We had some time this afternoon to review some of our old blog posts from the Fall of 2015. It quickly became clear that many of the concerns we wondered about back then continue as festering problems to this day. One of our last posts detailed the process we went through in connection with our opening a California office in Oakland. The process included:
- Formation of a California professional corporation, registration as a taxpayer
California Accountancy Act in California, and licensure as a California CPA Corporation.
- Completion of the process of becoming licensed as a California CPA
- Filing and paying California income taxes for both the corporation and personally.
JUST BECAUSE BUSINESS IS DONE “IN THE CLOUD:, THE PRESENCE OF AN OFFICE ON EMPLOYEES IN CALIFORNIA, TOGETHER WITH OTHER ATTRIBUTED THAT NEED TO BE REVIEWED CAREFULLY IT IS UNWISE AND NEGLIGENT TO ASSUME THAT THE OBLIGATIONS DON’T EXIST.
If a person is NOT licensed as a certified public accountant in California [or hold a limited purpose “Practice Permit”] and that list of persons would include
- Enrolled Agents
- a California CTEC
- a person listed in the Federal Directory of Tax Return Preparer with “credentials and select qualifications.”
then the restriction that applies to them under CA Accountancy Act 5051 is:
a person shall be deemed to be engaged in the practice of public accountancy within the meaning and intent of this chapter if he or she does any of the following:
(a) Holds himself or herself out to the public in any manner as one skilled in the knowledge, science, and practice of accounting, and as qualified and ready to render professional service therein as a public accountant for compensation.
(b) Maintains an office for the transaction of business as a public accountant.
(c) Offers to prospective clients to perform for compensation, or who does perform on behalf of clients for compensation, professional services that involve or require an audit, examination, verification, investigation, certification, presentation, or review of financial transactions and accounting records.
(d) Prepares or certifies for clients reports on audits or examinations of books or records of account, balance sheets, and other financial, accounting and related schedules, exhibits, statements, or reports that are to be used for publication, for the purpose of obtaining credit, for filing with a court of law or with any governmental agency, or for any other purpose.
(e) In general or as an incident to that work, renders professional services to clients for compensation in any or all matters relating to accounting procedure and to the recording, presentation, or certification of financial information or data.
(f) Keeps books, makes trial balances, or prepares statements, makes audits, or prepares reports, all as a part of bookkeeping operations for clients.
(g) Prepares or signs, as the tax preparer, tax returns for clients.
(h) Prepares personal financial or investment plans or provides to clients products or services of others in implementation of personal financial or investment plans.
(i) Provides management consulting services to clients
The activities set forth in subdivisions (f) to (i), inclusive, are “public accountancy” only when performed by a certified public accountant or public accountant, as defined in this chapter.
A person is not engaged in the practice of public accountancy if the only services he or she engages in are those defined by subdivisions (f) to (i), inclusive, and he or she does not hold himself or herself out, solicit, or advertise for clients using the certified public accountant or public accountant designation.
There are two additional exceptions provided for persons that exclusively perform bookkeeping tasks under certain conditions.
Sec 5052 states:
Nothing in this chapter shall apply to any person who as an employee, independent contractor, or otherwise, contracts with one or more persons, organizations, or entities, for the purpose of keeping books, making trial balances, statements, making audits or preparing reports, all as a part of bookkeeping operations, provided that such trial balances, statements, or reports are not issued over the name of such person as having been prepared or examined by a certified public accountant or public accountant.
A further exception exists for employees
Sec. 5053 states:
Nothing contained in this chapter precludes a person who is not a certified public accountant or public accountant from serving as an employee of, or an assistant to, a certified public accountant or public accountant or partnership or a corporation composed of certified public accountants or public accountants holding a permit to practice pursuant to this chapter if the employee or assistant works under the control and supervision of a certified public accountant, or a public accountant authorized to practice public accountancy pursuant to this chapter and if the employee or assistant does not issue any statement over his or her name.
Finally, there is a catch-all if an individual is employed or affiliated with an out-of-state firm in Sec. 5054 which states:
Notwithstanding any other provision of this chapter, 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 under this chapter or a practice privilege pursuant to Article 5.1 (commencing with Section 5096) 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.
(b) The board may, by regulation, limit the number of tax returns that may be prepared pursuant to subdivision (a).
It is critical to understand that the exception described above is NOT available to business, or an individual who is non-California CPA if the firm has:
- employees or independent contractors who provide services for the company or individual that are resident in California OR
- the firm maintains an office in California. [It is entirely clear that if a company subleases office space or supports a “hot desk” arrangement such as those provided by WeWork.com
- where a firm is listed on a “Find An Advisor” page on a website as “serving clients in California” could very easily be construed either as having a physical presence in California or “engaged in the solicitation of business from California taxpayers.

The status of an individual or firm’s licensure to practice public accountancy in California can be verified either on cpaverify.com or on the CBA website.
If an individual is NOT a Circular 230 Practitioner [attorney, CPA or Enrolled Agent], then the following applies for California Tax Education Council members [“CTEC’s”]
Registered: Registered status indicates the individual has completed the annual registration requirements by completing the required education and maintaining a $5,000 tax preparer bond. Registered individuals are compliant with the California Business & Professions Code, Section 22250-22259, and are able to prepare taxes for a fee in California.
Just as a reminder, an individual preparing taxes for a fee may also be a CPA (www.dca.ca.gov/cba), an Enrolled Agent (www.irs.gov), or an attorney (www.calbar.ca.gov). You may wish to check the websites indicated to be sure the individual in question is not a CPA, EA or attorney, and, therefore, exempt from registering with CTEC. If you have any questions or concerns feel free to contact CTEC.
The penalty for being a NON-COMPLIANT preparer in California is:
As of January 1, 2005, the California Franchise Tax Board (FTB) has the authority to identify and penalize unregistered tax preparers.“Failure to register as a tax preparer with the California Tax Education Council, as required by Section 22253 of the Business and Professions Code, unless it is shown that the failure was due to reasonable cause and not due to willful neglect.
(1) The amount of the penalty under this subdivision for the first failure to register is two thousand five hundred dollars ($2,500). This penalty shall be waived if proof of registration is provided to the Franchise Tax Board within 90 days from the date notice of the penalty is mailed to the tax preparer.
(2) The amount of the penalty under this subdivision for a failure to register, other than the first failure to register, is five thousand dollars ($5,000).”
Consumers can report unregistered tax preparers by filling out the Noncompliant Complaint Form through CTEC’s website. All reports are kept confidential.
We have additional resources for registration and regulation of tax professionals on our website.
There are several additional points that need to be mentioned.
- Where a firm or individual tax return preparer is doing business in a state such as California, there is an obligation to ascertain where the business entity or the individuals have obligations to file or pay income, sales, excise or franchise taxes to California FTB, EDD, and CDTFA. The authorities are certainly within their rights to hold tax professionals to a higher standard concerning knowing what their obligations are than the general public.
- California has very specific rules for income tax withholding at the source for non-residents of California that perform services within California. Withholding is required when a nonresident payee:
- Provides services in California. Compensation is considered earned where the payee performs the services. Services include covenants not to compete, options, bonuses, non-employee compensation,
- receives cash and non-cash distributions.
- Nonresident payees are subject to withholding on California source income regardless of where they live, enter into a contract, or receive payment.
An example of the latter situation might be where an individual accountant or bookkeeper provides services for a California corporation like a Xero Ambassador where some portion of their services is performed while present in California for an event or a project.
As a final thought, we note that many “cloud accounting firms” provide services on a Good, Better, and Best package basis. While core bookkeeping services clearly fall within a safe harbor, certain enhanced services such as “virtual controller and CFO” falls outside the safe harbors and is deemed to be the practice of public accountancy. There is a compelling reason for both CALCPA and the California Board of Accountancy to perform aggressive oversight for the protection of the public.