Should I hire a CPA or an EA to do my personal or business taxes? What are the pros and cons of hiring a Certified Public Accountant versus an Enrolled Agent?
First of all, thanks for the ask? Disclosure: I am getting my MS in Accounting (Tax) in May 2021. and I am working towards the EA credential. That said, I'll do my best to make this fair and balanced. [ETA March 12, 2021. I've been an EA since May 2014.]The short answer (people will hate hearing this) is: It depends.When people talk about tax, they really mean two things. Tax planning (planning transactions before they happen) and tax compliance (filling out forms, applying for credits, calculating, etc). I'm going to say this comes down to four choices: EA, CPA, tax attorney, and non-credentialed accountant. First of all, let's talk about the sort of thing each person is likely to help you with.Non-credentialed Accountant (NCA for short)It's a matter of WHY they are non-credentialed. Is it because they can't pass the exam? Have they tried? Can they do it? There's obviously a difference between NCAs who can't pass any of the exams, NCAs who have passed the exams but didn't bother getting a license, and NCAs who used to practice more actively but are now "retired" because they prefer to take life easier.Tax planning or tax compliance? It depends. Most of a typical NCA's experience will probably be in tax compliance. What a NCA knows is pretty much dictated by their experience and their personal drive to learn.NCAs can be very good. It takes guts (or ignorance) and a heck of a lot of perseverance to go out there and make it without any sort of credential. They've either proven they can do it and dropped the credential after building up a client base, or just sort of wandered into the profession after years of experience.Or, they could just be NCAs because they can't pass the exams. You can't really tell unless you ask, but can you trust the answers?Certified Public Accountant (CPA)What is a CPA anyway? Why have certified public accountants? Aren't you required to be a CPA to be an accountant anyway?Well, no. The only real difference (for a client, practically speaking, besides the ethics stuff) between a CPA and an NCA is that a CPA can legally sign off on audits. CPAs are valued for being an impartial attesting party. (@What is the difference between an audit and an attestation?) Also, the four parts of the CPA exam are REG (regulations), AUD (audit & attest), FAR (financial accounting & reporting), and BEC (business environment and concepts).Less than 25% of what you need to know to be a CPA is tax. Just like lawyers specialize, accountants do too. That said, the CPA credential has come to be shorthand for "accountant". CPAs are permitted to practice before the IRS (see Circular 230). If your CPA is an audit/attest kind of person, I'm not convinced they'll know everything about tax, since if you don't use it, you lose it, and the minutae of tax regulations changes every year. However, if your CPA is a tax specialist, you're probably okay. (What kind of tax specialist are they? Personal tax? Small biz? State and local? Sales/business? International? Corporate? M&A specialist? Everything?)While we're here, let me point out that after you get a credential, you have to get continuing professional education (CPE) to maintain said credential. CPAs need 120 hours every three years, but that 120 hours can be in pretty much anything. (Though they do need to do 2 hours of ethics every year.) Most CPAs will probably do a tax updates CPE course, but it's not required. A CPA can choose to do zero tax and be just fine.If you are in the habit of getting your bookkeeping done by a CPA, they offer a tax service, and they seem knowledgeable, it probably won't hurt to have the CPA do your taxes. They know all your financials anyway, and it's easier to just have it all done by the same person. For complicated, out-of-the-norm things, though, it might be better to tread with caution. A CPA who does small business is probably good at things like personal taxes and small business tax compliance. Any more than that and it depends on how up-to-date they are in their CPE.Tax Attorney/Lawyer (I use these words as synonyms)Right off the bat, if the person is not a tax lawyer, why are you talking to them about taxes? Better to just ask Uncle George or Aunt Gina.Tax attorneys are trained in the planning of taxation/transactions and in the legal side of things. A tax attorney is usually necessary for large, complex transactions, usually in M&As, consolidation, business structure, etc. The tax attorney is also the one who is most likely to be able to represent you in court should the need arise. (CPAs and EAs can't go to District Court or the Court of Federal Claims, and they will need to pass a special exam to represent you in Tax Court.)Where tax lawyers MAY fall short is in the accounting side of things. A tax lawyer may not know GAAP (generally accepted accounting principles) because they aren't required to know any of it. In large engagements, it's normal to have both accountants and lawyers. The lawyers figure the high-level "do it this way, make X a C corp, Y a partnership, here's the best way to figure the M&A details, etc." The accountants are the ones who handle the numbers and actually work out the sums. When it comes to things like legal reasoning etc, it's hard to beat a tax lawyer.When do you most need legal reasoning for taxes? Well, first of all, if you're in trouble with the IRS (or if you want to challenge something and you want your day in court), the lawyer is going to have the most training in court procedure and tax law. The other place where legal reasoning is crucial? Estates and trust.Tax lawyers, by the way, are usually far more expensive than any NCA, CPA, or EA. Hiring them to do your personal taxes on a regular basis may be overkill on your wallet. If that's what you want, however, hey, it's your money.Enrolled Agent (EA) - NOT TO BE CONFUSED WITH ENROLLED ACTUARYWhat is an EA anyway? For a lot of people, they'll only just have begun to hear this term and will think it's a new credential. Actually, the EA is America's earliest tax credential. Wiki has the details: Enrolled agentLike a CPA, an EA has to pass a set of exams and do CPE to maintain their license. However, there are three main differences:The EA exam is 100% taxes. The EA Exam is the Special Enrollment Exam (SEE). Part 1 deals with individuals, Part 2 with businesses, and Part 3 with rules and regulations (the entirety of Circular 230.) You can check the syllabus if you want: IRS Special Enrollment ExaminationEA CPE must be tax-related (with the exception of 2 hours a year in ethics.) 72 hours every 3 years, which works out to 24 hours a year. Most EAs are part of the NAEA (National Association of Enrolled Agents), which mandates 30 hours of CPE per calendar year. All of it in tax (okay, yes, less 2 hours of ethics.)EAs aren't required to know GAAP. (Many do, anyway, because the obvious synergy between bookkeeping and taxes is really hard to ignore. An EA doing business on their own usually has some sort of bookkeeping license or experience.)EAs are trained in tax compliance: it is the be-all and end-all of their existence. That said, there are EAs who specialize in things such as offer-in-compromise (OIC). Many EAs are former IRS agents (you can get an EA license without taking the exam after working 5 years in the IRS.)So which do I choose?It's hard to say without knowing what you want your taxperson to do. We're going to assume that all four are equally competent and ethical. If you want someone to file your taxes, then the EA or NCA is going to be more cost-efficient. (Tax software or doing your own taxes is the MOST cost-efficient, but if you're looking for a taxperson, you have already decided you want someone else to do it.)If you want to think about a more complicated scenario then it starts getting a little murky. Estate planning and need to figure out the most tax-efficient way to pass your millions on to the next generation? (We're literally talking millions, because the lifetime exemption for gifts/estate tax is $5.34 million in 2021 and it goes up every year.) Incorporating a partnership? Dissolving a business? What are your needs? It may be that you'll need certain help that isn't just about tax... or maybe all you need is a sounding board.EA vs CPA: A NoteSome EAs are accountants who decided to take the EA exam instead of the CPA exam because they aren't interested in audit/attest work. These accountants are usually comparable to a CPA in terms of knowledge. In fact, within the Big Four, the EA is an acceptable substitute for the CPA within the tax branches of the firms.For all that, though, EAs are looked down upon, because the requirements to actually sit for the exam are... zero. If you think you want to take the SEE, go for it, all you need is to be 18 years old? If you want to take the CPA exam, you have to fulfill a set of requirements related to your education (and in some cases, experience) that varies depending on which state you are getting licensed in.For example, I will have an MS in Accounting and will have well over 150 hours of college and graduate education by the time I graduate. My graduate GPA is almost 4.0. However, I am ineligible to sit for the CPA exam because the specific courses I took in college don't match up to Colorado's CPA requirements.I could go to a different state and take the exam there instead (for example, WA), but I live and work in CO and I don't have any interest in audit/attest work, so I decided to get the EA license instead. If I want to make partner in a firm, I'll ultimately have to get the CPA license down the road (legal requirements having to do with firm formation/partner qualifications), and clients respond better to someone with CPA behind their name.Last WordsThe credential of the accountant doesn't necessarily matter, but it's a good shorthand for their experience/education/background/training. Ultimately, choosing a good accountant is like choosing a doctor/lawyer/dentist/any other professional. Get to know them and what they specialize in or like to do. Make your choice from there? Above all, find a financial professional you can trust and rely on. They're going to know a LOT about some very private details of your life. Pick an accountant the way you'd pick a spouse: think carefully, throw away arbitrary requirements, and go with what works best for YOU.