In this guide, we explore the four main types of tax professionals and the benefits of working with a tax advisor to help navigate challenging tax scenarios. We’ll dive into what a tax advisor does, and help you make an informed decision about which type of tax professional is right for you.
Choosing a tax preparer is an important decision for everyone, and even more so with complex situations such as equity compensation, crypto, or business transactions. With unique or challenging tax scenarios, you can benefit from the proactive, ongoing support of a tax professional, in which case a credentialed tax advisor is a wise choice.
Table of contents:
- What are the four main types of tax professionals?
- Which tax professionals are considered tax advisors?
- What does a tax advisor do?
- Who should hire a tax advisor?
- The importance of a PTIN
- Considerations when selecting a tax advisor
What are the four main types of tax professionals?
When selecting a tax professional, there are four main types to consider:
- Certified Public Accountant (CPA)
- Enrolled Agent (EA)
- Tax Attorney
- Non-credential Tax Professional
Each type requires its own education and training, allowing them to provide specific services, which we’ll explore below.
Certified Public Accountant (CPA)
A Certified Public Accountant, or CPA, is a tax professional who has met state credentials for holding the designation.
Education and Employment
Typically, a CPA has earned a bachelor’s degree, has completed 150 hours of education credit, and has passed the Uniform Certified Public Accountant Examination, administered by the American Institute of Certified Public Accountants (AICPA). CPAs are licensed by state boards of accountancy in the state where they practice. Many states require an ethics exam covering professional conduct and accounting rules, ensuring that CPAs are equipped to handle ethical situations during their career. Additionally, after passing exams, CPAs are required to meet continuing education standards in their state.
Once licensed, CPAs work in various settings including public accounting firms, corporate finance departments, and other financial companies offering services that span tax preparation and planning, auditing, and financial strategy.
When to work with a CPA
CPAs are granted unlimited representation rights by the IRS, which means they can represent clients on any tax matters, such as audits and appeals even if they did not prepare the tax return.
CPAs provide ongoing, holistic advice including:
- Tax preparation for complex situations including multiple income sources, business transactions, and investments
- Tax advice for equity compensation transactions involving RSUs and stock options
- Strategic business, financial, and tax guidance to optimize a business’s tax liability
- Assistance with estimated tax payments from self-employment income
- Estate planning to minimize tax implications and align with family goals
Enrolled Agent (EA)
An enrolled agent (EA) holds an IRS-granted credential proving proficiency in federal tax matters.
Education and Employment
To become an EA, one must pass the IRS’s Special Enrollment Examination (SEE). The exam covers a wide array of tax topics, including tax preparation for individuals and businesses, client representation, and tax practice and procedures. Enrolled agents must obtain continuing education of 72 hours every three years with a minimum of 16 hours per year including ethics training. The National Association of Enrolled Agents (NAEA) is the leading professional organization for EAs, providing resources and advocacy for its members.
Licensed EAs can work for a range of companies including public account firms, small accounting and tax firms, banks, and investment or law firms. Additionally, EAs can work directly for the IRS or state departments of revenue.
When to work with an EA
As tax specialists, EAs are granted unlimited representation rights by the IRS and are authorized to represent clients for audits, collections, and appeals.
EAs are trained to provide comprehensive services, including:
- Tax preparation, advice, and filing for individuals and businesses with complex situations
- Representation and resolution services before the IRS for audits, back taxes, or penalties
- Tax planning and preparation for estates and trusts
Tax Attorney
A tax attorney specializes in tax law, having completed law school and passed the bar examination in their practicing state.
Education and Employment
In addition to law school, many tax attorneys also pursue an optional LLM, or Legum Magister degree, in taxation to deepen their expertise in the subject. Tax attorneys are typically affiliated with bar associations at both the state and national levels, such as the American Bar Association (ABA). Many states require continuing education to remain current on tax law.
Employed by law firms, corporate legal departments, or running their own practices, tax attorneys can be looked to for legal tax issues and disputes, along with comprehensive tax planning and preparation.
When to work with a Tax Attorney
Similar to CPAs and EAs, tax attorneys are granted unlimited representation rights by the IRS.
Tax attorneys provide comprehensive advice, making them a good fit for clients needing:
- Potential representation in U.S. Tax Court and the need for attorney-client privilege
- Advice on which business entity to select (LLC, C Corporation, S Corporation, etc.)
- Guidance and creation of wills, trusts, and estate planning to optimize tax strategies
- Strategies to legally minimize business or individual tax payments associated with large transactions such as mergers and acquisitions or the sale of an asset
- International tax law advice on issues including foreign tax credits or international incorporation
Their training and education make them a good fit for clients needing a deep understanding of legal precedents and regulatory nuances.
Non-credentialed Tax Preparer
Non-credentialed tax preparers, sometimes generally referred to as tax professionals, vary widely in their backgrounds and expertise but lack the advanced education and licensing of credentialed tax professionals.
Education and Employment
Individuals who are non-credentialed tax preparers lack the formal credentials of a CPA, EA, or Tax Attorney, with some states requiring less extensive tax education prior to operating. While they don’t have the credentials from the IRS, AICPA, or a Bar Association, they are still required by the IRS to obtain a Preparer Tax Identification Number (PTIN) allowing them to prepare federal tax returns legally.
They may work independently or for tax preparation firms, sometimes on a seasonal basis. Non-credentialed tax preparers may also work for the IRS’s Volunteer Income Tax Assistance program which is an initiative that supports free tax preparation service for the underserved through various partner organizations.
When to work with a Non-credentialed Tax preparer
Unlike CPAs, EAs, and tax attorneys, they are not granted unlimited representation rights by the IRS.
Non-credentialed tax preparers generally provide:
- Basic tax preparation to clients with less complex situations on an annual basis without an ongoing relationship
- General guidance on common tax credits and deductions applicable to individual taxpayers
Which tax professionals are considered tax advisors?
In the United States, a tax advisor, sometimes called a tax consultant, is a broad term that is used to apply to a financial expert with advanced knowledge of tax accounting and law. Tax advisors focus on counseling clients on a range of tax optimization strategies.
Tax advisors can be CPAs, Enrolled Agents, or Tax attorneys and work for a company or be self-employed.
The Different Types of Tax Advisors |
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| Tax Professional | Qualifications | Services Offered |
| Certified Public Accountant (CPA) | Active CPA license and completed coursework |
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| Enrolled Agent (EA) | Passed IRS Special Enrollment Exam or former IRS experience |
|
| Tax Attorney | Law degree (JD), often with a Master of Laws (LLM) in Taxation |
|
What does a tax advisor do?
What distinguishes a tax advisor from working with a credentialed or non-credentialed tax professional on a one-time basis is an advisor’s ability to provide holistic advice on tax strategy to minimize tax liabilities for their clients.
Beyond credentials and education, the benefit of working with a tax advisor over a one-time tax preparer lies in their deep understanding of a client’s financial situation. The ongoing advisor-client relationship can lead to more tailored tax strategies. Because tax advisors understand their client’s unique challenges and are up to speed on the tax code, they can proactively work with clients to navigate tax situations.
Services provided by tax advisors
Tax advisors can range from general advisors to specialized experts. The services provided by these professionals vary but may fall into the following categories.
- Tax preparation and filing: Advisors prepare and file taxes on behalf of taxpayers, helping clients avoid penalties, remain in compliance, and optimize tax deductions and credits.
- Specialized services: Tax advisors provide tailored advice for unique situations including estate planning, property tax, international taxes, and industry-specific taxes. They may also help clients who were granted stock options or RSUs by their employer.
- Business taxes: Some tax advisors may specialize in areas of business tax such as corporate restructuring, small business, or startups.
- Tax scenario modeling: Taxpayers can work with advisors throughout the year to help understand the tax implications of different actions, such as real estate or investment transactions.
- Tax law: Tax attorneys may be valuable when clients are looking to minimize legal risk or when dealing directly with the IRS.
Who should hire a tax advisor?
Tax advisors can be invaluable for a broad spectrum of taxpayers with complex tax situations. This can include taxpayers with multiple income streams, investments in stocks, real estate, or foreign assets, and those who have experienced significant recent life events, such as marriage, divorce, the birth of a child, or the purchase of a home. These situations can introduce tax complexities that a seasoned professional can help navigate.
Taxpayers in the following groups commonly look to tax advisors for guidance:
- Business owners: Regardless of the business’s size, a tax advisor can lend their expertise to navigating the intricacies of payroll, deductions, credits, and multi-state tax compliance. Strategic tax planning can positively impact a business owner’s bottom line as an advisor can identify tax-saving opportunities.
- Self-employed individuals: There are unique tax considerations for self-employed individuals including business structure, deductions for home offices, work equipment, and additional business expenses. Similar to a small business, a tax advisor can assist in ensuring eligible deductions are maximized along with minimizing tax liabilities. Additionally, an advisor can help self-employed individuals with quarterly tax payments to avoid penalties or underpayment to the IRS.
- Employees with equity compensation: Employees who receive equity compensation may face complex tax situations. Equity compensation can include restricted stock units or awards (RSUs/RSAs), stock options, or Qualified Small Business Stock (QSBS) with various arrangements depending on the company. A tax advisor can provide guidance on the implications of vesting schedules and timing of stock sales to help minimize the taxes owed on equity compensation.
- High-net-worth individuals: Tax advisors can help individuals navigate multiple income sources, investments, and potentially international tax considerations to help preserve and grow wealth. As an individual’s net worth increases, they can leverage a tax advisor’s expertise to navigate the increasing complexities of tax laws.
- Individuals with stock and crypto investments: For individuals with large stock and cryptocurrency investments, navigating taxes can be particularly challenging due to the evolving regulations and tax treatment of capital gains and losses. As a result, do-it-yourself tax software is constantly changing, potentially making self-filing overwhelming, especially for crypto gains and losses. A tax advisor can help individuals accurately report short-term vs. long-term capital gains, comply with wash sale rules, and proactively understand the unique considerations for crypto transactions.
Additionally, individuals or businesses facing tax issues such as audits, back taxes, or penalties should seek the expertise of a tax advisor. These situations can result in negotiating with tax authorities and a tax advisor can minimize the negative outcomes using their knowledge of the legal and regulatory system.
In summary, anyone who needs services beyond basic tax preparation and filing may benefit from the expertise of a credentialed tax advisor.
The importance of a PTIN
When selecting a tax professional, it is essential to understand their qualifications. A PTIN is required by all individuals to be compensated for preparing taxes.
What is a Preparer Tax Identification Number (PTIN)?
A PTIN is an IRS-issued number given to a professional tax preparer. An individual must hold a PTIN to be compensated for preparing tax returns. A CPA, enrolled agent (EA), tax attorney, or non-credentialed tax preparer may be provided a PTIN, allowing them to accept payment for tax preparation services assuming they meet other requirements.
PTIN essentials
When planning for tax preparation, keep the following in mind:
- Individuals who self-file their taxes do not need a PTIN
- When selecting a tax professional, ask for their licensing credentials and verify their PTIN before engaging in tax preparation.
Considerations when selecting a tax advisor
Deciding whether to hire a tax advisor is a significant consideration for many individuals and businesses.
- Taxpayers can select from CPAs, enrolled agents, or tax attorneys.
- Look for an advisor with expertise applicable to your unique situation.
- Always verify a tax advisor’s credentials before engaging with their services.
Work with a Harness Tax Advisor
If you’ve been offered equity compensation, own a business, are self-employed, or have any other unique tax situation, working with a Harness Tax Advisor can help you navigate the complex landscape of tax laws and regulations to reduce tax liabilities and preserve wealth.
Harness Tax Advisors work with you to understand your situation, answer your questions, and optimize your tax strategy. From comprehensive planning to tax preparation, we provide expert help at every step of the way. Get started with Harness Wealth today.
Tax related services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is a paid promoter, internet registered investment adviser. This article should not be considered tax or legal advice and is provided for informational purposes only. Please consult a tax and/or legal professional for advice specific to your individual circumstances.
