocate Nina Olson stated in her semi-annual report to Congress that she was concerned about the increase in negligence and outright fraud amongst unenrolled tax preparers.
She called for the swift implementation of a strict regulatory regime.
She did not express similar concerns about CPA tax preparers.

Thanks to Bill of blog 

I read several of the other articles in Bill’s archive and found some of them quite interesting.
I have bookmarked his blog and will be reading it daily.
You should do the same. 
About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida

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  1. Agreeably “CPAs have demonstrated the knowledge and ability to handle numbers and maintain proper books and records.” this doesn’t include tax rules and regulations, or tax law.

    I am confused. Why I should prove my accounting ability?

    Is it possible that mentioning concern about the increase in negligence and outright fraud amongst CPAs might have reduced her credibility?

    No that is just militantly nefarious and hopelessly deluded.

    From IRS Publication Circular 230
    10.2 Definitions.
    (1) Attorney means any person who is a member in good standing of the bar of the highest court of any state, territory, or possession of the United States, including a Commonwealth, or the District of Columbia.

    (2) Certified public accountant means any person who is duly qualified to practice as a certified public accountant in any state, territory, or possession of the United States, including a Commonwealth, or the District of Columbia.

    (4) Practice before the Internal Revenue Service comprehends all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing
    and filing documents, corresponding and communicating with the Internal Revenue Service, rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion, and representing a client at conferences, hearings and meetings.

    (5) Practitioner means any individual described in paragraphs (a), (b), (c), (d) or (e) of §10.3.

    § 10.3 Who may practice.
    (a) Attorneys.
    (b) Certified public accountants.
    (c) Enrolled agents.
    (d) Enrolled actuaries.
    (e) Enrolled retirement plan agents

    (f) Others. Any individual qualifying under paragraph §10.5(d) or §10.7 is eligible to practice before the Internal Revenue Service to the extent provided in those sections.

    § 10.7 Representing oneself; participating in rulemaking; limited practice; special appearances;
    and return preparation.

    (c) Limited practice —
    (viii) An individual who prepares and signs a taxpayer’s tax return as the preparer, or who prepares a tax return
    (2) Limitations.
    (iii) An individual who represents a taxpayer under the authority of paragraph (c)(1) of this section is subject, to the extent of his or her authority, to such rules of general applicability regarding standards of conduct and other matters as the Director of the Office of Professional Responsibility prescribes.

    (e) Preparing tax returns and furnishing information.
    Any individual may prepare a tax return, appear as a witness for the taxpayer before the Internal Revenue Service, or furnish information at the request of the Internal Revenue Service or any of its officers or employees.

    Publication 470, Limited Practice Without Enrollment (PDF) explains Revenue Procedure 81-38, which prescribes the standards of conduct, scope of authority, and the circumstances under which an individual preparer of tax returns may exercise the privilege of limited practice as the taxpayer’s representative before the IRS, without enrollment and pursuant to section 10.7(a)(7) of Treasury Department Circular No. 230

    As you can see unenrolled preparers are regulated just as Any other practitioner by Circular 230

  2. Bruce,

    My detailed response to your post will be published tomorrow morning.

    Read my post again. Here is what I said:

    “All but the militantly nefarious and hopelessly deluded will concede that CPAs are experts at keeping books and records. There simply is no higher accounting designation.”

    You can’t possibly disagree with this statement?

    Are you saying that a CPA is NOT an expert in accounting?

    If you are (and I pray you aren’t), then you’re indeed either nefarious or deluded.

    Bruce, “unenrolled preparer” is NOT a designation.

    It simply means that the preparer is neither a CPA, lawyer or IRS Enrolled Agent.

    It is a negative or non-designation meaning anyone who is NOT licensed, has not been required to demonstrate a minimal level of ability or knowledge and does not have to comply with a regulatory body’s professional standards.

    This is stunning that you cannot concede something as basic as this logical formulation:

    An unenrolled preparer with a CPA license is, presumptively, a better trained and educated preparer than,

    Just an unenrolled preparer.

  3. You are correct; I agree a CPA is probably the expert at keeping books and records.

    However, being an expert bookkeeper does not make an expert tax preparer.

    I am aware greatly that “unenrolled preparer” is NOT a designation. What I read into your words are that because one does not have a designation they aren’t capable because they have no one to answer to.

    This just isn’t so.

    What higher regulatory body is there in taxation than the IRS?

    Does Circular 230 not regulate us as well as a CPA or other prepares with title such as Attorneys.
    Enrolled agents, Enrolled actuaries?

    This just isn’t so.

    What higher regulatory body is there in taxation than the IRS?
    Does Circular 230 not regulate us as well as a CPA?

  4. Bruce,

    You have read my post incorrectly on two accounts.

    1. I never said CPAs are expert preparers. I merely said that given a choice between an unenrolled preparer and a preparer who happens to have a CPA license, it makes sense to choose the latter. Independent studies and Nina Olson’s findings agree with my position;

    2. I did not say that unenrolled preparers are incapable of preparing returns. In fact I said the opposite. Some of the best preparers out there are unenrolled preparers. Probably you and Robert fall into that category.

    The good unenrolled preparers should do everything possible to either become CPAs or become IRS Enrolled Agents.

  5. You say
    “The good unenrolled preparers should do everything possible to either become CPAs or become IRS Enrolled Agents.”

    I ask:
    Why? For what purpose?
    Have you forgotten I support the need for tax preparer regulation even Tax Preparer Licensing?

    I’ve had a license. It did nothing for me.

    When preparer regulation is enacted, I’ll be first in line to do whatever is necessary. At that point I’ll be out front demanding that those falsely accredited the title be dealt with accordingly .

  6. Bruce,

    If you guys are right in saying that CPA’s are assumed to be competent in tax preparation, then how could being a CPA NOT do anything for you?

    I am confused.

    Either CPAs have an unfair advantage over unenrolled preparers or they don’t.

    You can’t have it both ways.

    And are you also saying that being an enrolled agent would do nothing for you?

    Robert says he would trust an enrolled agent to prepare a return before he would trust unenrolled preparers or CPAs.

    How, then, could this designation NOT do anything for you?

    By the way, if unenrolled preparers are so good, as Robert and now apparently you suggest, how come we need to regulate them at all?

  7. Just because something is assumed, does not make it so. Given all that has gone on the past few weeks, as a reader, I think now at this point I would begin to question the term CPA and try to become a bit more aware.

    The CPA in my post, is a clear example of why there needs to be a better reign on “who is a tax preparer”, and that is where regulation will come in. At the same time if all of us (including CPAs) are grandfathered in, then nothing will be any different for many years.

    It isn’t just un-enrolled preparers that need regulated. Everyone who preparers returns for profit needs to be tested and regulated. EVERYONE!

    An Attorney who has his/her specialty it tax law, this makes since for him/her to also become a CPA. As you stated, “CPAs have demonstrated the knowledge and ability to handle numbers and maintain proper books and records.”, A key to preparing an accurate return. (Having properly maintained books.)

    How can you not agree that the general public associates tax pro with CPA? Even someone from the AICPA acknowledges this believe by the general public. To not agree yourself would be delusional on your part, and I don’t believe that you are delusional.

    Do I need to copy and paste again the quote from the AICPA the quote that stated plainly that tax prep is an area for which the public already ‘believes’ CPAs to ‘own’.

    It has been suggested that CPAs are aware of this belief.

    Why do we need regulation?

    Is this not reason enough? I mean if for no other reason, wouldn’t it be enough to separate the CPAs who have no business preparing returns from those who do? Or as a CPA, should it just be overlooked that there is one who can’t add or subtract (five places on one return), and has no clue about tax preparation, as one bad egg?

    My personal decisions are just that, personal. However I will answer your question. I was a CPA has I keep pointing out, When client/taxpayers come to me for assistance I don’t want them doing so blindly just because I have a Certification for being a licensed bookkeeper. I want clients to come to me because I am known for my abilities as a “Tax Preparer”. That is why no CPA.
    As for Not becoming an EA, well, Why? I mean a taxpayer regardless of all things is ultimately responsible for their own return. Right? So in a situation before the IRS shouldn’t the taxpayer stand there before them? I believe they should. According to Circular 230, am I not allowed to be there? On the contrary, I am. (I can quote this area of the 230 if you’d like.)

    I never figured you for a propaganda sponge. A lot is being said about un-enrolled prepares and how we need to regulate them. The blinding fact is all preparers need to be regulated.

    Why are un-enrolled prepares the talk and focus point of regulation?

    I cannot say for sure, but it surely couldn’t be because of the blind belief of the public that CPAs and others with professional designations calling themselves Tax pros are doing anything wrong. I mean aren’t they held accountable by private groups.

    Funny, I don’t see the AICPA arresting someone. Then again the IRS will. A designation won’t help either, A CPA will be penalized and possibly imprisoned just as any un-enrolled preparer.

    I put this to you again, is not anyone/everyone who is a tax preparer (CPA or un-enrolled preparer) governed by Circular 230?

    Understandably there are limits placed on an un-enrolled preparer, but they are just as accountable to the IRS as a CPA or some other designation.

  8. Don’t you think it might help your business if you were a CPA or IRS Enrolled Agent?

    Isn’t THAT a good enough reason?

  9. I wasn’t aware my business needed help.

    For some it might be, for me no.

    Again, I want the client because they know I am a tax pro not because they blindly believe I am.

  10. Oh, okay.

    I’m always looking for ways to improve my business.


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