EXPLAINED: Why CPA or EA designations do not matter much

[Michael Plaks]

It's often repeated, especially here on BiggerPockets, that you need your taxes done by a CPA or an EA - Enrolled Agent. Despite me being an EA myself for almost 30 years and me having trained several other accountants for their EA credentials, I'm telling you now: you do NOT have to hire a CPA or an EA for your taxes. Tax preparation does not require one to be licensed.

I will start with a quick personal story. My mother had been dealing with severe back pains for years. She consulted multiple highly recommended physicians and even had a surgery, with no improvement. During one of her post-surgery office visits, a newly hired nurse examined her and remarked: Ma'am, you have a broken hip! And the pain from it feels like a back pain. Three highly acclaimed doctors with multiple credentials missed it despite all their testing and technology, resulting in many months of mistreatment. 

And one other personal story, this one even more to the point. When I conceived my tax business back in 1995, I decided to obtain an Enrolled Agent designation beforehand. For some credibility, since I had nothing else to lean on. So I signed up for an EA exam preparation course. I was the only one in the class with no field experience. Other folks had been preparing taxes for years. I passed the test on my first try and got my EA letters. Most of my seasoned classmates did not. 

So here I was, a freshly minted EA with an impressive certificate, accepting my first client and bluffing my way through the initial client meeting as I still did not know squat about actual tax preparation. Once the client left, I opened my tax course manuals trying to figure out what to do about their tax form that I have never seen before. The form was 1099-DIV. Yes, this is how ignorant this EA was back then. 

No reason to expect that today's EAs (or CPAs) are much better prepared to do their job. I have seen too many atrocious tax returns prepared and signed by EAs and CPAs to have a more optimistic outlook. In contrast, my employees, most of them without any letters after their names, understand HUDs, STRs and REPS better than most CPAs. So do many unlicensed tax preparers elsewhere, as long as they are well trained and specialize in real estate.

Really, you can stop reading now. I already made my point: licensing is not required for your tax preparer. The rest of this post clarifies licensing and training of various tax professionals.

CPAs - Certified Public Accountants.

This is a license in accounting issued by a state. Despite some differences between states in what is required to become a CPA, most of the requirements are uniform nationwide:

1. A Bachelor's degree in accounting with a 150 credit hours minimum
2. One year of verified experience in accounting
3. Pass a CPA exam
4. Ongoing continuing education in accounting

This looks pretty solid and reliable for a tax person. Until you realize that CPAs' education, work experience and ongoing training are in accounting and not necessarily in taxation. Yes, taxation is accounting, but only a small part of it. CPAs can work in corporate finance or in government payroll and have zero tax knowledge after instantly forgetting their couple of college tax courses and a small subsection of their CPA exam. 

Their continuing education can be in anything remotely related to accounting, including economics, human resources and IT. They literally can never take a tax class after passing their CPA exam. My firm prepares tax returns for quite a few CPAs. They have no idea how to do it.

What if your CPA does specialize in real estate taxation? That is fantastic. Being a CPA, they should also have a good understanding of other parts of accounting. For instance, they can audit your financial statements. Plus, just like EAs and attorneys, they have the right to represent you if you have IRS problems. Finally, CPAs licensed in one state can prepare tax returns in all other states, too.

EAs - Enrolled Agents

This is a license issued by the Federal government allowing a person to represent clients in dealings with the IRS: audits, collections and so on.

Important to point out two facts:
1. This license is specific to taxation and IRS procedures. Nothing else. 
2. This is a license in IRS representation and NOT in tax preparation. Tax preparation requires no license.

To earn an EA designation, one must either:

A. Pass an EA exam - or -
B. Have 5 years of experience working for the IRS (in certain specific roles)
and
Ongoing continuing education in taxation

You can notice a huge difference from the requirements imposed on CPAs:
- no college degree required
- no training in accounting as a whole, just in taxation
- for former IRS employees, no testing is required, they're presumed to be qualified (a questionable assumption, actually)
- for everyone else who is taking the EA exam, no work experience is required (as my own story illustrated)

The good news is that your EA is assured to have either training in taxation or prior experience working for the IRS, and their ongoing training is specifically in taxation. Does it guarantee that they are competent and up to date? Of course not.

One could have previously worked for the IRS while being totally ignorant (oh yes, it does happen, a lot) and carry their ignorance and bad attitude into their EA career. I have met some of those EAs. One could fake their continuing education online while multitasking or even have their staff take classes for them, it also happens.

Most importantly, even an ethical and competent EA cannot really help an investor if not specializing in real estate. They could be brilliant in Oil&Gas taxation or farmers taxation, yet not understand real estate taxation. Let's again compare this with healthcare. If you have a severe cough, are you going to see your proctologist or your ENT? They are both MDs, should not make a difference, right?

What if your EA does specialize in real estate taxation? That one is a winner. They can work with any state, and, just like CPAs and attorneys, they have the right to represent you if you're in trouble with the IRS. In fact, EAs frequently specialize in resolving IRS problems, which also translates into preventing such problems.

Tax attorneys

For some reason, BiggerPockets people often ask for a tax attorney. I guess, it's our society's fascination with litigation.

Let's understand what tax attorneys are supposed to be for. For situations requiring in-depth law analysis or for taking the IRS to court. Most tax questions have answers based on the tax law. You read what the law says, and with an understanding of the big picture concepts (unfortunately, this understanding is often absent) and some experience reading the legalese, you can figure out what you need. Competent tax accountants, including CPAs, EAs and unlicensed ones, are doing this daily. 

Then there's a grey area, often a massive one, particularly with real estate taxation. In these situations, there is no clear answer in the law. It is subject to interpretation, and interpretation of the law is what courts do. You need to study case precedents and analyze how the courts interpret the law. 

It's challenging for more than one reason. First, the language used by courts is heavy. Knowing English is not enough. Then, decisions are often contradictory and are always case-specific. In other words, your mileage will vary. Also, different cases in different courts have different weight. For example, some decisions are not allowed to be used as precedents. 

The most experienced CPAs and EAs have the skills to find and interpret relevant court cases and apply such analysis to your situation. However, tax attorneys are best suited for legal research. Whether or not your situation is complex enough to warrant consulting a tax attorney is a good question.

But the IRS sent me a threatening letter, I need a tax attorney! No, you don't. There are three types of professionals who are permitted to deal with the IRS on your behalf:
- CPAs
- EAs
- attorneys (any attorney, not only a tax attorney)

In most situations, CPAs and EAs can do the job, as long as they specialize in IRS representation. However, if your case gets so serious that you have to take the IRS to court - well, now you do need a tax attorney. Nobody else can sue the IRS on your behalf and represent you in court. That said, in my almost 30 years in business, only one case warranted taking the IRS to court, and even that case was settled out of court without tax attorneys.


Unlicensed tax preparers.

Again: licensing is NOT required for tax preparation. Anybody can legally work on your taxes. Also, anybody can legally work on your car. Do you want someone licensed or someone good? Ideally, both, but they don't always go together.

One thing about "always": always do your due diligence.

Mandatory "in closing..." paragraph.

If I have to summarize this long post in one sentence, what matters is not CPA/EA designation but competence, and specifically in real estate taxation.

By the way, here is my old but still relevant post on verifying a real estate accountant's technical competence:
https://www.biggerpockets.com/forums/51/topics/792277-how-to...