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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:

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.

"We find the people who have done some write-up have the easiest transition to tax prep. We start them out entering W2s and 1099s into UltraTax CS, and then transition to Schedule C and F, etc. We have them print out the organizer, and enter the info on it (not W2s and 1099s) before they enter it into UltraTax CS. It makes it easier for us to review the return, and see where they may have gone wrong, and go over the return with them to point those things out."

UltraTax CS user Lynn Wells of Paul T. Wells CPAs

What are the most common tax forms and types of tax returns prepared by a tax preparer?

Depending on levels of experience, your client roster, and the specifics of your business, the types of tax returns a preparer will work on can range from an Individual Income Tax Return, Form 1040 to a Corporation Income Tax Return, Form 1120 to interpreting complex partnership agreements.

However, most tax forms will break down into two different groups: 

  • Individual forms, such as 1040.
  • Business returns, including corporations, partnerships, trusts, not for profit exempt organizations.

Most preparers will usually focus on 1040s/individual tax preparations when starting out. This is generally because they’re easier to prepare and, honestly, easier clients to get. For some preparers, staying 1040 focused is a career choice, doing a little bit of business work as it arises from current clients.

However, often tax preparers are looking to get more business work, and their 1040 clients are a bridge to that career goal. Doing individual returns gets cash flow underway. Over time, they can get enough money and clients to transition to a more business-focused client list.

How much does a tax preparer make? And what’s the average salary for the role?

The amount of money a preparer can make is largely dependent on whether they’re a sole practitioner or work for a public accounting firm, the number of clients they can handle, and the geographical location of their practice.

So, while many first-year tax preparers may claim a starting salary around the $50,000, year one staff might be somewhere between $30,000-$40,000 at a different firm. And if you’re serving as an intern, you might not make anything. 

While the salaries of most regional firms will be set before you walk through the doors for your interview, the amount of money a sole practitioner can make is limitless (or at least, based on how much work you’re willing to do). So, then the questions become: how many clients can you get? How much work can you get through? What kind of software can boost your efficiency and increase throughput?

Some people begin their careers at firms to get the first two years of experience. And then they break away and start a local firm. This allows you to get high-quality training to boost your skills out of the gate.

Several national and seasonal businesses also offer training to their preparers.

How much should tax preparers charge for their services?

For most preparers, this will vary wildly by the region in which they work. So, while there’s no clear cut, silver bullet answer about how much a preparer should charge, there are some tips to get started. 

  • The National Society of Accountants cites the latest data on the average price for a 1040 preparation.
  • Associations and professional groups, including collegiate accounting clubs, can be good resources to determine prices.
  • Most preparers will call around and get quotes from other firms and then use that to make up their pricing system.

Once you’ve determined a competitive price for your context, consider whether you want to charge an hourly rate, or price your services with a fixed fee.

While an hourly rate may seem more intuitive at first (and potentially less shady), consider what will be the best way to make money when you become efficient. Why would you charge an hourly rate for a 1040 form that might take you 15 minutes to complete? Fixed fee or value billing is not about the time you spend on a client’s preparation but instead focuses on the expertise and efficiency you’ve gained as a professional.

It takes the preparer a short amount of time because they are talented and efficient. And that’s what clients are truly paying for – your experience.

What does a tax preparer need to prepare tax returns?

Tax preparers need to efficiently and securely access and manage confidential information for their clients. As a result, most preparers look for software to manage their workflow effectively and efficiently.

Tax software should help preparers in the following ways:

  • Learn. You can’t know everything. There will always be knowledge gaps and questions from clients that you didn’t anticipate. Professional tax software should increase your know-how, the ability to fill knowledge gaps with trusted and meaningful information for your daily work. Something to “unstuck you” when you don’t know how to proceed.
  • Research. Every client is different. And that means every answer you provide will need to be tailored to their specific questions and concerns. A tax research software solution can help get the answers when you need to go deeper and retrieve more information. 
  • Operate. Tax preparation requires a significant amount of day-to-day organization. You need tools to do the work and produce all the necessary forms. From document management solutions to e-filing assistance, tax software should make your operational duties easier, more productive, to do your job with confidence every time.

What software do tax preparers use?

Thomson Reuters UltraTax CS is a leading professional tax preparation software that automates your entire business – whether for individual tax preparation or business clients.

Filled with powerful time-saving tools and features, UltraTax CS gives preparers access to federal, state, and local tax programs including individual, corporate, partnership, estates and trusts, multi-state returns, and many others.

UltraTax CS also offers seamless integration with other Thomson Reuters solutions, including CS Professional Suite and Onvio Firm Management, connecting your entire practice and ensuring that you’ll never lose time (or money) doing a task manually.

From cloud computing to advanced data sharing and paperless processing, UltraTax CS meets all your tax workflow needs with a customizable, end-to-end solution.

How do I keep up with new tax law changes?

Keeping up with tax law changes is imperative for both new and experienced preparers. As a result, most preparers invest some time each day checking on any IRS changes, technical corrections, or any other state or local changes that might impact their business.

An excellent first stop is the IRS website, which is full of publications and instructions that will help new and experienced preparers navigate changes to the tax code, as well as commonly asked questions and other useful tips.

Checkpoint Edge from Thomson Reuters is another resource for tax professionals who are looking to do their jobs with more accuracy, confidence, and daily news updates. Checkpoint Edge provides you with up-to-date research materials, editorial insight, productivity tools, online learning, and marketing resources that add value to your firm immediately.  

Alternatively, if you’re on a tight budget, a few well-chosen tax books may be sufficient to begin with.

"Understand that you cannot possibly know every tax law ever written, especially in times of sweeping tax law changes as we are experiencing today. Make yourself valuable by honing your tax research skills. If you don't know the answer, you must know how to find the answer."

UltraTax CS user Kathleen Sheahan of Professional Management of Milwaukee, Inc

Thanks to our subject matter experts Jordan Kleinsmith, Mo Arbas, and Jennifer J. Paillon, Esq., MPA, LL.M. in Taxation, for their input into this article.

Learn more about UltraTax CS

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