Every business owner, whether a beginner entrepreneur or an already experienced business owner, is faced with situations that arise for the first time. At the initial stage of entrepreneurial activity, these are questions of creating a business, keeping records and setting up the workflow, and using the necessary forms of contracts in practice. However, there are things that companies face every year, and those are taxes. It might seem that such an ordinary matter should not cause any issues for business owners. We all know that tax matters are not that easy to handle unless you a tax attorney, enrolled agent, or at least a CPA who specializes in taxes.
Taxes are the blood vessels of the state budget, an instrument of economic management, a means of influencing the social and political life of society. The United States tax system has more than a century of history and is continually being improved. Tax Law – U.S. tax code is becoming more sophisticated and confusing. When preparing the tax returns, the taxpayer will have to take into account all the changes approved by the U.S. Congress. Also, the adjustments provided for in civilian and local tax laws even should not be forgotten. In this regard, about 75% of taxpayers, when preparing tax returns, turn to tax specialists for help.
Tax legislation has a complex structure, it is continually being amended, and this complicates the life of a business. Not only individual citizens but also large companies are often not able to calculate the amount of taxes or deductions and fill out the tax return on their own. They need the help of a specialist, and this makes the profession of a tax specialist very popular, especially in the business environment.
Of course, the services of knowledgeable tax specialists are required by many individuals and legal entities. Enrolled agent’s task is to help the client understand how to pay taxes, and, if possible, optimize the number of payments. They help to prevent errors and related fines and, if necessary, represent taxpayers before the Internal Revenue Services.
Who is an Enrolled Agent?
An enrolled agent is an only tax consultant who is a federally-authorized tax practitioner empowered by the U.S. Department of the Treasury. It is the highest credential one can get from the IRS. Enrolled agents have unlimited practice rights, except for Tax Court, where an attorney must be present.
Individuals, corporations, trusts or any other entity that need someone to advise and represent them in tax matters can all turn to the enrolled agents. They can represent taxpayers before the Internal Revenue Service (IRS) at all levels for tax issues, including audits, collections, and appeals. IRS enrolled agent can provide the following services:
- advising on tax matters, including the application of tax legislation in specific situations, taking into account the circumstances of the client;
- preparing recommendations on taxation issues, including determining optimal solutions (tax planning, informing about changes in legislation, etc.);
- conducting comprehensive tax services and audits for clients;
- preparation of reports, tax returns and other documents, including complaints;
- representation of the interests of consulted persons in tax legal relations with the Internal Revenue Services and organizations (forwarding tax returns, different materials, statements and complaints to tax authorities, protecting interests, etc.).
EA vs. CPA: Which is Better?
More reasonable to get a private tax consultation directly from an IRS enrolled agent rather than to get an answer from a certified public accountant (CPA) or other tax professionals. Both can offer their clients ways to resolve tax issues that will bring tangible benefits to their business tax advice. They may not be the primary goal of the CPA you have chosen, and he or she may have little experience with tax matters.
Clients of enrolled receive professional tax advice that helps solve complex tax issues. If the viability of your business depends on the reliability of the answer, then it is probably more practical to consider all the nuances of the problem and get such tax advice. That advice will help to defend your case in a dispute with the tax authority (if it comes to that) from the IRS enrolled agent.
If your question is classified as complex (for example, due to the ambiguity of the legislation), then it will be more challenging to make an informed decision regarding the tax consequences without a certified tax consultant. Also, optimization of taxation (i.e., minimization of tax payments) cannot be ignored. When doing tax optimization, one needs to have a high enough qualification so that, for example, in the process of optimizing some taxes, they would not miss the appearance of others.
What Does It Take to Be an Enrolled Agent?
In any profession, you need to maintain your skills at a level that meets modern requirements; therefore, this requirement is critical in the system of professional development of tax experts. About tax functions, the availability of technical skills has always meant a deep understanding of the technical aspects of taxation, knowledge of tax legislation and judicial practice, as well as the ability to research and analyze materials, perform complex tax calculations and prepare tax returns. Technical knowledge and skills in taxation are still relevant. But the field of taxation is constantly changing, and it requires skills that are not limited only to the technical side of the problem.
Knowledge of the tax code, the ability to navigate through its articles to find the right solution to a particular issue that a taxpayer has is not enough. It is necessary to establish contact with the taxpayer, understand their question, and answer by the legal framework clearly and intelligibly.
“One of the most important skills and the most lacking in tax is communication, the ability to explain tax issues to non-tax team members so that they can understand. Tax should spend more time listening, developing relationships, and being helpful to other functions. Listening is key since it is important to understand issues fully to calibrate the appropriate actions. It’s not just about the tax agenda, and it is about developing tax people to be organizationally aware.” — Alex Peng, Emerson Electric
It must be remembered that along with the right of the IRS to check income, expenses, and write-offs of taxpayers, certain restrictions are set for tax auditors that establish the procedure for their actions during inspections. The involvement of an enrolled agent to protect the interests of the client during the audits of the federal or state tax services involves the following:
- Thanks to an in-depth knowledge of tax legislation, all additions, and exceptions to the rules, it will be easier for the E.A. than the ordinary taxpayer to dispute with the auditor.
- The client meets and answers the questions of the auditor only in the presence of the EA.
- The EA must have experience in protecting clients and know the rules of the game with the federal and state tax services.
To become a certified enrolled agent, one either needs to pass the Special Enrollment Exam (SEE) and a background check or to work for the IRS in a position that requires you to interpret the tax code for at least five years. The Return Preparer Office oversees the certification issue and all the steps that go into it. Moreover, it is also responsible for the certification renewal, which we will talk about later. It might sound surprising, but there are no education or experience requirements for one to be able to take the exam and receive the certification. Passing the exam will show one’s advance knowledge of tax laws and issues and the ability to solve real-life situations.
Even before applying for the exam, one needs to use for a Preparer Tax Identification Number (PTIN), which it will be necessary to renew every year. Once the individual passes the exam, he or she would need to send an application for enrollment within one year of moving all three parts of the SEE exam. The app will be processed 60 to 90 days by the IRS. To get the certification, one also needs to pass a suitability check. This means that all tax returns were filed, and the potential enrolled agent has no obligations before the Internal Revenue Service. A background check is also done.
What is the Enrolled Agent Exam?
Special Enrollment Exam, the enrollment agent exam, has three parts to it. Each section, consisting of 100 questions plus some test questions, is taken separately and the test taker has three and a half hours to complete the test. These three parts test knowledge of business, individuals and representation, practice, and procedure topics. All three parts should be passed in two years and do not have to be taken in any specific order.
If the test is completed successfully, and the individual receives a score of 105 or higher, they will know that they passed the test right away, but the actual rating will not be announced. If the score is lower, the test taker will be told the exact count to be able to know how far they are from passing the exam. Moreover, they will be told which areas they need to focus on more. It should be noted that only a relatively small percentage can pass the exam on the first try.
There are many resources available to help individuals prepare for the Special Enrollment Exam. Sample questions are available on the official IRS website, and the National Association of Enrolled Agents offers an online course that covers the information on the SEE.
To keep their certification once they earn it, enrolled agents also have continuing education requirements. To maintain their status as the enrolled agent, they must complete 72 hours of continuing education every three years. If the enrolled agent is a member of the NAEA (National Association of Enrolled Agents) than, they should earn 30 hours of continuing education, 2 hours of which are in ethics.
What Benefits Can Enrol Agent Bring?
Employees of federal and state tax services are trying to reduce the underpayment of taxes by individuals and businesses, which, according to experts, amount to more than $250 billion a year. As a result of audits of tax auditors, the state treasury additionally receives up to $100 billion a year. Of particular interest to tax, agents are tax returns of small business owners (shops, restaurants, hairdressers, car repair shops, radio, and television equipment, household appliances, computers) and those who are called professionals in the U.S.: doctors, lawyers, insurance agents, real estate brokers and, etc.
The main reason for the increased attention of tax auditors to these types of businesses is that payment for their services can be made in cash; that is, there is an opportunity to hide income. Even if you are faithfully doing your tax returns, it does mean that you a secured against IRS tax audits. As you might have already guessed, there is no better candidate for helping you to prepare for the inspection and represent you before the IRS than the enrolled agent.
At the same time, experts note such a paradox – about 10 million taxpayers pay $1,000 more than what is required by the tax legislation. This happens, first of all, because a significant number of taxpayers learn methods of competent reporting on their own mistakes, and this, as you know, is a bitter experience. According to published data, out of the total number of tax returns audited by tax authorities, the underpayment of taxes was revealed in 80% of cases. As a rule, this occurs due to poor preparation of the tax return: lack of primary documents confirming income and expenses, poor knowledge of tax legislation and instructions for filling out forms, poor quality of accounting, level of planning and economic analysis of the financial situation.
If you take into account tax optimization that the enrolled agents can offer, you can save hundreds of thousands of dollars. Also, you can avoid fines due to errors in the preparation of tax returns, any other reports that are submitted to the Internal Revenue Services. Sometimes mistakes in taxation are costly for companies, and only the qualified assistance of an enrolled agent can help avoid this fate. It turns out that the service provided by E.A.s is one of the most important for businesses that want to optimize their income and expenses as profitably as possible.
Your tax assistant should meet the following basic requirements:
- They should not be too conservative but also not very aggressive. Your financial position should align.
- They are obliged to promptly recognize and inform you of all changes in tax laws relating to your business or you personally.
- They should be able to find options for saving on taxes based on a deep understanding of your financial situation and, at the same time, warn against dangerous tax pitfalls.
- They should formulate for you an effective financial and tax strategy which will be the basis for the development of a business plan and a family financial plan.
You can find an enrolled agent by contacting the National Association of Enrolled Agents or searching their web directory titled “Find a Tax Expert.” You can also turn to Liberty Tax Service, H&R Block, or any other tax agency to see if they have enrolled agents among their tax experts. Some joined agents also add themselves to business directories or local yellow pages. You must make sure that they are not only tax experts, but also certified, enrolled agents.