In last week’s column, we looked from a high-level perspective at some of the pros and cons of forming alliances with different types of professionals. As promised, this week we’re going to focus specifically on the different types of tax professionals you may be considering forming alliances with.
Advisors often ask me: “Just what is the difference between CPAs, enrolled agents and accountants anyway? And should it affect who I decide to form alliances with?” Great questions.
In short, the differences between the three come down to the scope of work they perform. A CPA generally is trained in many different areas of planning, including everything from preparing individual tax returns, performing business valuations, handling audits and other corporate tax issues along with some additional duties. In order to pass the CPA exam (administered and earned on the state level), only about 25 percent of the information covered on the exam actually pertains specifically to taxes and tax law. Interesting, isn’t it?
Next, enrolled agents (EA) earn their designations directly from the IRS and are exclusively tested on their knowledge of taxes and tax laws. Therefore, the majority of an enrolled agent’s business will typically involve tax preparation services. In many cases, an annuity producer might find an enrolled agent to be one of the best fits for an alliance.
Finally, accountants or bookkeepers may perform many of the same functions as a CPA or enrolled agent, but they do not have to meet the same level of education requirements to be certified as a CPA or EA. The main difference is that accountants and bookkeepers cannot represent their clients before the IRS. However, they can still legally be paid for tax preparation services as long as they pass a basic competency exam and file for a Preparer Tax Identification Number.
What Does it Mean to You?
Why should you care about the differences between the three? On one hand, I think it helps in making sure that you form relationships with the right types of professionals who are more likely to be working with your ideal clients and prospects. On the other hand, let me say that in my opinion, the designation doesn’t matter.
Let’s be honest, to draw a parallel example from our world, has a client ever chosen to work with you because of your designation? Most clients couldn’t tell you the differences between all of the designations that an advisor can earn. Beyond the recognition of CFP, most clients are clueless. The same goes for the tax planning world. Many clients of mine often refer to their bookkeepers, accountants and enrolled agents all as their CPA. Don’t get me wrong, I believe in designations, but for educational purposes, not for use in leveraging them in your marketing activities.
So, if the designation doesn’t really matter, then how do you choose between the three when deciding who to work with? In my experience, the most important component in any successful alliance is the type and level of relationship these tax planners have with their clients. I tell all of the annuity producers I coach that the most vital component of a successful alliance with other professionals is how well they do in building trust with their clients.