Tax Preparer vs CPA: The Differences Explained
In many countries with convoluted tax codes that require companies to report and file their own internal taxes, it is not uncommon for accounting firms or even freelance accounting professionals to provide their services so as to facilitate the filing of these taxes.
However, there is quite a distinct difference between the services provided by these accounting professionals, especially in that of the exact method at which they have arrived at their current profession, and as such it would do many business owners well to learn the distinction between these different professionals.
Tax preparers, in comparison to CPAs, are not as qualified for the deep and complex factors that are brought into account when calculating the maximum possible federal tax return as well as the little intricate details of each tax law, especially when concerning state-level or even municipal-level tax code.
What Does a Tax Preparer Do?
Tax preparers are individuals certified by the Internal Revenue Service to prepare tax filings, returns or claims in return for monetary compensation. In layman’s terms, this means that tax preparers are usually hired for the purpose of doing the taxes of a corporate entity or individual who will pay them upon completion of the job.
However, the tax preparers sector is primarily an unregulated profession with very little in the name of certification, registration or even formal education requirements and as such many freelance or independent contractor tax preparers may provide a lower quality service as opposed to other members of the same profession.
Keep in mind that the term tax preparer is also interchangeably used to refer to any member of the financial sector certified and capable of preparing documents pertaining to tax returns, filings, and claims, and as such certified accountants, bookkeepers, CPAs and professional financial firm agents may also call themselves tax preparers in certain instances.
In the event that you are looking for a tax preparer to hire that does not otherwise possess any of these other credentials, it is possible to investigate their background and tax preparer qualifications in the Internal Revenue Service’s treasury network, of which they must be licensed within so as to operate under the purview of federal law.
What Does a CPA Do?
The abbreviation CPA refers to the profession known as a certified public accountant, wherein legally and educationally qualified accountants may act within an accounting firm or as independent contractors in order to provide their financial services to any individual of the public.
While it depends on the particular location, the majority of CPAs must first undergo a licensure exam, possess a college degree and also have at least a single year of experience working as an accountant or in a similar profession within the financial sector.
Certified public accountants, unlike tax preparers, are capable of offering a wide variety of services not only pertaining to the filing and claiming of taxes, and as such require a higher compensation when being kept on retainer. Amongst these other services are business consultation, financial audit services, estate planning, financial management planning and, of course, tax preparation and planning.
The majority of CPAs are usually employed either directly by a corporation or otherwise by association through an accounting firm. However, some CPAs in certain areas of the western world have instead chosen to either work for the public sector as public servants or to otherwise act as independent contractors which govern their own accounting services.
Does a Tax Preparer Have to Be a CPA?
While the term tax preparer can also, by technical definition, refer to certified public accountants as well, the profession of tax preparer does not in fact require the individual to be a certified public accountant or to possess anything remotely close to their qualifications at all.
Thus, it is entirely possible for a tax preparer to offer their services without possessing CPA certifications, and as such tax preparers are the ideal choice for simpler tax preparation jobs, as their rates are often lower than that of professional accountants such as CPAs.
And in vice versa, CPAs are also automatically considered tax preparers by nature of their profession. While the internal revenue service requires that tax preparers possess a PTIN certification in order to work under the legal definition of a tax preparer, it is only certified members of the financial profession that are granted specific representation rights by the IRS.
However, this may depend on the particular country or state jurisdiction the tax preparer is choosing to practice in, and as such this particular legal distinction is not always reliable. As always, it is up to the company or individual to decide whether their accounting assistance is of sufficient quality.
Are Tax Advisors Tax Preparers?
While the general function of a tax advisor and tax preparer is practically the same in the eyes of the federal government, they are in fact distinctly different and as such should not be confused between one another.
Tax advisors provide a more in-depth analysis into the financial tax state of an individual or entity than a tax preparer would owing to a higher level of interest placed into their particular client’s case. This equates, often, to a more efficient but slower service that may cost somewhat more than the services of a tax preparer.
While tax preparers often only require a cursory exchange of information in order to prepare their services and advise the client on reducing their income tax liability, tax advisors often require a partial to full disclosure of the client’s financial information as well as may interview them on their own personal goals or the goals of their corporation.
Is a Tax Accountant the Same as a Tax Preparer?
The term tax accountant most often is found to refer to certified public accountants, financial professionals who have undergone careful examination and education in order to perform their jobs. Tax accountants may assist their clients not only with filing of taxes and their subsequent returns but also during IRS tax audits, of which no corporation will wish to undergo without significant accounting assistance.
Tax preparers, on the other hand, are not licensed to aid their clients during an IRS financial audit and as such may only provide their services on a situational basis, most often pertaining to the narrow scope of advising their clients in regards to preparing and filing of tax-related documentation.
Tax accountants may also provide advice much like a tax preparer would, with the added extension that their advice may encompass the entirety of the client’s estate and financial plans, providing a full coverage of their accounts, whether it be an individual or an entity.
Can Anyone Be a Tax Preparer?
As the legal definition of an individual capable of acting in a professional capacity to prepare taxes is rather lax, it is likely that nearly anyone desiring to do so can develop a career as a tax preparer.
Considering the fact that the only requirement to being a licensed tax preparer is possessing an IRS Preparer Tax Identification Number, persons from all walks of life and levels of experience may work beneath the title of tax preparer.
This often results in tax preparers widely differing in levels of experience, subjective skill and even educational attainment. This is not to say, however, that tax preparers that do not possess these qualifications will not perform an adequate or even excellent job, however, and it is entirely up to the individual client or corporate entity to decide the best course of action for their particular needs.
In the event that the client is still unsure of whom to hire, it is best to take the safe route and pay a higher premium for the services of a CPA or accounting firm, as it is likely these individuals not only have undergone rigorous education to achieve their title but also possess colleagues they may consult in the event that they cannot perform an adequate service.
Are CPAs the Same as Accountants?
The term CPA, as previously mentioned in this article, is simply abbreviation of the job title certified public accountant, and as such it is by no stretch of logic to reason that all CPAs are considered accountants.
However, the opposite is not true at all, and not all accountants may be considered CPAs. The particular training required to become a certified public accountant is somewhat different than that of becoming an accountant, and as such this minor distinction separates the two professions at a certain level.
Among these distinctions is the Uniform CPA exam, a type of professional certification exam that a certified public accountant prospective must first pass prior to being legally certified to work in their desired profession.
While accountants must also be registered with certain organizations in order to legally provide professional accounting services, their field of focus may be more specific or specialized than that of a CPA.
A large majority of fields other than that of a certified public accountant may be pursued by accountants that desire higher certification, such as that of a certified internal auditor, or even the prestigious certified management accountancy qualification.
What Sort of Software Do Tax Preparers and CPAs Use? Can You Use Tax Preparation Software Instead?
With the advent of modern tax software, professional financial advisors such as CPAs and tax preparers have been forced to adapt to a rapidly changing career sector, though this is not without its benefits.
Whether part of a large tax firm or working as a freelance professional, both CPAs and tax preparers may utilize proprietary tax software in order to facilitate their work, especially in simpler tax cases that do not require in-depth scrutinization.
Tax preparation software companies, while ordinarily developing tax preparation software for tax payers as an alternative to tax preparers or CPAs, also develop more specialized forms of their own software in order to assist financial professionals with their job, and as such are capable of increasing the speed and efficiency of both types of tax professionals.
Not all software is applicable to every tax situation, however, and because of this it is best to hire CPAs or tax preparers instead of using tax software yourself so as to prevent any discrepancies or errors from occurring.
This is doubly as applicable if the client in question is a corporate entity or otherwise an individual with a significant amount of assets.
1. Unknown Author. “See generally Uniform CPA Examination: Examination Content Specifications, American Inst. of Certified Public Accountants, p. 11-12 (orig. issued June 14, 2002; references updated October 19, 2005)” (PDF). Cpa-exam.org.
2. Unknown Author. “Paid Preparer Review for National Public Liaison,” Office of Program Evaluation and Risk Analysis, Internal Revenue Service, U.S. Dep’t of the Treasury (Sept. 2007), as cited in IRS Publication 4832, “Return Preparer Review” (Dec. 2009)
3. Unknown Author. (August 2021) “Need someone to prepare your tax return?” U.S. Internal Revenue Service irs.gov