Q&As from the California Board of Accountancy

Effective January 1, 2006, the new practice privilege rules went into effect in California. The Board of Accountancy has issued a revised set of questions and answers that are available on their website. Here is a direct link to those Q&As:

http://www.dca.ca.gov/cba/forms/pphandbook.pdf#page=14

I noted a couple of interesting issues contained in the California Board of Accountancy Q&As.

Specifically for California CPAs

Q: I am a California CPA and prepare tax returns for a few clients in other states. Do other states require a practice privilege in order to continue to serve these clients?

A: The requirements to practice public accountancy vary from state to state. It is your responsibility to comply with the laws and requirements of any jurisdiction in which you practice. Therefore, it is suggested you contact the relevant state board(s) to determine what is required. Unauthorized practice in another state can be cause for discipline against your California license.

Specifically for out-of-state licensees with California clients

Q: I’m a CPA in another state and do not plan to be in California. I do only one tax return for a California client. Do I need a California practice privilege?

A: Yes, in order to provide public accounting services to clients who reside in California you will be required to obtain a California practice privilege or obtain a California CPA license. Preparing tax returns as a CPA is a service that falls within the definition of the practice of public accountancy contained in Section 5051 of the California Accountancy Act.

If tax returns are prepared in the name of a firm, the firm would also need to be registered in California. You can visit the Board’s Web site at: www.dca.ca.gov/cba to review the firm registration requirements and obtain the application.

However, Section 5054 of the California Accountancy Act allows for a narrow exception from the practice privilege requirements for the preparation of tax returns for clients who are individuals (natural persons) or the estate of individuals (natural persons) who were clients at the time of death.

The exception provides that an individual or firm holding a valid and current license, certificate, or permit to practice public accountancy from another state may prepare tax returns for natural persons who are California residents or estate tax returns for the estates of natural persons who were clients at the time of death without obtaining a permit to practice public accountancy issued by the Board provided that the individual or firm does not physically enter California to practice public accountancy pursuant to Section 5051, does not solicit California clients, and does not assert or imply that the individual or firm is licensed or registered to practice public accountancy in California.

For a complete discussion of the new California rules on practice privilege go to: http://www.dca.ca.gov/cba/new.htm

Comments from Practitioners

In the first 72 hours after I published the excel spreadsheet on out-of-state licensing, over 1650 practitioners accessed the chart. I have received dozens of E-mails and telephone calls thanking me for my efforts and asking me questions about how to use the chart.

Now that the information has been out there for nearly a month, I thought it might be helpful to publish some of the ideas that practitioners have discussed with me regarding what they are considering doing in response to this difficult challenge.

DISCLAIMER

First let me state clearly that everything discussed on this blog site is unofficial. It is up to you and your firm to decide how best to deal with the issue of out-of-state licensing. One of the major purposes for my blog (and the spreadsheet) was to bring this issue to the forefront so that CPAs, CPA associations, and maybe even regulators and legislators will deal with this issue now (not two or three years from now). From the comments I have been receiving, the number of calls being made to state boards of accountancy and state societies has already resulted in some states reconsidering their interpretation and/or enforcement of these laws.

BENIGN NEGLECT

Unfortunately, the inconsistent responses and difficulty encountered by many practitioners in getting meaningful information from state boards of accountancy has also led some to conclude that their best option is one of "benign neglect". I'll keep doing what I am doing until they catch me.

I do not believe that is a proper response. Yet I do understand the level of frustration.

Do you really want to be the test case?

ALTERNATIVES BEING DISCUSSED

Limited Exposure

One of the things I discovered when talking to state boards of accountancy was the difference between how many states look at the preparation of tax returns. While some states have restrictions on who can be a paid preparer, other states permit anyone to prepare tax returns. Therefore you will find in my spreadsheet that many states do not include tax preparation at all in their definition of out-of-state CPA regulation. Others only include tax preparation if the practitioner sets foot in their state. There are currently only 17 states where tax returns are included in the definition of out-of-state practice AND the rules apply even if the practitioner does not set foot in the state.

Hiring EAs or getting your EA license

Several firms have been discussing having an Enrolled Agent (EA) sign all of their out of state tax returns. EAs are nationally licensed. The only exception we have heard about is in Oregon. I still don't fully understand how or to what extent Oregon has limited EA tax practice, but if you do not have a tax client in Oregon, this might be something to consider.

Signing the Tax Return Without Using Your CPA Designation

I first encountered this option when speaking with the Illinois Board of Accountancy. They said that they would not have any problem or oversight if a CPA signed an Illinois tax return without using their CPA designation. My immediate reaction to that suggestion was very negative. I worked hard for my CPA license and felt that a practitioner was still holding out as a CPA even if he/she did not use the designation on the tax return. I also heard unofficially that the California Board of Accountancy would frown upon such a decision. In the past week, I have heard from several CPAs who are seriously considering using this alternative. They state that they have received approval from their board of accountancy. I unofficially spoke with my board, who offered these thoughts:

1. It is doubtful whether the issue would come to their attention in such a situation.

2. Only if the tax return "blew up" and the other agency found reason to discipline the practitioner would out-of-state licensing become a violation to be dealt with.

3. Because of the growing nature and controversy surrounding out-of-state practice, the penalties for this rule violation will probably not be very harsh.

4. They wondered how the firm was going to deal with the line on the tax return that asks for the firm's signature.

Dealing with Temporary Practice on an Individual Basis

Several states do not have any temporary practice privilege rules for firms. In addition, the fees could become prohibitive when registering both the firm and the individuals. Some of the practitioners who spoke with or E-mailed me have been exploring the alternative of just having the tax returns signed by the individual and some are even considering it for financial statements. If someone comes up with an effective way to do this, please let me know and I will publish the idea on this blog so others can comment.

Added - January 15, 2006

I received this recent comment from a California practitioner. Does anyone have any thoughts?

I am having an anxiety attack. I have been investigating the out of state temporary licenses. I am a professional corporation. It appears, I have to ALSO pay a fee for my corporation as well as myself in those specific states. However, I am finding that I may have to file a corporate tax return in some states as well which then imposes another minimum tax fee.....this is a nightmare.

HOW DID THIS HAPPEN

Probably the most common question I get is how and when did this all happen. The truth is that several states have had rules on their books restricting out-of-state licensees from practicing in their state without obtaining a license or permit to practice. But it has only been in the last year or so that the number of states passing new restrictions and promising to enforce these laws has blown up.

I have two thoughts as to how it passed under the radar:

1. The Big Four international CPA firms have people licensed in every state. To them this was not a huge issue. And they may be the only entities that have the power and resources to stop the tidal wave. Some have suggested that they were actually behind the movement to restrict smaller firms from competing with them. If this is true, I have no evidence to support it.

2. CPAs did not consider these new laws as a threat because they only affected practitioners from other states. Some even looked at them as protection from outsiders who might take away some of their business. It is now quite obvious that states were not going to sit idly by while neighboring states put restrictions on their state's professionals. For many this has become "tit for tat". For others it has become a way to raise revenue. Whatever the reason, the issue has now taken on a life of its own.

FRUSTRATION

Although a wide range of feelings (many of which could not be displayed on this website) were expressed in the calls and E-mails to me, by far the most prevalent expression was frustration - frustration with the 50 different rules; frustration in obtaining information about the rules; and frustration with the time and cost involved in providing a needed service for their clients.

I believe that we can effectively turn that frustration into productive change. Now is the time to contact your state society, your state board of accountancy and tell them what you would like done.

Should we go back to a system of temporary and incidental practice?
Should we have a de minimus exception (something that one state recently implemented)?
Should we have national licensing (politically not a likely outcome)?
Should the states agree to one system under the guidance of NASBA or the AICPA?

or perhaps you have another solution to this problem that you would like me to post on this website.

YOUR COMMENTS ARE WELCOME!