How to become a tax preparer

Tax preparation is a career that is on the rise and brings a necessary and welcome service to the community.

But how do you become a tax preparer? What sort of qualifications are needed? What tools are available to make you more productive? And what does a tax preparer do on a day-to-day basis? 

What does a tax preparer do?

Most tax preparers prepare, file, or assist with general tax forms. Beyond these basic services, a tax preparer can also defend a taxpayer with the IRS. This includes audits and tax court issues. However, the extent of what a tax preparer can do is based on their credentials and whether they have representation rights.

In a way, tax preparers are asked to serve two masters – their clients and the IRS. They must assist their clients in complying with the state and federal tax codes, while simultaneously minimizing the client’s tax burden. While they are hired to serve their client, they must also diligently remember their obligation to the IRS and not break any laws or help others file a fraudulent return.

What do you need to become a tax preparer?

Becoming a tax preparer is a straightforward process involving a few basic requirements.

These include:

1. Know-how. For most new tax preparers, learning the ins and outs of the business means acquiring an entirely new professional language. In some cases, this know-how comes in the form of certification. But finding a platform that can boost know-how and assist you with knowledge gaps is critical to success.
2. Technology. As is the case with most professions, having access to the right technology will help you work efficiently and contributes to the general success of your new business. Most tax professional software assists with both know-how and the tools to accomplish the work itself.
3. Clients. This might seem obvious, but you need to attract tax clients to succeed and become profitable. Many preparers start on a small scale – doing individual returns – before moving on to bigger and more complicated matters.
4. Preparer Tax Identification Number. If you want to be paid for preparing tax returns, the first step is applying for – and being issued – a preparer tax identification number (PTIN).

What exactly is IRS tax preparer certification?

The basic IRS requirement for all paid tax preparers is to pass the suitability check and get issued a PTIN. However, once you start talking about the work of an enrolled agent, there will be additional requirements such as a state license or an electronic filing identification numbers (EFIN).

How do you get a PTIN?

This process begins on the IRS website and requires annual renewal. However, there is no fee for either the initial registration process or the renewal.

Once a PTIN is issued, the tax preparer is required to put this on every single return they prepare. In general, the IRS website includes many helpful solutions and other tips for people beginning this process.

Do you need a license to prepare tax returns?

While the starting point for any preparer will be the PTIN process, a “license” is not the same thing. To become a preparer, you don’t need a specific license. With the IRS, however, if you want representation rights, you need to be an enrolled agent, CPA, or attorney.

However, seven states require a license if you want to prepare in those geographical areas. And while many states call it a “license” it’s very similar to the federal PTIN – both in design and in process.

The current states that require a separate credential include:

• California
• Connecticut
• Illinois
• Nevada
• New York
• Oregon

Many states (if not all) exempt this requirement if you are a CPA or have other professional credentials.

What are the IRS e-file requirements for tax preparers? 

The IRS takes the sanctity of the e-file system very seriously, and it has become an area of increased scrutiny, mainly because this is a high-risk area for potential hacking and fraud. As a result, it’s a little more work for a preparer to complete this process.

In many ways, e-file requirements are like acquiring a PTIN. E-file requirements ask for two additional security measures.

First, a professional certification (such as a PTIN) is required, as well as an official copy of your fingerprints. Once you’ve submitted the online documents and sent in your fingerprints, you will receive an electronic filing identification number (EFIN). Then you are ready to access the portal to submit e-filings.

If a preparer prepares less than ten returns, they are not required to e-file. If they have filed more than ten returns in a given year, they are required to e-file every single return they prepare. While there are some exceptions, they are rare.

What is an Electronic Filing Identification Number (EFIN)?

An electronic filing identification number (EFIN) is a number assigned by the IRS to preparers who are approved for the federal and state e-file program.

Once issued, an EFIN does not expire. However, if you change your Employer Identification Number (EIN) or the name of your firm, you will have to either get a new one or update it through the online portal.

It’s important to note: everybody who prepares taxes needs a PTIN. However, only your firm needs an EFIN. One per firm or per physical location is usually required.

To put even more simply: you need a PTIN to prepare and an EFIN to e-file.

So, can you tell me how to get an EFIN?

It’s a 3-step process. Here’s the process to obtain an EFIN:

1.      Create an IRS e-Services account on the IRS website.

2.      Complete and submit your application to become an authorized IRS e-file provider. It can take up to 45 days for the IRS to approve an e-file application, so plan accordingly. All applicants must provide the following:

• Identification information for your firm
•  Information about each Principal and Responsible Official in your organization
• Your e-file provider option (if you are a return preparer and want to e-file on behalf of clients, select Electronic Return Originator, or ERO)

If the Principal or Responsible Official is a certified or licensed professional, such as an attorney, CPA, or enrolled agent, they must provide their current professional status information.

All other applicants must provide a fingerprint card, which can be arranged by calling the IRS toll-free at 866-255-0654. If you need to be fingerprinted, work with a trained professional. There are commercial services, but your local police station will likely provide this service for a modest fee. Then mail the signed and completed card to the IRS.

3.      Pass a suitability check. After you submit your application and related documents, the IRS will conduct a suitability check on the firm and each person listed on your application as either a Principal or Responsible Official. This may include: a credit check; a tax compliance check; a criminal background check; and a check for prior non-compliance with IRS e-file requirements. Once approved, you will receive an acceptance letter from the IRS with your EFIN.

How long does it take to become a tax preparer?

The simplest answer to this is: in the time it takes to apply for and receive a PTIN and an EFIN.

However, how long it takes to become a seasoned tax preparer is perhaps the more correct question to ask, as the ability to make money and build a career is dependent upon a certain amount of experience and skill.

In most cases, it takes about two seasons to learn the basics of tax preparation.  Whether you plan on starting at a firm or becoming a sole practitioner, the career progression looks similar. In the first year, most new preparers will focus on raw data entry. The second year brings a little more autonomy. By the third year, you’re armed with the necessary experience and skills to work as a full-fledged staff preparer.

After the initial period of seasoning, it takes about five years to learn the nuances and niche areas of your clients and your practice. In that time, you gain expertise that differentiates you as a tax preparer and allows you to set yourself apart in the market.