CPAs and Public Accountants Who Must Take the IRS Tax Preparer Competency Exam

The final regulations in Circular 230 introduce new competency exam requirements for paid tax return prepares, and provide an exemption from the test for individuals eligible to practice before the IRS. These individuals include Attorneys, Enrolled Agents, and CPAs. Since CPAs are regulated by the states, and not all states define a CPA in the same manner, certain accountants are required to take the exam if they intend to prepare Form 1040 series returns for compensation. A license to practice accountancy as a public or registered accountant, or some other title not conferring "certified public accountant" status, issued under the laws of any United States jurisdiction does not necessarily confer eligibility to practice before the IRS.

According to the IRS, a certified public accountant is any person who is duly licensed to practice as a certified public accountant in any state, territory, or possession of the United States, including a Commonwealth, or the District of Columbia. A certified public accountant who is duly qualified is an individual who is currently eligible to exercise all rights conferred by a license to practice as a certified public accountant. A certified public accountant in other than active status as a certified public accountant has the burden of establishing that he or she is nevertheless duly qualified.

At the time of this article, we are aware of seven states where certain accountants may be required to take the RTRP exam—Delaware, Illinois, Iowa, Kansas, Michigan, Oregon and South Carolina.

Delaware

In the great state of Delaware there are two CPA designations. Holders of a CPA certificate cannot engage in practicing public accountancy and they must identify themselves using the words “not in public practice.” As it pertains to the IRS registered tax return preparer (RTRP) exam, these individuals must take and pass the exam if they wish to file tax returns on behalf of their clients. To qualify for exemption from the exam, Delaware CPAs need an actual permit to practice and it must be current and in good standing.

Illinois

Illinois, formerly a two-tier state, has switched to a single-tier system as of July 2010. The two recognized designations in Illinois are licensed certified public accountant (LCPA) and registered certified public accountant (RCPA). The RCPA designation is the one that is being phased out. Despite the fact that RCPAs are entitled to prepare and sign tax returns, these professionals will not be exempt from the IRS registered tax return preparer (RTRP) exam requirements. Because they are not required to obtain continuing education credits, the IRS does not allow for the exemption. The LCPA on the other hand, is exempt from the new tax preparer test.

Iowa

Iowa recognizes two public accounting designations: certified public accountant and licensed public accountant. As with other states, LPAs are not exempt from the new IRS competency exam requirements, and as such, LPAs should plan on taking the test prior to the December 31, 2013 deadline (this deadline exists for individuals in possession of an active PTIN prior to the end of 2011). Individuals who hold the CPA status in Iowa are exempt from the requirement to pass the exam.

Kansas

The state of Kansas authorizes two levels of public accountancy practice. An individual can hold a CPA certificate or a permit to practice as a CPA. A certificate holder may not hold himself out as a CPA; it is simply the first step in the process toward licensure. Because of the difference in designation, it must be stated that individuals who hold only the CPA certificate are not exempt from the new IRS exam requirements for tax preparer competency if they wish to continue preparing and signing tax returns. Accountants who have earned the permit (or license) from the state are then classified as CPAs and are therefore exempt from the exam requirement.

Michigan

Michigan differentiates a CPA status as being either registered or active. Active CPAs are classified in the group of individuals who are exempt from the new IRS registered tax return preparer (RTRP) competency exam requirements. Registered CPAs on the other hand, are allowed to sign returns but, because they are not completing annual continuing education requirements, they cannot use the CPA designation. This means that the requirement to pass the competency exam is the same for Michigan registered CPAs as it is for other paid tax return preparers.

Oregon

Oregon is one of few states with direct regulation of all tax preparation professionals. There are two designations for tax preparers in Oregon—licensed tax consultant and licensed tax preparer. Despite their state licenses, holders of both of these designations are not exempt from the requirement to take the IRS Registered Tax Return Preparer competency exam.

In addition, Oregon differentiates between a public accountant (PA) and a certified public accountant (CPA). Individuals who have not obtained a certificate as a certified public accountant may not hold themselves out as such. PAs in Oregon will also need to comply with the new IRS RTRP competency exam requirements in order to prepare Form 1040 series tax returns for their clients.

South Carolina

Like many states, South Carolina has various designations which indicate an accounting practitioner’s level of certification. Only CPAs, attorneys and enrolled agents are exempt from the new IRS requirements. Individuals in South Carolina who hold public accounting licenses or the designation of accounting practitioner are not exempt from the IRS Registered Tax Return Preparer competency exam scheduled for release in October 2011.

The information in this article is meant to be a summary and is not intended as personal advice regarding your individual requirements. For more details on the rules within your state, please contact us.

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