In business school, I somehow managed to ace my accounting classes. I was a shocked as anyone because even though I managed to get good marks, I still felt confused about the material. My classmates who saw my grades thought for sure that I was going to be a Certified Public Accountant (CPA). I definitely knew that I wasn't interested in the material enough to work hard and pass all the required classes, tests and then practice accounting for 40 years. NOPE.
When I started my career in consulting, I started to meet people with the title Enrolled Agent. As if the tax code isn't confusing enough, I discovered another layer of WTF when it came to the people who help prepare and file tax returns. Which lead me to ask myself, "What's the difference between an Enrolled Agent and a CPA?"
What is an Enrolled Agent?
Enrolled Agents represent taxpayers before the Internal Revenue Service (IRS) for tax issues including audits, collections and appeals. Enrolled agent status is the highest credential awarded by the IRS. The EA credential is recognized across all 50 U.S. states.
How Do You Become An Enrolled Agent (EA)?
One way you can become an EA is by passing the Special Enrollment Examination exam. This exam is comprehensive and covers all facets of the tax code. Another way to become an EA is by providing enough documentation to show that your experience qualifies you for the position. Additionally, you'll have to pass a pretty extensive background examination. This includes investigating the applicant's tax history.
What Does an Enrolled Agent Do?
Enrolled have the legal authority to prepare tax returns, advise and represent individuals, estates, corporations, partnerships and trusts. An EA is a tax expert. Part of their job is to keep their knowledge of the ever changing tax code current. Yup, the tax code has changes every year. An EA may represent people who are being audited by the IRS.
An EA receives their license from the federal government while Certified Public Accountants, like attorneys are usually licensed by the state they reside in.
What is a Certified Public Accountant (CPA)?
A Certified Public Accountant (CPA) is a a member of an officially accredited professional body of accountants. CPA's are extremely knowledgeable in accounting principles, practices and applications.
How Do You Become A CPA?
You must pass a state exam. After you receive the CPA designation, you're still required to complete a certain amount of continuing education credits/units throughout your career.
Most often, continuing education is a requirement of 120 hours of class time every three years, with a minimum of 20 hours a year. Class time is defined as in-person classes, online courses or web seminars. In addition, many states also require an ethics course to be taken when a license is renewed.
Each state has its own board of accounting/accountancy that controls the issuing CPA licenses. Having a license to practice in one state doesn't necessarily qualify a CPA to automatically practice in another state.
What Does A CPA Do?
CPAs prepare and file individual and business tax returns. A CPA can also help small business owners make decisions that will impact their tax situation.
For example, if you're a small business owner, a CPA can help answer some common questions you might have like:
- Should I set up an entity or continue to operate a sole proprietorship?
- Should I be saving for taxes as I get paid and how much should I save?
- Can we set up a system for paying myself?
- How much will I owe in taxes this year?
- What expenses can I write off?
- How does purchasing this house impact my taxes?
CPAs who help individuals and small business owners in this capacity, often work for public accounting firms.
An accountant can also work for and within a company. Often times an accountant will serve as Chief Financial Officer (CFO) or in another role in the accounting department. Usually, these accountants are working full time for these companies and do not provide accounting services to the public.