Editors Note: This is republished with approval from A Biz In A Box author Jordan Zoot.
Choosing Cannabis Tax Advisors – is one of the most important decisions that the owners of a legal commercial cannabis business must make. We are consistently disappointed by the lack of consideration owners invest in making their selections and abhor the misformation and in some instances criminal conduct by a small number of “tax advisors”. This piece is NOT about our practice, it’s about the selection process. We readily acknowledge that we are not the only skilled and qualified tax advisors out there, they do exist and our goal is to assist everyone in finding one. We have been very careful to divide the piece into distinct parts, the first part is comprised solely of factual information where the source of information will be hyperlinked, or a citation provided. The second part is going to reflect our opinions on the topic, and we certainly accept that “opinions are like a**holes”, everybody has one. The California Board of Accountancy [“CBA”] maintains a Cannabis Industry Information page on its website which highlights its unique status.
Critical Criteria – FACTUAL INFORMATION
The U.S. Treasury – Internal Revenue Service [“IRS”]
The Internal Revenue Service maintains an extensive structure for the oversight, regulation, supervision, and, and if the required discipline of individuals and firms that are involved with Federal taxes. The oversight is divided into several broad groupings and you need to understand the differences between them. They are:
Office of Professional Responsibility [“OPR”] – OPR’s vision, mission, strategic goals, and objectives support effective tax administration by ensuring all tax practitioners, tax preparers, and other third parties in the tax system adhere to professional standards and follow the law. OPR’s goals include the following: (1) Increase awareness and understanding of Circular 230 and OPR through outreach activities, (2) Apply the principles of due process to the investigation, analysis, enforcement, and litigation of Circular 230 cases and (3) Build, train and motivate a cohesive OPR team.
Return Preparer Office [“RPO”] – is a community of professional tax practitioners working with the IRS to improve tax administration with the strategic goals to register and promote a qualified tax rofessional community,improve the compliance and accuracy of tax returns prepared by tax preparers and engage stakeholders to create an environment that fosters compliance and program improvement
Treasury Inspector General for Tax Administration [“TIGTA”] – audits, investigations, and inspections and evaluations protect and promote the fair administration of the Federal tax system and work to ensure that the Internal Revenue Service (IRS) is properly doing its job. TIGTA reports directly to the Secretary of the Treasury and has oversight and review responsibility that extends to the IRS Office of Chief Counsel, the IRS Oversight Board, and the Taxpayer Advocate Service maintains a highly skilled, proactive, and diverse Inspector General organization dedicated to working in a collaborative environment with key stakeholders to foster and promote fair tax administration. TIGTA reports directly to the Secretary of the Treasury and has oversight and review responsibility that extends to the IRS Office of Chief Counsel, the IRS Oversight Board, and the Taxpayer Advocate Service. A maintains a highly skilled, proactive, and diverse Inspector General organization dedicated to working in a collaborative environment with key stakeholders to foster and promote fair tax administration.
OPR is responsible for the top tier of tax “professionals” – attorneys, certified public accountants and enrolled agents who are subject to the provisions of Circular 230 [“Circ. 230”] – Regulations Governing Practice before the Internal Revenue Service.
Certified Public Accountant [“CPA”] Verification – The tools available to perform that task include cpaverify.org a CPA lookup tool populated by official state regulatory data sent from Boards of Accountancy to a central database. The website represents the first ever single-source national database of licensed ‘ and CPA firms. Determine a CPA or CPA firm’s credentials without having to search each of the 55 Boards of Accountancy website individually. The California Board of Accountancy [“CBA”] licensee search is located here.
Enrolled Agent [“EA”] Verification – An enrolled agent is 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. Enrolled agent status is the highest credential the IRS awards. Individuals who obtain this elite status must adhere to ethical standards and complete 72 hours of continuing education courses every three years. Enrolled agents, like attorneys and certified public accountants (CPAs), have unlimited practice rights. This means they are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can represent clients before. An Enrolled Agent’s credentials can be verified here.
Return Preparer Verification [make sure you understand how they differ from Circular 230 Practitioners]
Registered Tax Return Preparer [“RTRP”] – Program suspended due to IRS loss in litigation read here.
California Tax Education Council [California Registration Only] – Verify a Tax Return Preparer here [Circ. 230 Practitioner are Exempt]
Annual Filing Season Program [“AFSP”] aims to recognize the efforts of non-credentialed return preparers who aspire to a higher level of professionalism. Those who choose to participate can meet the requirements by obtaining 18 hours of continuing education, including a six-hour federal tax law refresher course with a test. The return preparer must also renew their preparer tax identification number (PTIN) for the upcoming year and consent to adhere to the obligations in Circular 230, Subpart B and section 10.51.
Preparer Tax Identification Number [“PTIN”] – anyone who prepares or assists in preparing federal tax returns for compensation must have a valid 2019 PTIN before preparing returns. All enrolled agents must also have a valid PTIN. The PTIN Directory is located here.
Authorized eFile Provider –the “Authorized IRS e-file Provider” database is a nationwide listing of all businesses which have been accepted to participate in the electronic filing (IRS e-file) program.
Circ. 230 Practitioners are the ONLY group of tax advisors that are permitted to sign extensions of time to file, and represent a taxpayer before the IRS and state tax agencies for the Examination, Appeals and Collection functions Does it make sense to select a tax advisor that isn’t permitted to defend the positions claimed in your tax return, particularly if they prepare the return?
Certified Public Accountants [“CPAs”] are the only tax advisors that may* be permitted to certify financial statements, review or compile financial statements. Enrolled Agents [“EA’s”] are not permitted to provide certification, review or compilations of financial statements. The IRS is prohibited from hiring EA’s as Revenue Agents [the entry-level position for “auditing” tax return unless that possess a CPA Certificate or have completed thirty hours of accounting courses at the college level. The IRS is limited to hiring EA’s that don’t meet the criteria as mail or file clerks.
Enrolled Agents [“EAs”] often state that “EAs are the only federally licensed tax professionals who also have unlimited rights to represent taxpayers before the IRS”. The statement is factually untrue as CPA”s and attorneys have the same rights and obligations when representing taxpayers before the IRS. There are some additional distinctions which need to be made at the state level.
California is one of seven states that requires registration of tax return preparers [Circ. 230 Tax Practitioners are EXEMPT from the requirement. The registration is accomplished through the California Tax Education Council [“CTEC”] and requires continuing tax education and a $5,000 surety bond.
CPA’s may either complete a process known as “reciprocity” and obtain a license in a state other than their state of primary licensure, or they may utilize the procedures developed under the National Association of State Boards of Accountancy [“NASBA”] CPA Mobility Project to obtain a “limited practice privilege“. Once a CPA have completed either of the two steps above they have rights to represent a taxpayer in any location which is the same as an EA.
* – the California Board of Accountancy issues two types of licenses, A and G.
Type A – “Authorized” means the CBA has determined that the CPA completed a minimum of 500 hours of the experience required for licensure in attest work. The 500-hour minimum standard ensures entry-level exposure to attest engagements.
Type G – “Qualified” means that regardless of whether a CPA has met the minimum steps to be authorized to sign reports on attest engagements, they comply with applicable professional standards, which requires the CPA to undertake only those professional services that can be reasonably completed with professional competence, including achieving a level of competence that will assure that the quality of service meets the high level of professionalism required. It is the responsibility of the CPA to evaluate whether their specific education, experience, and judgment are adequate to perform the services being requested. As a result, it important to ask the CPA about their number of years and level of experience, continuing education, and recent peer review, if any.
California CPA’s and CPA Firms that provide attest services are required to undergo a quality control process known as “peer review“.
CPA’s that certify financial statements or provide SSARS-21 attest services for a client are strictly prohibited by “independence rules which can be found under both state accountancy statutes and professional standards from providing bookkeeping or technology services, such as accounting software or POS systems for the same client.
Choosing Cannabis Tax Advisors
Our Recommendations – Opinion
We believe that the optimal combination of tax advisors for a cannabis business would be to have BOTH a CPA with a graduate degree [a Masters in Taxation or “MST”] and a tax attorney with a graduate law degree [an “LLM – Taxation”]. Our rationale for the collaboration of both is detailed in “Legal Cannabis Support – Clarion Call“. You can learn more about the importance of having access to both sets of skills in “CPA Becomes A Cannibal” and “Kovel Accountants Cannabis Industry“
Where your tax advisor went to school is important, and we believe continues to be relevant without regard to the number of years since they graduated. I personally have an undergraduate degree in accountancy from the University of Illinois – Urbana, and an MST from the University of Texas – Austin. Both programs have been ranked no lower than #3 in the United States for the past FORTY years.
Listings of top undergraduate and graduate accountancy and tax programs can found here for undergraduate and here for graduate and LLM – Tax are here.
Experience with a Big 4 Accounting Firm is important. The level of experience is probably of greater importance – the usual progression is Staff Accountant [“Analyst”], Senior Accountant [“Associate”], Manager [“Director”], Senior Manager [“Director”], and Partner [“Managing Director”]. Big 4 experience at the Partner level is the “gold standard” with fewer than one in thirty Big 4 firm hires becoming partners.
Additional Recommendations – Opinion
Professional Memberships are important, with increased value ascribed to participation in the organization’s Technical Committees increasing their value
State Society Membership – provides development of local relationships and is a stepping stone to AICPA Committee appointed membership. CalCPAcan be found here, and the other state societies here.
AICPA Private Companies Practice Section [“PCPS”] for firms – The AICPA’s
Private Companies Practice Section (PCPS) supports CPA firms in the everyday intricacies of running a practice. PCPS partners with firms of all sizes, creating targeted and customizable practice management resources, networking opportunities and is a strong, collective voice within the CPA profession. PCPS provides content designed to sharpen technical proficiency to best practices in firm practice management.
Locate the Firm’s website and explore it, and investigate the firm’s presence on social media. You are welcome to explore our firm’s digital presence here.
We hope this piece provides insight into the process of selecting a professional tax advisor and welcome your comments, you can email us at firstname.lastname@example.org.
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