If you’ve ever wondered about the different tax professionals available to help your business, you’ve probably asked yourself what is an enrolled agent. In this article we’ll go over how they can help you and how they compare with the popular CPA designation.
What's the Difference Between EA's and CPA's
The main difference between EA’s and CPA’s comes from the requirements they have to get their credentials. However, a second, quite significant distinguishing factor also relates to their likely backgrounds, which we’ll touch upon.
The enrolled agent designation is directly regulated and given out by the IRS. This differs from the certified public accountant (CPA) credential, which is regulated by each state’s accountancy board. One consequence of this is that a CPA’s license will only be valid within the state they’re registered in. An EA’s credential is not state bound, on the other hand.
EA status is the highest credential the IRS awards.1 Together with CPA’s and attorneys, enrolled agents enjoy unlimited rights of representing their clients on tax matters before the IRS. EA’s are qualified to deal with any level of tax matters for their clients according to the IRS.2
How Their Expertise Differs
Let’s consider the differences in their expertise. That way, you can get a better idea of which of the two would be better suited to help you.
How EA's are qualified
We can get a basic gauge of this by considering their testing requirements. Enrolled agents are required to complete a three part test called the Special Enrollment Examination. Each part consists of a four-hour exam:
- Part one deals with taxation at the individual level
- Two deals with taxation at the business level
- The last part, part three deals with the representation of taxpayers before the IRS on tax matters
How CPA's Are Qualified
CPA’s have to go through four four-hour exams consisting of the following topics:
- Part one deals with auditing and ethics
- The second part of the exam deals with business concepts
- The third part deals with financial accounting
- The last part deals with taxation
In conclusion to how the two professionals differ, we can clearly appreciate that enrolled agents are heavily qualified on the side of taxation. While the EA exam is nearly entirely devoted to tax, CPA’s only have 25% of their overall examination centered on taxation.
The Lowdown on EA's vs. CPA's
There are additional requirements for both designations. CPA’s are required to have a bachelor’s degree and also to complete 150 college units in specified areas. They typically also need to complete 40 hours on continuing professional education each year.
EA’s are required to pass a suitability check by the IRS. They must also complete 72 hours of continuing education every three years along with two hours of ethics training yearly.
In My Experience...
Perhaps because of the heavy schooling requirement of CPA’s, there tends to be a much more academic mentality to CPA’s in my experience.
Some individuals may view this as a positive. However, for many small business owners who are looking to outsource a crucial aspect of their business to a trusted advisor, this may not be all that good.
Business is not learned in schools, it’s real life.
I’ve dealt internationally with accountants that are more afraid of the government than interested in helping your business succeed. Sometimes if you’re not careful, too much time spent in school can make your approach to life and the world lopsided. But of course, that’s not the case with a lot of people in the accounting world, just something to look out for.
Real Life Business
Most business management schools impart training that is meant to create managers within organizations, not entrepreneurs/business owners. The economic theories taught in schools are so much highfalutin gobbledygook; the cost-centered training of accountants makes you wonder whether this mentality will ultimately be a productive one within your organization.
Even Warren Buffet and Charlie Munger expressed a similar outlook when it comes to academic training and business.3
In the final analysis both CPA’s and EA’s can help your business but it depends on what area you’re needing help with that one of them might be more helpful.
When it comes to taxation, tax strategy and planning, and tax preparation, EA’s shine although CPA’s can also help depending on their experience. In matters of assurance regarding financial statements, auditing, and forensic accounting, CPA’s clearly have advantage.
When it comes to becoming the integral outsourced accountant “second” that can help with take off the financial hat and wear the entrepreneur hat for more of the time, it’s case-by-case.
You want to pick someone that is really good at tax planning, bookkeeping, and will keep you compliant. Someone who’s down to earth and has business sense but who’s also “an accountant”, not a crazy entrepreneur!
And with all the sans common sense ideologies infecting our academia, it won’t harm you to come at it with a heavy spoonful of caution when working with someone.
1. IRS, “Enrolled Agent Information.” IRS.gov, https://www.irs.gov/tax-professionals/enrolled-agents/enrolled-agent-information#:~:text=Enrolled%20agent%20status%20is%20the,)%2C%20have%20unlimited%20practice%20rights. Accessed 5 May 2023.
3. “Charlie Munger: ‘Business schools teach a lot of things we don’t believe.'” YouTube, uploaded by The Financial Review,24 August 2020, https://www.youtube.com/watch?v=l1dI3dpSMzM. Accessed 5 May 2023.