CPAs and lawyers -- and tax practice

[Famspear]

I'm engaged in an interesting discussion in another place on the internet about the differences between lawyers and CPAs when it comes to the subject of taxation. The party with whom I am interacting seems to think that CPAs don't do much more (in a tax practice) than subtract expenses from revenues and fill out tax forms.

This is a complicated subject, but I'll start with what is expected of a CPA candidate when he or she sits for the CPA exam. The following is taken from the Content and Skill Specifications for the Uniform CPA Examination from the Examinations Team of the American Institute of Certified Public Accountants (AICPA) (rev. July 1, 2011). There is NOTHING anywhere NEAR this extensive in terms of testing for prospective lawyers on any bar examination, to my knowledge.

These topics test knowledge and understanding of concepts and laws relating to federal taxation (income, gift, and estate). The areas of testing include federal tax process, procedures, accounting, and planning, as well as federal taxation of property transactions, individuals, and entities (which include sole proprietorships, partnerships, limited liability entities, C corporations, S corporations, joint ventures, trusts, estates, and tax-exempt organizations).

In addition to demonstrating knowledge and understanding of these topics, candidates are required to demonstrate the skills required to apply that knowledge in providing tax preparation and advisory services and performing other responsibilities as certified public accountants. To demonstrate such knowledge and skills, candidates will be expected to perform the following tasks:

• Evaluate the tax implications of different legal structures for business entities.

• Apply analytical reasoning tools to assess how taxes affect economic decisions related to the timing of income/expense recognition and property transactions.

• Consider the impact of multijurisdictional tax issues on federal taxes.

• Identify the differences between tax and financial accounting.

• Analyze information and identify data relevant for tax purposes.

• Identify issues, elections, and alternative tax treatments.

• Research issues and alternative tax treatments.

• Formulate conclusions.

• Prepare documentation to support conclusions and tax positions.

• Research relevant professional literature.

1. Treasury Department Circular 230 [the Treasury regulations relating to practice before the Internal Revenue Service]

2. AICPA Statements on Standards for Tax Services

3. Internal Revenue Code of 1986, as amended, and Regulations related to tax return preparers

Federal Tax Process, Procedures, Accounting, and Planning [ . . . ]

A. Federal Tax Legislative Process

B. Federal Tax Procedures

1. Due dates and related extensions of time

2. Internal Revenue Service (IRS) audit and appeals process

3. Judicial process

4. Required disclosure of tax return positions

5. Substantiation requirements

6. Penalties

7. Statute of limitations

C. Accounting Periods

D. Accounting Methods

1. Recognition of revenues and expenses under cash, accrual, or other permitted methods

2. Inventory valuation methods, including uniform capitalization rules

3. Accounting for long-term contracts

4. Installment sales

E. Tax Return Elections, Including Federal Status Elections, Alternative Treatment Elections, or Other Types of Elections Applicable to an Individual or Entity’s Tax Return

F. Tax Planning

1. Alternative treatments

2. Projections of tax consequences

3. Implications of different business entities

4. Impact of proposed tax audit adjustments

5. Impact of estimated tax payment rules on planning

6. Role of taxes in decision-making

G. Impact of Multijurisdictional Tax Issues on Federal Taxation (Including Consideration of Local, State, and Multinational Tax Issues)

H. Tax Research and Communication

1. Authoritative hierarchy

2. Communications with or on behalf of clients

IV. Federal Taxation of Property Transactions [ . . . ]

A. Types of Assets

B. Basis and Holding Periods of Assets

C. Cost Recovery (Depreciation, Depletion, and Amortization)

D. Taxable and Nontaxable Sales and Exchanges

E. Amount and Character of Gains and Losses, and Netting Process

F. Related Party Transactions

G. Estate and Gift Taxation

1. Transfers subject to the gift tax

2. Annual exclusion and gift tax deductions

3. Determination of taxable estate

4. Marital deduction

5. Unified credit

V. Federal Taxation of Individuals [ . . . ]

A. Gross Income

1. Inclusions and exclusions

2. Characterization of income

B. Reporting of Items from Pass-Through Entities

C. Adjustments and Deductions to Arrive at Taxable Income

D. Passive Activity Losses

E. Loss Limitations

F. Taxation of Retirement Plan Benefits

G. Filing Status and Exemptions

H. Tax Computations and Credits

I. Alternative Minimum Tax

Federal Taxation of Entities [ . . . ]

A. Similarities and Distinctions in Tax Treatment Among Business Entities

1. Formation

2. Operation

3. Distributions

4. Liquidation

B. Differences Between Tax and Financial Accounting

1. Reconciliation of book income to taxable income

2. Disclosures under Schedule M-3

C. C Corporations

1. Determination of taxable income/loss

2. Tax computations and credits, including alternative minimum tax

3. Net operating losses

4. Entity/owner transactions, including contributions and distributions

5. Earnings and profits

6. Consolidated returns

D. S Corporations

1. Eligibility and election

2. Determination of ordinary income/loss and separately stated items

3. Basis of shareholder’s interest

4. Entity/owner transactions, including contributions and distributions

5. Built-in gains tax

E. Partnerships

1. Determination of ordinary income/loss and separately stated items

2. Basis of partner’s/member’s interest and basis of assets contributed to the partnership

3. Partnership and partner elections

4. Transactions between a partner and the partnership

5. Treatment of partnership liabilities

6. Distribution of partnership assets

7. Ownership changes and liquidation and termination of partnership

F. Trusts and Estates

1. Types of trusts

2. Income and deductions

3. Determination of beneficiary’s share of taxable income

G. Tax-Exempt Organizations

1. Types of organizations

2. Obtaining and maintaining tax-exempt status

3. Unrelated business income

There is no bar exam that has this kind of scope for the testing of a candidate’s knowledge of taxation.

As I stated in the other forum, this is not to say that the "tax skill" of a lawyer who specializes in tax law is the same kind of skill as the "tax skill" of a CPA who specializes in tax law.

There are certain skills that a CPA who has not become a lawyer will have, and certain skills he or she probably will not have. Likewise, there are certain skills that a lawyer who has never passed the CPA exam will have, and certain skills he or she probably will not have. Everything else being equal in terms of typical training and testing of lawyers and CPAs, the typical entry level CPA will know much more than the typical entry level lawyer about tax law.

Given a CPA/non-lawyer and a lawyer/non-CPA, there are certain aspects of tax law at which the lawyer will be "better at" (and, probably, vice versa).

[JamesVincent]

I would probably have said its a non-starter simply because your looking at someone whos a specialist (a CPA being a specialist) and someone who is a generalist being a specialist (the lawyer who trains to be a lawyer and then picks a field to specialize in). And even then they both would approach the same things from different sides of the same book. Kinda like the argument over an engineer and a technician, who would be the smarter or the better to call with a problem. The CPA would know all the ins and outs of the actual working code and how it actually applies in real life. The lawyer would be able to tell you the laws and why they apply to you, but not necessarily the same way that the CPA could since that is not what they are concerned with.

[LaVidaRoja]

The real issue is the TAX training and specialization of each. I once worked on the appeal of a CPA who was a hospital/health plans specialist. She had VERY LITTLE knowledge of tax law. In her field, she could run rings around me. But in tax law? Nope. A lot depends on the field of tax law. When it comes to the income taxes of the individual, a good EA is probably as capable as an expert who has a "more professional" credential. However, when you get into fields such as individual retirement plans, corporations, LLCs, partnerships, etc, you need a specialist. A CPA can do the basic reporting. Whether a CPA or a tax attorney is better at planning out, figuring how to work aggresive strategies is a question that is best answered on an individual situation basis.
A lot depends on the money involved. If you have ten million, you want a team of financial planners, CPAs and attorneys. If you have a hundred million, you need a bigger team.

[jg]

Although that is an impressive list, does the CPA exam actually cover all, or even most, of that? And what, if any, requirements are there for a cpa to maintain any competence or take continuting education specifically regarding income taxes?

From an article describing the new regimen of preparer regulation and testing at http://www.cpa2biz.com/Content/media/PR ... eparer.jsp

Professional licensure: CPAs and attorneys are exempted from testing and mandatory CE. The rationale is that they are already subject to regulation by their state and the IRS (via Circular 230 (PDF)). In addition, these individuals have passed rigorous examinations to gain licensure. However, these exams do not include the same quantity or detail of tax questions as the EA exam (see sample EA exam questions from the IRS and exam information from Prometric). Also, while undergraduate accounting curriculum typically includes at least one tax course, law school curriculum does not. The CPA exam covers a variety of tax topics, while bar exams generally exclude tax questions (see AICPA CPA exam content information (PDF) and New York State Bar Examination information (PDF)).

Despite the fact that CPA exams do include tax questions, CPAs are not always viewed as tax experts, likely because the key purpose of the designation ties to financial statements and auditing. In Friedman, TC Memo 2010–45, the judge stated that just because the preparer was a CPA did “not necessarily make him a competent tax adviser.”

The testing and CE exemptions for CPAs and attorneys likely indicates that the IRS believes the effort devoted to gaining licensure, along with the existence of state regulation and ethical obligations reduces the likelihood of filing incorrect returns. The IRS has noted though, that it will monitor CPAs, attorneys and EAs to see if future testing is warranted (Pub. 4832, pages 34 – 45).

EA designation: EAs are exempt from competency tests and mandatory CE. However, EAs are already required to take a test on the federal tax law (or have certain IRS experience) and complete 72 hours of CE every three years (IRS EA Information).

The fact that the IRS did not create a system in which everyone had to be a CPA, attorney or EA to be a preparer indicates that they do not expect an RTRP to meet the exam rigors imposed upon an EA. An RTRP will not have the same practice rights as an EA, thus making a less comprehensive test a logical approach.

That author, among others, claim "these exams do not include the same quantity or detail of tax questions as the EA exam" (referring to bar and CPA exams).

If you do not know, please see NAEA : What is an Enrolled Agent? at http://www.naea.org/taxpayers/what-enrolled-agent

I do concur that experience is more important than initials in any specialized application of income taxes.

NOTE: This is the entirely biased and subjective opinion of an enrolled agent!

[Olsenfin]

Even a CPA can be considered a generalist. I do quite a lot of speaking engagements on various aspects of annuities. One of my most popular presentations is "tax traps in annuity planning" (I'll be discussing that topic, with Mary Ann Mancini and Mel Warshaw, at Heckerling on Wednesday). I've lost track of the number of times that attendees - often, CPAs and attorneys (some with LLMs in taxation) - have told me, after the class, that they had no idea of some of the traps we discussed. That should not suggest to anyone that these folks are dumb or lazy, merely that annuity taxation (especially, when a trust is owner and/or beneficiary) is a very narrow and complicated niche that is covered only briefly, if at all, in most courses on taxation.

(Examples: Question: George establishes an irrevocable grantor trust for the benefit of his daughter, Sally. Trust buys a deferred annuity with Sally named as annuitant. Whose death triggers the required payout of the annuity? Answer: It depends upon whether you think that the grantor trust rules trump IRC 7(s)(6)(A). And, most of all, upon what the issuing insurer thinks.

Question: George makes a gift of a deferred annuity to his irrevocable grantor trust. Is that an INCOME taxable event? Answer: It depends upon whether you think those grantor trust rules trump IRC 72(e)(4)(C).

Question: George owns a deferred annuity of which Sally is annuitant. Whose death triggers the death benefit, and WHICH death benefit does it trigger? Answer: It depends upon whether the contract is "annuitant-driven" or not, and, if so, whether there's a guaranteed death benefit greater than the account balance.

[Cpt Banjo]

Conspicuously absent from the Content and Skill Specifications for the Uniform CPA Examination was any mention of the generation-skipping tax, which is a must in the estate planning area.

[Red Cedar PM]

You can be a CPA and not know much about taxes. Tax classes are required for almost any accounting degree (which is required for a CPA license) and tax is a little over half of the REG section of the current CPA exam (out of four parts). However, once you have passed the CPA exam there is no specific continuing education requirement for tax. The only requirements (at least in Michigan) other than to obtain general continuing professional education (which can include tax but doesn't have to) is for a baseline requirement for accounting and auditing and ethics.

Really a CPA license is more geared towards providing accounting, auditing, and other assurance services, because that is what the AICPA and state boards of accountancy mostly regulates. There is still a requirement that a CPA not engage in activity that they are not qualified to perform and there have been CPAs who have lost their license because they have improperly performed tax services.

There are many highly-skilled CPAs out there that do absolutely nothing with taxes and don't even prepare their own tax forms. So being a CPA doesn't necessarily mean you are a good tax preparer. HOWEVER, being an attorney also doesn't mean that you are a good tax practitioner either. I know many attorneys who know next to nothing about taxes, and would say that generally most CPAs know more than most attorneys about taxes. I also interned at a division of PwC where about half of the tax staff were attorneys and other other half were accountants - I'm sure the attorneys were very good at research but in what I observed about their ability to prepare tax returns they were well behind. IMHO, accountants are just more naturally wired for the skill of preparing tax returns. That's not to say some attorneys aren't great tax pracitioners, and almost all of them who are tax specialists are way out of the CPA's league when it comes to research and understanding of tax law.

[Red Cedar PM]

Conspicuously absent from the Content and Skill Specifications for the Uniform CPA Examination was any mention of the generation-skipping tax, which is a must in the estate planning area.

I consider estate planning to be a specialty. I took a "stiffs and gifts" class in college but I worked for over 6 years in public accounting and never once dealt with any estate or gift issues. We had 3-4 people in our office that specialized in that area - it's such a robust topic that it didn't make sense for everyone to have a surface-level knowledge. There are many topics like this in accounting though - it certainly doesn't make sense for every CPA to be an expert in low-income housing tax credits (also a robust subject) but me and several of my former colleagues are because that was a specialized business line we had.