CPA Out-of-state licensing

Friday, August 26, 2005

You Could Have a Big Surprise Next Tax Season

The Facts about Out-of-State Licensing

Perhaps you were not paying attention when your state legislature and state Board of Accountancy were debating the issue of out-of-state licensing. Or maybe you said, “What does this have to do with me, since I am already licensed in ….”

Whether it is called interstate practice, the term used by the National Association of State Boards of Accountancy (NASBA), temporary licensing, right to practice, or practice privilege, as we do here in California, one after another, states have been strengthening their laws regarding practicing public accounting within their state.

So when you begin to prepare those individual or business tax returns for your out-of-state clients, you and your clients may be in for a BIG SURPRISE. Several California practitioners have already found that out when they recently tried to e-file a return in Oregon. They were refused access because they were not licensed (either fully or temporarily) in Oregon.

How Extensive is the Practice?

In the last two months alone several states, including Colorado, Wyoming and Illinois, have revised their rules with regard to out-of-state licensing. And those are only the ones I know about. From a cursory review of state board websites, it appears that more than half of the states now have some kind of notification and/or restrictions on the practice of accounting in their state.

What Kind of Services are Covered?

Some of the states apply their temporary licensing rules only to attest work; some apply only if you set foot in their state; some apply to business, but not individual tax returns (like California); some apply only to residents of their state.

And then there are states like Illinois. If you do ANY accounting work for an individual or company that resides in Illinois or has any kind of filing requirement in the state, you must be licensed in Illinois. That includes nonresident returns and partnerships with multi-state filing requirements. (Fortunately, Illinois' rules do not go into effect until October 1, 2006 and there has been such a commotion that they are looking for ways to modify the regulations or enforcement of the law).

Now we just got word of a new problem in Nevada. The Division of Mortgage Lending (not the Board of Accountancy) is requiring that any financial statements filed with their agency “must be prepared by an Independent Certified Public Accountant licensed to practice in Nevada.” In other words, if you have a client that is required to file an annual statement with the regulatory agency because they sell mortgages in Nevada, the financial statements must be prepared by a CPA licensed in Nevada.

How Do I Find Out About the Rules?

The biggest problem is that there is no central place to go to get the latest state-by-state rules. In addition, the rules seem to be changing faster than anyone can keep up with. In researching the issue, I did find one website that has a great deal of the key information. The Idaho Board of Accountancy has put together a summary of the licensing requirements for all 50 states and the four additional jurisdictions covered by US accounting rules. I can’t guarantee that they have the very latest changes, but there are links to the specific sections of the individual state websites and it’s a great place to start:

The Emperor Has No Clothes

Most of the states are passing these rules in order to “protect the public”. However, the real and chilling effect is that small and midsized firms (including those in their own state) will not be able to comply with the various state rules because of the time and cost involved, unless they have numerous clients (or one large one) in the state. Their own states CPAs will feel the impact as they have to consider how they can efficiently handle their out-of-state clients. I guess some state legislators and state Boards of Accountancy don’t believe that giving people the widest choice possible and permitting people to make their own decisions about their professionals might truly be “protecting the public”.

What About NASBA and the UAA?

The National Association of State Boards of Accountancy on August 1st released proposed changes to the Uniform Accountancy Act to bring state rules closer together. They have proposed that firms be permitted to file a “master notice” with NASBA and consent to the state’s accountancy laws. However, NASBA has no enforcement power and depends on the cooperation of the individual states.

What Can You Do?

1. Don’t wait until tax season to decide how you are going to deal with out-of-state clients.

2. Consider the cost/benefit of temporary licensing, permanent licensing, and continuing to service out-of-state clients. (For example: Does it really pay to prepare one Illinois tax return?)

3. Contact your legislators, your Board of Accountancy, your state society and let them know your views about this issue. (For example: Do you believe there should be national licensing instead of state licensing of accountants or is the main problem just one of making the rules more widely known? Do you agree with the proposed changes being offered by NASBA?)