Often considered as America's tax experts, Enrolled agents are federally licensed tax professionals who prepare tax returns, provide tax planning advice, and represent clients before the IRS. Additionally, enrolled agents can represent taxpayers before the IRS at all levels, including examinations, collections, and appeals.
Thus, if a client gets audited, an enrolled agent may represent him or her during the audit process, file an appeal or fight IRS collection actions. The only thing an enrolled agent can't do tax-wise is representing clients in the U.S. Tax Court or other courts: only lawyers can do this.
Although often confused with certified public accountants (CPA), enrolled agents differ from CPAs significantly. CPAs may perform a variety of accounting and tax work, but enrolled agents have to prove their knowledge in all areas of taxation. Since they have official authorization by the IRS and Department of Treasury regulations, enrolled agents have unlimited practice rights to represent taxpayers before the IRS.
A CPA must pass an exam determined by the state board of accountancy in one of the 55 U.S. jurisdictions before getting a license to practice in that state. Whereas, the responsibility of licensing enrolled agents lies with the U.S. Department of the Treasury
To become an enrolled agent, most people take and pass the EA exam, also known as the Special Enrollment Examination (SEE). This three-part exam is a comprehensive test of tax knowledge created by the IRS. Each section tests your knowledge on all tax-related matters.
You can also become an enrolled agent without taking the exam if you work for the IRS for at least five years in a job requiring analysis of the tax laws.
Across the entire nation, there are only about 53,700 enrolled agents according to the NAEA. In contrast, CPAs and tax preparers "who lack the enrolled agent credential greatly" outnumber enrolled agents. Many enrolled agents have their own practices, while others work for tax preparation companies like H&R Block.
The great thing about becoming an enrolled agent is that you don't need to satisfy any special educational or experience requirements. You don't need to be a college graduate or have had any special college major like accounting or business. And you don't need to have worked in the tax field.
All you have to do is pass the Special Enrollment Examination. In addition, you must have filed all necessary tax returns and have no outstanding tax liabilities.
Once you pass and become an enrolled agent, you must complete 72 hours of continuing education every three years.
However, passing the enrolled agent exam is not easy. This is a multiple-choice closed book three-part exam that covers all aspects of taxation. Each part is 3.5 hours long and contains 100 questions. Here are the parts to the exam:
1. Preliminary Work with Taxpayer Data: 17 questions
2. Income and Assets: 21 questions
3. Deductions and Credits: 21 questions
4. Taxation and Advice: 14 questions
5. Specialized Returns for Individuals: 12 questions
1. Business Entities: 28 questions
2. Business Financial Information: 39 questions
3. Specialized Returns and Taxpayers: 18 questions
1. Practices and Procedures: 25 questions
2. Representation before the IRS: 24 questions
3. Specific Types of Representation: 19 questions
4. Completion of the Filing Process: 17 questions
Here's an example of a typical question you'll find on the exam:
Which of the following entities are required to file Form 709, United States Gift Tax Return?
1. An individual
2. An estate or trust
3. A corporation
4. All of the above
By the way, the answer is 1.
The enrolled agent exam is created by the IRS but is administered by a private testing company called Prometric. Each year several hundred locations throughout the United States offer the test.
You can take the three parts in any order at any time. Completing all three parts on the same day isn't a requirement. However, you must pass all three parts within a two-year period. If you fail one part, you can take it again up to three more times. It costs $181.94 to take each part of the exam.
The scoring procedure for the enrolled agent exam is rather complicated. Your total number of right answers is converted to a scale between 40 and 130, with 105 set as the minimum passing score. The scale does not represent the number of questions on the test and the scaled score does not represent the percentage correct.
It's not entirely clear how this scaling of the scores is done. If it is a linear scale that starts at zero, a passing score of 105 is 65 points above the lowest score of 40. This would mean you need to earn 65 out of 90 total points to pass. 65 of 90 is 73 percent, so you would need to answer at least 73 percent of the questions correctly to pass. However, no one (other than the IRS) knows for sure if the test is scored this way.
If you pass, the score report will show a passing designation. It will not show your exact score. If you fail, your score report will show a scaled score between 40 and 104. You will also receive diagnostic information showing what test areas you were weak or marginal in.
The enrolled agent exam is not easy. Here are some tips to help you pass:
You're going to have to study hard to pass. Most people need to study at least 50 hours for one of the three parts of the exam. That's 150 hours total. You may need to study more for some parts of the exam than others. The average pass rates for the exam over the last three years are 88 percent for Part 3, 72 percent for Part 1, and 57 percent for Part 2. So, you may want to spend more time studying for Part 2.
For most people, the easiest way to pass is to take an enrolled agent exam review course. Several private companies offer exam preparation courses. They include detailed study guides and may also have video or live lectures. Among others, check out review courses by:
In addition to studying the material covered by the exam, you should take as many practice exams as you can. Enrolled agent review courses contain many practice exams. You can also find many sample questions on the IRS website (https://www.irs.gov/tax-professionals/enrolled-agents/special-enrollment-examination-questions-and-official-answers).
When studying for the exam, don't overlook IRS publications, forms, and instructions. These are all freely available at the IRS website (irs.gov). Be sure to review Circular 230, which covers the regulations governing practice before the IRS.
IRS Tax Maps may also be useful when studying for the exam. Each Tax Map gathers IRS forms, instructions, publications, and web pages by topic and organizes links to these sources on a single topic page. IRS Tax Map is available at https://taxmap.irs.gov.
Remember, you can take each of the three parts of the test at any time. It's entirely up to you when to schedule each test during your two-year window. You could take all three parts in one or two days if you want. However, for most people, the best strategy is to take one part at a time with a break in between.
You can find all kinds of great information on enrolled agents at the website of the National Association of Enrolled Agents (NAEA.org).