This article has been reviewed by tax expert Erica Gellerman, CPA.
Enrolled Agent Definition
An enrolled agent is a federally authorized tax practitioner empowered by the U.S. Department of the Treasury to represent taxpayers before the IRS for tax issues including audits, collections, and appeals. To become an enrolled agent one must pass an extensive exam or work at the IRS for a minimum of five years in a role that requires interpretation of the tax code. Enrolled agents can assist small business owners in situations where they must deal directly with the IRS.
As a small business owner, keeping your finances in order is a top priority. For some, it is also a constant struggle. That’s why there are tax preparers and financial advisors. These folks understand the tax code and can help you with your business tax returns, accounting needs, and general tax compliance requirements.
However, not all financial professionals are the same.
Two types of financial professionals you may have heard of are bookkeepers and certified public accountants (CPA). A lesser-known title is that of the enrolled agent. An enrolled agent is the highest credential a tax practitioner can receive from the Internal Revenue Service (IRS). Because of the level of expertise required to become an enrolled agent, there are only about 53,700 practicing enrolled agents in the United States, according to the National Association of Enrolled Agents (NAEA).
As a small business owner, it behooves you to know what an enrolled agent can do, and how one can help your business.
What Is an Enrolled Agent?
To understand the job of an enrolled agent, it helps to first look at the history of the profession. According to the NAEA, the enrolled agent was a job created in 1884 when Congress decided to regulate individuals who represented citizens to the U.S. Treasury Department after being flooded with dubious claims relating to Civil War losses.
The enrolled agent role expanded with the passage of the first income tax law in 1913 to include claims for monetary relief for citizens whose taxes had become inequitable. As taxes became more complicated, the job of the enrolled agent grew to include the preparation of tax forms. In 1941, the role of the enrolled agent was formalized in Treasury Department Circular No. 230. According to the NAEA, the regulation stipulates that “enrolled agents, Circular 230 practitioners, are federally authorized tax practitioners empowered by the U.S. Department of the Treasury to represent taxpayers before the Internal Revenue Service (IRS) for tax issues including audits, collections, and appeals.”
What Does an Enrolled Agent Do?
Now that you understand what an enrolled agent does in theory, let’s learn more about what it looks like in practice.
The most important thing an enrolled agent does is represent taxpayers before the IRS at all administrative levels (examinations, collections, and appeals). For example, if you have a tax problem, a notice from the IRS, or are under audit, you can hire an enrolled agent to handle direct interactions with the IRS, provide information and explanations on your behalf, and enter into an agreement with the IRS.
The only area where an enrolled agent cannot represent you is in tax court. In order to represent a taxpayer in tax court, you must be a licensed attorney or have passed the “U.S. Tax Court Non-Attorney” exam.
Enrolled agents are also authorized to advise and prepare tax returns for individuals, partnerships, corporations, estates, trusts, or any other entities with tax-reporting requirements. According to the NAEA, enrolled agents are the only federally licensed tax practitioners who specialize in taxation and have unlimited rights to represent taxpayers before the IRS.
It is important to note that enrolled agents have privilege with the taxpayers they represent, under certain conditions. This privilege allows for confidentiality between the enrolled agent and taxpayer in situations where the taxpayer is being represented in cases involving audits and collection matters. However, this privilege is not applicable to the preparation and filing of a tax return, and does not apply to state tax matters.
How Is an Enrolled Agent Different From Other Tax Experts?
Enrolled agents differ from other tax practitioners like CPAs and bookkeepers in a few ways.
The enrolled agent credential can only be acquired in one of two ways: An individual must work for the IRS for a minimum of five years in a role that requires the application and interpretation of the tax code, or pass all three parts of the Special Enrollment Exam (SEE) and pass what the IRS calls a suitability check. The suitability check is administered by the IRS and includes looking into your personal tax history.
The SEE exam focuses specifically on tax law (as opposed to the CPA exam, which focuses on a broader scope of accounting and tax topics), and is divided into three parts: individuals, businesses, and representation, practices, and procedures. Each part features 100 questions and takes three and a half hours to complete. When you pass one part of the exam, you have two years to pass the other two parts.
Once credentialed, enrolled agents are required to abide by the provisions of the Department of Treasury’s Circular 230, which provides the regulations governing the practice of enrolled agents before the IRS.
The IRS requires enrolled agents to complete 72 hours of continuing education every three years, with a minimum of 16 credited hours annually, in order to maintain their active enrolled agent license and practice rights. Classes include everything from updates to the tax law to enrolled agent ethics.
Another major difference between enrolled agents and other tax professionals is that enrolled agents are federally licensed, meaning they can practice in any state in the country. CPAs, on the other hand, are licensed at the state level, and can only practice within the jurisdiction in which they are licensed.
Enrolled agents must demonstrate to the IRS their expertise in all areas of taxation in order to be awarded the credential. If they do, they are granted unlimited representation rights to represent taxpayers before the IRS. This means they can represent all types of taxpayers on any matter regarding taxation, including audits, payment or collection issues, and appeals. CPAs and attorneys are also afforded this right.
Enrolled Agent vs. CPA
The jobs of CPAs and enrolled agents are actually quite similar. The main difference is that an enrolled agent specializes in taxation. CPAs can also perform tax services, but may not specialize in taxation. However, a CPA can perform other services like accounting and bookkeeping, which an enrolled agent may not be as knowledgeable in (unless they are also licensed as a CPA).
Although both professions have rigorous continuing education requirements, a CPA must also have a college degree, pass the Uniform CPA Examination, and meet the requirements of their state’s board of accountancy.
Does Your Business Need an Enrolled Agent?
According to Jerry Gaddis, an enrolled agent and CEO and founder of Florida-based tax firm Tropical Tax, there are several scenarios in which it makes sense to work with an enrolled agent. The first is when you are selecting a legal entity for your business.
“You should work with an attorney to select your legal entity,” says Gaddis. “But an enrolled agent can help you understand how you will be taxed depending on your business type.”
Once your business is formed, Gaddis says an enrolled agent can help explain to you what business expenses are deductible from your taxes. They can also prepare and file your business and payroll tax returns. An enrolled agent is especially helpful if you’re filing returns in more than one state, as enrolled agents can operate across state lines. Note that a CPA can also prepare your business tax returns, but only in the state in which they are licensed.
If the IRS has any questions regarding your taxes, or if they decide to conduct an audit, an enrolled agent could advocate on your behalf.
“You could give us the power of attorney and then the IRS would have to cease communicating directly with you and instead go through us,” Gaddis says. An enrolled agent could also work on the behalf of a small business to settle an appeal or collections matter—such as failing to file your tax return, failing to pay tax penalties, debt relief, tax evasion, tax liens, tax levies, and tax fraud.
If you’re looking for a little accounting guidance, or need help with your bookkeeping, budgeting, or financial planning, you’re better off working with a CPA. But if you have any issues regarding taxation, Gaddis recommends finding an enrolled agent.
“We are America’s tax experts,” Gaddis says. “If you want to know how your business is taxed and how to minimize your tax liability, call an enrolled agent.
How to Find an Enrolled Agent
There are a few different ways you can go about finding an enrolled agent. The first is to use the database provided on the NAEA website, which provides you with a list of enrolled agents in your area. On top of federal requirements, NAEA members are also bound by a code of ethics and rules of professional conduct of the association.
Popular tax preparation companies like H&R Block also have many enrolled agents on staff to assist with the particular of filing taxes. Public and corporate accounting firms, law firms, investment firms, private practices, banks, and state departments of revenue also typically employ enrolled agents. Many enrolled agents also work as independent contractors.
Finally, performing a local Google search or flipping through your Yellow Pages is another way to find credentialed enrolled agents in your area. Oftentimes, an enrolled agent will have the acronym “EA” in parenthesis next to their name.
Closing the Book on Enrolled Agents
Enrolled agents are a highly specialized form of financial professional who can provide valuable assistance to small businesses dealing with tax issues. If you’re dealing with the IRS in any capacity, it would be smart to bring an enrolled agent into the fold to make sure your business gets the best outcome possible. Nobody likes tax issues. Enrolled agents can help make sure the process is as painless as possible.