Enrolled Agents, Certified Public Accountants, and Tax Attorneys: What’s the Difference?

Most people do not know the difference between the varied tax professionals and how they might be useful to an individual or business in various financial circumstances. Why pay a certified public accountant (CPA) or enrolled agent (EA) to prepare a tax return versus respond to a federal or state tax notice? Why not try to do everything yourself and hope for the best? Why retain an attorney when the CPA or EA prepared the return in the first place? Why would a tax attorney respond differently than a CPA to an audit request notice? Trying to remember what all the multitude of tax professionals do can be a daunting task, especially because most people are unfamiliar with this field and thus are not sure of the questions to ask or the red flags to be wary of.

It is essential to work with the right tax professional when it comes to tax return preparation or talking with the Internal Revenue Service (IRS) or a state tax collection agency. When it comes to tax professionals, not all are created equal, and distinguishing between EAs, CPAs, and tax attorneys can be confusing. Which of these tax professionals is the best option for your current tax situation? Let us take a look at each of these professionals and see how their expertise can help you and/or your business’s tax matters.

Enrolled Agent (EA)

An EA is a tax advisor who is a federally authorized tax practitioner empowered by the U.S. Department of the Treasury. EAs represent taxpayers before the IRS or state tax agency on tax issues that include audits, collections, and appeals. In order to practice and represent taxpayers, EAs need to either pass a three-part comprehensive IRS test covering individual and business tax returns or be certified through experience as a former IRS employee. Individuals who obtain this status must adhere to ethical standards and complete 72 hours of continuing education courses every three years.

Enrolled agents have unlimited practice rights, as do attorneys and CPAs. This means they are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can represent clients before. EAs also prepare tax returns and do bookkeeping for those individuals and businesses that need extra help with their financial statements.

EAs are the most cost-effective option for tax preparation and representation of the three options due to their limited education and licensing requirements. They usually handle smaller-sized individual and business taxpayers who are looking to have their bookkeeping and tax preparation housed with the same person for convenience and ease. Based on their experience and expertise, they are also a great option for small collection action items should the taxpayer be in fear of collection action via lien, levy, or an appeal. Although EAs can handle the same items as a CPA, they may not always be the best option for large, ongoing audits, criminal matters, or high-dollar-amount collection action. Always make sure to speak with EAs about their professional capacity before engaging their services. Sometimes, the most cost-effective professional is not the best option for the situation at hand.

Certified Public Accountant (CPA)

A CPA is a state-licensed accountant who provides accounting services to taxpayers. CPAs must have higher, and often technical, skills to perform their job duties. They need a full accounting degree and additional graduate classes in order to sit for their licensing exams. CPAs need to pass the state CPA exam and must have taken 150 semester units of college education, and they also need one year of accounting-related experience. CPAs are also required to participate in yearly continuing education in order to keep their certification current for tax return preparation and representation in front of government entities.

A CPA is a great tax professional choice to prepare large individual or business tax returns, assist with estimated tax payments, and provide guidance to businesses and individuals as they manage their finances and asset accumulation. They also can be extremely helpful when it comes to financial planning and future business projections. The level of expertise of a CPA will vary by firm size and experience, but many CPAs have worked with large and complicated tax transactions for individuals and businesses, making them great resources. However, when it comes to matters of representing the taxpayer in a dispute with the IRS or state taxing agencies, CPAs do not always have the education or experience to maneuver the legal situation in such a way that benefits the taxpayer.

Tax resolution. If the matter is something such as requesting an installment agreement for an amount below $25,000 or requesting a first-time penalty abatement, a CPA may be the most cost-effective route to go, especially if the CPA prepared your return. A CPA can essentially perform all the same tax functions as a tax attorney and EA outside of representing a taxpayer in U.S. Tax Court. Depending on the nature of the federal or state taxpayer audit, CPAs may be the best option because they usually hold the tax return source documents that they used to prepare the return.

Be aware that CPAs do not represent the taxpayer before U.S. Tax Court and do not usually take on clients without an attorney present for representation if the clients have indulged in criminal actions.

Tax planning. CPAs will review your prior returns and current financial situation and listen to your goals for the future of yourself individually or your business and determine the available tax deductions, credits, and other ways to reduce your adjusted gross income. They will be able to educate you on ways to reduce your adjusted gross income, which is the easiest way to reduce your tax liability. Some examples include contributing to your 401(k), IRA, self-employed health insurance, and health savings account plan. These are things you may not have thought of as you file your tax return through TurboTax.

CPAs can also assist and advise on the benefits and structure of additional tax strategies, including 1031 exchanges. A 1031 transaction allows a taxpayer to defer capital gains taxation on a sale of property. It allows the non-recognition of gain or loss as long as the property being sold had been held for productive use in a trade or business or for investment and the property being purchased is a like-kind property of equivalent or greater value. This tax strategy can have significant tax benefits and can avoid large capital gains tax on property that has been held for a long period of time.

A CPA is a great solution for certain technical transactions that the CPA might specialize in, as well as the preparation of individual and business tax returns. Sometimes, having a CPA prepare a return and submit it adds a level of confidence in the preparation of the return and related transactions.

Tax Attorney

Tax attorneys are tax professionals with a law degree who have taken specific coursework to learn about all aspects of transaction and controversial tax law. They understand the law and are able to take your legal situation as far as necessary to obtain a successful result. Lawyers also have the ability to take your tax controversy case to U.S. Tax Court if necessary. Further, when you hire an attorney, you have attorney-client privilege. There is no client confidentiality between you and your accountant, tax preparer, or EA unless specific circumstances and agreements are put into place by an attorney. When you hire an attorney, you are allowed to freely communicate with your attorney about all aspects, regardless of right or wrong actions taken on behalf of you, the taxpayer. If you face any criminal charges, tax preparers and accountants cannot provide this same level of protection. In most cases, they will be compelled to testify against you—not because they want to, but because confidentiality does not exist. The state or federal government tax entity can force an EA/CPA to testify and provide documents against the taxpayer.

Tax attorneys also can assist with incorporating and advising on the choice of business entities, including LLCs, C corporations, and S corporations. Each entity has its own legal and business benefits and risks. Attorneys can help guide and provide legal structure to an organization.

Tax attorneys can be divided into two separate buckets: tax controversy and transactional tax planning. Most tax attorneys can do both to some extent, but they usually focus on one area more than the other. Tax attorneys also focus on wills, trusts, and estate planning.

Tax controversy. Attorneys who handle more of the tax controversy side are heavily versed in the inner workings of the IRS and related state taxation agencies. They deal with collections, audits, appeals, and U.S. Tax Court–related items on behalf of individuals or businesses. They also represent those individuals or businesses who may have engaged in criminal activities, as well as foreign activities known or unknown to federal and state taxing agencies and needing representation. The ability of these tax attorneys to represent a taxpayer in specific criminal matters can sometimes allow them to umbrella other tax professionals under their attorney-client privilege for certain circumstances.

This type of tax professional is best utilized by those individuals or businesses that owe large dollar amounts or have complicated fact patterns related to their tax returns. Sometimes hiring a tax controversy attorney is the best solution so that the tax preparer is not involved in defending why certain transactions were classified or why there are discrepancies between the general ledger and the return based on the returns prepared by that CPA or EA. This creates a layer of separation between the preparer and the advocate that can sometimes allow for different avenues to be seen and explored on behalf of the taxpayer when responding and working with the government agency. Compared to CPAs or EAs, these tax attorneys tend to adopt a less black-and-white approach when it comes to government taxation entities and describing the transactions at issue. Further, having a tax attorney when working with a CPA or EA can sometimes allow them to collaborate on how a transaction or audit should be handled.

Transactional tax planning. Attorneys who handle mostly transactional tax planning can represent you before a federal or state tax agency, but usually their proficiency lies within complicated individual or business transactions and the tax implications behind those transactions. These types of attorneys are looking to strategize with taxpayers and minimize their business and individual transactions. They usually help structure and document transactions that include sales, mergers, capitalization, etc.

Transactional tax attorneys will also be able to advise on international transactions related to foreign tax credits, international incorporation, tax treaty issues, and repatriations. Transactional tax attorneys’ goals are to create a solution for the present and the future of their clients.

Tax attorneys can be extremely knowledgeable about mergers and acquisitions. Understanding the tax implications and ensuring the contracts and agreements state the intentions of the parties are critical. Many business owners need to be educated on the benefits and risks of advance tax planning, especially when they are buying or selling a business. Knowing these risks and advantages can help with strategizing and negotiating a business plan.

Tax planning for wills, trusts, and estate planning. A tax attorney may also be able to advise on certain transactions related to the tax planning of wills, trusts, and estates. They also can represent the estate before the IRS for audit or collection action. Those estates that have larger asset or contribution limits may benefit from working not only with an estate attorney but also a tax attorney.

When one hires a tax and estate planning attorney, tax considerations can be more deeply reviewed for the individual and estate during the current transactions and once the estate has become irrevocable. Will there be gifts or exemption levels that will be hit while the executor is alive that should be taken into consideration? Should certain stock or assets be liquidated or held differently within the estate? What steps can be taken to minimize the taxes paid by the estate and guarantee that the maximum assets are passed on to loved ones?

Conclusion

Individuals and businesses turn to tax professionals for many different tax-related needs, from preparing tax returns to responding to audits to advance planning for will, estates, and trusts. One choice of tax professional does not fit all. Sometimes, it is even best to engage more than one tax professional at a time to confirm that all options are fully explored before moving forward with individual or business tax matters.