You may be asking yourself, do I need to hire a Certified Public Accountant (CPA)? The answer is, it depends.
There are many misconceptions about what a CPA actually does. What you may not know is that there are many CPAs out there who have never prepared a tax return in their whole career.
In order to answer the question at hand, it is important to first understand what a CPA credential is.
The CPA Credential
The CPA exam is administered by the National Association of State Boards of Accountancy (NASBA), but you actually become licensed by a specific state board of accountancy, each of which have their own unique requirements.
To become licensed as a CPA, usually you must meet a variation of the following requirements:
- A university degree in accounting, which usually requires an additional year of study past getting a typical bachelors degree
- Passing the uniform CPA exam, which is one of the most challenging professional exams that currently exists and can take over a year to complete
- One or more years of work experience under a licensed CPA, which usually requires focus in several specific areas of accountancy
- Passing a national and/or state professional ethics exam
- Submitting an application to a state board of accountancy and providing evidence that the aforementioned requirements were met
After you become a licensed CPA, you usually have to take several weeks of Continuing Professional Education (CPE) per year, and must renew your license with the state board of accountancy periodically.
It is no small feat becoming a CPA, and I can attest from my own experience that it was one of the most challenging experiences I’ve ever gone through.
However, the certification and requisite work experience has definitely set me apart from other non-CPAs who work in the accounting profession.
Non-CPA Accounting Professionals
There are many non-CPA accounting professionals who are qualified and very good at what they do. Typically, they have less formal education than a CPA.
Here are some examples of non-CPA accounting professionals:
Bookkeepers usually perform a wide variety of accounting tasks, of which the most obvious is “being the keeper of the books.” This usually involves periodic reconciliation of financial statement accounts with transactions reported by banks or other financial institutions. Some bookkeepers also perform such accounting functions, such as accounts receivable, accounts payable, payroll, etc.
A bookkeeper does not need a formal education or certification in order to perform bookkeeping work. They can apply for a job with little to no bookkeeping experience and can be trained by a more experienced bookkeeper or CPA. There are also some college programs for bookkeeping (usually requiring 1-2 years of courses), and several certified bookkeeping designations, one of which is administered by the American Institute of Professional Bookkeepers (AIPB).
A bookkeeper usually focuses on basic data entry and bank reconciliations. A CPA who specializes in accounting usually focuses on the more technical aspects of accounting, such as preparing required journal entries necessary to close the books at year end and making sure the technical standards of accounting are applied in order to prepare financial statements.
Tax Preparers and Enrolled Agents (EA)
Similarly to bookkeepers, you don’t need any formal education or certification to prepare income tax returns. You can go to various local companies like H&R Block, and be trained on-site by more experienced tax preparers. However, you do need a Preparer Tax Identification Number (PTIN) issued by the IRS if you prepare or assist in the preparation of tax returns for compensation. The PTIN can be applied for in about 15 minutes on the official IRS website.
There is also a professional designation called an IRS Enrolled Agent (EA). The IRS describes an enrolled agent as a person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee. From what I understand, the EA is actually a pretty tough designation to get.
If you plan on hiring someone to prepare your tax return or help you with tax planning, you should know what professional certifications and education they have, along with their requisite level of experience.
You might considering using a more basic tax preparer or online income tax preparation software if you have a relatively simple tax situation. This might fit best if you have a W-2, own a home, and have a couple children.
As your tax situation gets more complex, you should think about hiring a CPA or EA. Maybe you have a business or rental properties, are getting stock options or restricted stock units from your employer, or need more sophisticated tax planning. Also, perhaps you received an IRS notice or are under audit by the IRS, both of which are good reasons to hire a CPA or EA.
The Big Misconception about CPAs
We CPAs joke about the fact that most people think that all CPAs prepare tax returns. This honestly couldn’t be further from the truth.
Here are some examples of areas that CPAs can focus on outside of tax:
- Financial statement audits, reviews and compilations
- Internal control testing
- Management consulting
- Mergers and acquisitions
- Forensic accounting
- Managerial accounting
The list goes on and on.
Many people wonder why it usually costs a lot more to hire a CPA versus a bookkeeper or unlicensed tax preparer. The reason is clearly because of the additional educational requirements, work experience under a licensed CPA, and because they must pass one of the most rigorous professional exams in existence.
I hope you now have a better understanding of when you should hire a CPA.