I seem to get myself in trouble every time I write an article like this. However, I want to address some comments I received from the first article I wrote in late January, What Enrolled Agents Can do vs. CPAs, and give some clarifications.
My first article (that I referenced above) about this was met with several comments about how CPAs are better because they have a well rounded concept of business. You don’t think that we do? How can we not?
If you have ever worked with an attorney who is doing either estate planning or asset protection, you are supposed to understand the underlying reason why they are recommending what they are. However, you have to remind them that they are setting up tax consequences for the client with all of the separate entities they are forming.
Before we go any further, know that I am an enrolled agent (EA), and not a recent one at that. I took the Special Enrollment Exam (SEE) in 1999. Back then, the test was a two-day, four-part examination.
Part I was Individuals, Part II was sole-proprietorships and Partnerships, Part III was Corporations and S Corporations, and Part IV was Retirement Plans and Ethics. You had to take all four parts at the same time. The test was administered once a year in September. You got your results in mid-January.
When the results came, you were given the answers. The questions were so difficult that about 20 percent of them were thrown out because there was no answer. Not to mention about 10 percent had more than one answer. On top of that, you couldn’t use a calculator. The point is, you really had to know your stuff to pass the test.
I am a Provisional Member of the American Institute of Certified Public Accountants (AICPA) and a full member of the National Association of Enrolled Agents (NAEA). I know that there have been changes to the Uniform CPA Exam as well as the SEE Exam. CPAs are licensed and governed by the state where they practice. Every state is different. CPAs, attorneys and enrolled agents are allowed to represent clients before the Internal Revenue Service without limitation. However, EAs are the only designees that the IRS authorizes to practice. Here is where I have the issue.
Until the PATH Act became law, some EAs — thanks to various State Boards of Accountancy — were not allowed to advertise their credentials. NAEA had been working on an EA Protection Act for a few years, and it was good to see it pass. I have been in practice for 24 years. My practice is domiciled in Florida. As part of my practice, I produce Income Tax Method of Accounting Statements for my clients. I use these statements to do tax planning.
About 19 years ago, we used to be able to use the word compilation to describe the statements that we were producing. However, the AICPA decided to corner the market on that term.Not to mention, in the State of Florida, I can’t use the term Balance Sheet or Income Statement. I have to use Statement of Assets, Liabilities, and Equity, and Statement of Revenue. In my disclaimer letter, I state that the statements were produced under the Income Tax Method of Accounting. I then go on to explain that I am not a CPA, but an EA. I explain that EAs are licensed by the Federal Government.
Why do I go to these lengths? I have been censored by the Department of Business and Professional Responsibility in Florida for saying anything else. Their reasoning is that I am not a licensed accountant.
Fair enough. However, how do CPAs and any attorney have the right to practice before the IRS? The majority of CPAs offer attestation services, with tax being secondary. Not every CPA does that, but I would say about 90 percent view taxation as secondary.
I have seen some really astute CPAs who specialize in tax, but I’ve noticed that they are the exception to the rule. I say this knowing that I joined the AICPA because they have a very good tax section.
CPAs often thumb their noses at EAs. First, we hear how you don’t have to have an educational background to sit for the EA Exam. However, even though they have made the test easier from when I took it, you still have to know your stuff. The last time I wrote an article like this, I had a CPA say that I had no business knowledge, and being an EA was like being a notary.
The interesting thing is that I have several clients who I do business consulting for. The business consulting leads to tax consulting, which leads to tax work. One more thing, I have been accepted to law school, which I start over the summer. Not bad for a notary.
The next thing that I would like to address is that I started off wanting to be a CPA. In college, I took an internship with a CPA. I started off at the bottom doing data entry, moved into write-up, and eventually I found myself analyzing cash flow statements. The latter job was so boring to me that I rethought my major. I spoke with my accounting professor about the experience. She was a CPA, and she told me about tax and what an enrolled agent was. I found a job with an accountant who specialized in tax.
In those days, you learned tax with the Master Tax Guide, and Package X from the IRS. I poured through both in my off time, and realized that tax was for me. I never wanted to do attestation services, so I pursued tax as a specialty, and never looked back. After 24 years, the professor that I looked up to and steered me in the right direction was Margo Rock, CPA. I wrote her a letter not too long ago, thanking her for her advice.
Generally Accepted Accounting Principles (GAAP) is just the Accrual Method of Accounting. There are some differences between the two, but the concept of matching income to expenses is the same. What I don’t remember ever learning in any accounting class, or the one tax class I had to take, was the Cash Method of Accounting, or the Hybrid Method of Accounting. Both are tax concepts. Under Cash, income is recognized when received, and expenses when paid.
Hybrid is used when a company has inventory, and are not required to use the accrual method. Under hybrid, income and expense are accounted using cash. However, inventory is accounted using the accrual method.
The point that I am making for the second or third time is that CPAs and EAs both fit into the landscape. I don’t sit there and trash CPAs to clients, and if you are a CPA and trash EAs, perhaps you should reconsider.
Editor's note: Be advised that Mr. Smalley's views are his own and do not necessarily reflect the thoughts and opinions of AccountingWEB or its parent company Sift Media Ltd.
About Craig W. Smalley, EA
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.