by Jon A. Hayes, IAAM Executive Director

As the Internal Revenue Service continues to implement new competency standards for non-credentialed tax preparers, it is important for preparers to understand their examination options AND make the best choice to demonstrate required testing competence.

As we all know, the EA credential demonstrates superior competence because it tests at the highest possible level of tax expertise and affords the most privileges in representing clients before the IRS. The three-part test measures competence in individual taxation, business taxation, and client representation and professional ethics issues. It gives a distinct advantage because the EA can claim testing competence exceeding that of a registered tax preparer and even a certified public accountant. It also requires the EA to earn 72 hours of continuing professional education credit every three years to maintain that expertise and the privilege of the designation.

The new Registered Tax Return Preparer (RTRP) designation will test competence in federal 1040 taxation (click here to review the exam content). The two-part test generally examines competence in 1040-Schedule A and 1040-Schedule C knowledge. Those passing the exam with a score of 70 percent of higher will earn the RTRP credential and be registered to prepare 1040 returns, as well as business, estate tax, payroll, or other specialty returns. RTRPs will also be required to earn fifteen (15) Continuing Professional Education (CPE) credits each year to maintain their credential and preparer privileges with the IRS. The 15 credits must include 3 CPEs in 1040 tax update (tax changes, etc.); 10 CPEs in federal 1040 tax education, and 2 CPEs in professional ethics.

Based on my 27 years of experience interacting with tax preparers of all ages and who run businesses at all levels, these are the main benchmark considerations you should make in determining which exam to sit for:

– If you earn the majority of your income from the preparation of tax returns as an employee in a firm, you should pass the Enrolled Agent examination to preserve all tax preparation privileges.

– If you plan to prepare taxes for five or more years before retiring or selling, you should definitely pass the Enrolled Agent examination. This credential guarantees you can prepare any federal tax return, and as we already know, it allows you to represent tax clients when the IRS questions or examines their tax returns.

– If you are planning to retire in four years or less, you should pass the RTRP examination to insure you can prepare 1040 returns until retirement. Remember, non-credentialed preparers must pass either the RTRP or EA exam by December 31, 2013 to retain preparation privileges AND earn 15 CPEs in 2012 and 2013, so if you plan to retire AFTER December 31, 2013, you will lose preparation privileges on January 1, 2014.

– If you are planning to retire shortly after April 15, 2012 or April 15, 2013, you don’t need to earn a credential since one is not required until January 1, 2014. You will need to earn the 15 annually required CPEs in 2012 and 2013 to retain preparer privileges with the IRS through December 31, 2013.

– If you plan to retire on or about December 31, 2013, you may have unique issues. You can certainly choose not to take any credentialing examination and walk away before mandatory credentials take effect on January 1, 2014. However, bear in mind that the IRS is developing a national registry of preparers scheduled for upload and launch in 2012. We’re told the registry will divide preparers into credentialing classes, with the EA and CPA credentials on top, followed by the RTRP class, and then non-credentialed at the bottom. We’re also told the registry will be prominently highlighted in public service advertisements set to begin running in 2012. You can be sure the non-credentialed registry will alert taxpayers that these individuals have not demonstrated competence in tax preparation. So if you are not planning to retire in the near future, you’ve been preparing taxes for multiple years, and you own a sellable tax preparation business, you should give serious consideration to passing the RTRP exam to preserve your professional standing and business resale value.

First and foremost, if you own a business that produces significant tax preparation revenue, you need to preserve the clientele you’ve nurtured and grown. The EA credential not only gives you the best tool for retention, but it also gives you a big advantage over competitors lacking that demonstrated competence. The IRS will hold you in the highest regard, and you can certainly exploit that advantage in your marketing and retention efforts. More importantly, it gives you the chance to develop a practice with great resale value so you can maximize your retirement income.

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