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Article
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 do you need? What tools are available to make you more productive? 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 taxpayers with the IRS, including audits and tax court issues. However, a tax preparer’s credentials and representation rights determine the extent of what they can do.
In a way, tax preparers 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 hired to serve their clients, 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, including:
- 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 knowledge comes in the form of certification. Finding a professional grade, industry-specific tax research platform that can boost know-how and assist you with knowledge gaps can be helpful.
- Technology. As is the case with most professions, having access to the right technology contributes to the general success of your new business, helping you work more efficiently. Today, most tax professionals use AI-powered tax software to manage day-to-day tasks and enable future growth.
- Clients. It 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. As your knowledge grows, so does the opportunity to offer your clients more personalized advisory services.
- Preparer tax identification number. If you want to get paid for preparing tax returns, the first step is applying for — and receiving — 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 number (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 must put this on every return they prepare. The IRS website includes many helpful solutions and other tips for people beginning the PTIN application 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 to prepare in those geographical areas. While many states call it a license, it’s very similar to the federal PTIN in both design and 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; however, they ask for two additional security measures.
First, a professional certification like 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 10 returns, they do not need to e-file. If they have filed more than 10 returns in a given year, they must e-file every 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 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 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?
The process to obtain an EFIN is a three-step process:
- Create an IRS e-Services account on the IRS website.
- 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 they can arrange by calling the IRS toll-free at 866-255-0654. Work with a trained professional if you need to get fingerprinted. 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 process 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 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 correct question to ask, as the ability to make money and build a career depends 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 to start at a firm or become a sole practitioner, the career progression looks similar. Most new preparers will focus on raw data entry in the first year. The second year brings a little more autonomy. By the third year, you’ll have 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 usually focus on individual tax preparations (1040s) when starting out, generally because they’re easier to prepare and, honestly, easier clients to get. For some preparers, staying focused on 1040s is a career choice, doing a little bit of business work as it arises from current clients.
However, tax preparers are often 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 largely depends 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.
According to the U.S. Bureau of Labor Statistics, tax preparers in the United States earn a median annual wage of $58,000, with the lowest 10% earning around $29,170 and the highest 10% earning up to $98,810.
While most regional firms have set salaries 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; then they break away and start a local firm. Doing so allows them to get high-quality training to boost their 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?
Most preparers' charges will vary wildly depending on their region. 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 for determining 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 the best way to make money when you become efficient. Why would you charge an hourly rate for a 1040 form that might take 15 minutes to complete?
Instead of focusing on the time you spend on a client’s tax preparation, fixed-fee or value pricing is about the expertise and efficiency you’ve gained as a professional. The cost varies from client to client because you base it on what they value most and what they are willing to pay for that value.
While value-based pricing has many benefits, perhaps the most significant is how your clients respond to it. They’re no longer worried about the clock each time they talk to you; instead, they can begin collaborating with you. They become part of the process with a deeper understanding of your partnership and the value they will receive before work begins.
Remember, it takes a tax preparer a short amount of time to complete a tax return because they are talented and efficient. That’s what clients are truly paying for — your experience. Once you’ve gained that, you can open up additional revenue streams based on your unique knowledge.
What does a tax preparer need to prepare tax returns?
Tax preparers must efficiently and securely access and manage confidential information for their clients. As a result, most preparers look for software to manage workflows 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 and accounting software increases your know-how, reduces your workflow time, and boosts your productivity
- Research. Every client is different, and that means you’ll need to tailor every answer you provide to their specific questions and concerns. An AI-powered tax research solution simplifies tax research by delivering concise, professionally summarized answers complete with links to relevant primary and secondary sources materials. This technology empowers even new tax preparers to handle complex client queries confidently and quickly while ensuring you stay updated on the latest IRS rulings and tax regulations.
- 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, comprehensive firm management software can make your operational duties easier and more productive so you can focus on growing your business.
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.
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, multistate 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 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?
It is imperative for both new and experienced preparers to keep up with tax law changes. As a result, most preparers invest some time each day checking on 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 to help new and experienced preparers navigate changes to the tax code, as well as commonly asked questions and other useful tips.
Then there is Checkpoint Edge with CoCounsel, an AI-powered tax research assistant built specifically for tax and accounting professionals. Simply pose a question and quickly receive a relevant answer in everyday language, complete with citations from experts and primary sources, which you can copy and paste into communications to clients or colleagues.
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.
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