Ep. 227 – What’s The Difference Between an EA and a CPA?

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the difference between an enrolled agent (EA) and a certified public accountant (CPA) in retirement planning. The CPA and EA deal with tax at a certain level but differ in their education, scope of work, geographical limitations, and ethical standards.

Listen in to learn how we utilize an EA to do tax strategy beyond just tax filing as part of retirement planning. You will also learn why we consider the current financial situation, retirement plan, tax deductions, tax loss harvesting, changes in tax law, timing, and family life changes in a client’s formal tax strategy meeting.

In this episode, find out:

• The key educational and certification differences between an EA and a CPA.
• Scope of work – the wide range of duties of a CPA as opposed to an EA’s taxation-only focus.
• Understanding the continuing education both a CPA and EA have to do to maintain their status.
• Geographical limitations – a CPA is state-specific, while an EA is federally licensed.
• The specific ethical standards both a CPA and an EA must adhere to.
• A formal tax strategy – looking at your current financial situation, retirement plan, tax deductions, tax loss harvesting, changes in tax law, timing, and family life changes.

Tweetable Quotes:

• “It’s powerful to understand the intricacies of doing good tax planning ahead of time, not just tax filing.”– Radon Stancil   

“A CPA is going to be required and held to a certain standard how much continuing education they have to do; an EA is required to complete 72 hours of continuing education to maintain their status.”– Murs Tariq

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:	Welcome to Secure Your Retirement podcast. We are excited to be able to have a conversation we do today on something that we have been working very, very hard on for years now, and that is to really work on what we call our integrated wealth management experience. And a big, big part of that is tax planning, tax advice, and even assisting individuals with tax filing. And we have put all that together and now we have, really, a super integrated experience, meaning a person can come to our firm and when they’re here, they’re going to not have to worry anything about taxes unless they want to, and they don’t have to go anywhere else. We can take care of it all right here in-house.
	But one of the things that we’re super excited about is about a year ago, we hired Taylor, is her name, Wolverton is her last name, and she really came on and has been working with us and building up our tax advice, tax planning side of the business. She is a certified financial planner and she just now has finished everything to become an enrolled agent. We thought it would be good today to talk about what’s the difference between a CPA and an enrolled agent and what does it even mean to be an enrolled agent and how the IRS views that. So we wanted to talk you through that, because we just think that it’s so powerful, whether you’re working with us as a client or you just listen to the podcast, really understanding the intricacies of doing good tax planning ahead of time, not just tax filing. And sometimes people, by the way, say, “My situation is so simple.” Actually, a very simple return can provide us a lot of opportunity. So if you’ve got a real basic thing and you say, “Well, what are my opportunities,” there are opportunities, and we’ll talk a little bit about those.
	So what we’re going to really do right now is just go down, first of all, the list of what’s the difference between a CPA and an enrolled agent, so you get a little bit of understanding of what an enrolled agent is and what they can do, and why we feel that’s so beneficial to have an enrolled agent on our staff. And then we’re going to talk about what is a tax planning meeting look like, a tax strategy meeting. So Murs, can you get us kicked off here with, first of all, the education requirements or what you need in order to get these certifications?
Murs Tariq:	Yeah. And I think when you hear the word CPA, you just think tax, but the thing is that A CPA can go in a lot of different directions in tax, and we’ll talk about that, but A CPA is a certified public accountant. That’s what it stands for. An EA is an enrolled agent. As far as how do they get these letters behind their name, well, there’s an amount of education that’s required and there’s an amount of certification. A CPA is going to have to have a bachelor’s degree, and a lot of times they’re going to have to have a little bit more further education after that. Whereas an EA, you don’t have to have a bachelor’s degree. You’re really going for a specific type of licensing, so that’s one key difference there.
	The CPA must pass the uniform CPA examination. I believe that’s a multilayered test. I believe there’s four elements to it in various different areas of tax, and so you have to know quite a bit in a lot of different directions when it comes to tax. And then there’s also with the CPA, there’s state-specific requirements. That can include educational requirements, a certain amount of work experience, and ethical standards, all established by the state that you’re going to be practicing business or tax in. That’s a key difference, is that the CPA is going to be state-specific as to all the different boxes that you have to check to get your license and also keep it in enforced.
	An EA also has an exam that they have to pass. Like he was mentioning with Taylor, there’s three exams specific to different areas of tax and, really, specialize in taxation. CPA can go in and has to understand auditing, has to understand all types of different things. When it comes to the EA, we’ll talk about this more, those three tests are all about taxation. Personal and business and then, really, ethics are the three sections of what someone is going to have to test on and pass all three of those exams to be able to call themselves an enrolled agent. That’s the high level of difference between CPA and EA when it comes to, well, how can they actually get to where they use these letters? How do they get approved to be able to call themselves a CPA or an EA?
Radon Stancil:	Yeah. I think the way I think about that particular part, too is a CPA … We’ll just talk about financial advisor. You could be a financial advisor and then you can become a certified financial planner, and that’s what Murs and I are, but that doesn’t mean much in the sense of what we actually do. We’re very focused on retirement planning. A certified financial planner has to learn about all different types of financial planning. If you’re just starting out or you become very focused, in practice, though, and that’s us. We’re retirement planning. CPA is the same thing. They have to understand all the different aspects of tax planning, business planning, financial statements, all those kinds of things, but then a lot of CPAs will just focus. They might focus on small business owners or individuals. An enrolled agent is very specific, like what Murs said. It is all about taxation to an individual or to a business, so just very, very streamlined.
	Okay. The next thing is the scope of practice, and I just hit on that a little bit. CPAs, wide range of duties, they can do financial statements, audits, and reviews. They can represent clients before the IRS, but they are limited, depending on the credentials that are recognized by the state. They can also offer financial planning and business consulting services. An EA specializes primarily in taxation. They can represent taxpayers before the IRS at all administrative levels, so that’s really important. They just cannot perform audits and review financial statements and those things, but again, very, very focused.
Murs Tariq:	All right. Our next section is continuing education. What is continuing education? Once you have your license, once you’ve passed those tests and you’re able to call yourself a CPA or an enrolled agent, or even with us, as certified financial planners, there is an expectation that you are going to continue to learn and continue to stay on top of everything that it is in the world of, in our case, financial planning, but a CPA, in the world of what they practice around accounting and taxes and an EA, around taxation. A CPA is going to be required and held to a certain standard of how much continuing education that they have to do, and go back to where I said, it’s state specific for what they have to do to be able to call themselves a CPA. It’s also state-specific as far as how much continuing education they have to perform. Their state board is going to set what they have to do as far as hours of education and on what type of frequency.
	An EA, enrolled agent, is required, very specific, and it’s across the board. It’s not state-specific, so if you’re an EA, you’re required to complete 72 hours of continuing education every three years to maintain their status. That’s quite a bit of continuing education, but if you think about it, their focus is taxation and we know tax law is always changing, so it’s their job to stay on top of it and you want them to stay on top of it.
Radon Stancil:	Okay. A real quick geographical limitations, a CPA is very state-specific. They’ll have to get licensed in whatever state they’re practicing. It’ll be multilayered. An EA is federally licensed, so they can operate in any US jurisdiction, so very, very broad.
Murs Tariq:	All right. Ethical standards, A CPA must adhere to the ethical standards that are established by the specific arena is called the American Institute of Certified Public Accountants, AICPA, and also their state board. So state specific again, but also a CPA’s type of organization is going to set these ethical standards. And EA must adhere to the Treasury Department Circular 230 regulations. The EA is very in line with how the I$S expects them to act and the Treasury Department expects them to act when it comes to an ethical standard, so they’re very connected there to the IRS and the Treasury.
Radon Stancil:	An EA can do tax returns, all those kinds of things, but let me just tell you how we utilize it here and just how we think that it ought to be utilized, is really doing tax strategy. Tax strategy is not just saying, “I know how to file a tax return.” Tax strategy is looking ahead of that year where we’re going to file and say, “What things can we do to make it better so that when we do get to our filing of the tax return, we’ve done those things ahead of time?” There’s a lot of process there. For example, Taylor in our office is reading tax returns all the time and she’s taking those tax returns and saying, “What are all the things here that we need to think about so we’re ready for next year?” And then we are going to meet and talk about all these different things.
	Now, we’re going to go through this pretty high level, but I just want to hit on some of the things that we would consider that Taylor’s going to look at or an enrolled agent would look at, if you’re not with us. How does that work and look if we’re going to do a tax planning strategy meeting? So if you’ve not had one of these, you might go, “Wow, that’s a lot,” and it is, but it’s very, very crucial.
	Step number one, as a tax strategy meeting goes, you are going to look at the current financial situation. Now, that might just seem so simple, but it’s considering all aspects of income sources. Are you getting money from your IRAs? Are you getting money from brokerage accounts? Are you getting money from social security or a pension? We are looking also, we are considering your investments, and why? Because that could spin off taxable income. We also look at things like debt, so just looking at and considering what’s the current financial situation.
Murs Tariq:	All right. The next thing that we’re going to look at is the retirement plan. And really, this could be a little bit more forward looking of, well, if you are still working and you’re contributing, are you contributing to plans that you’re getting a tax benefit from, like a 401 K or an IRA, so taking those into account. Also, on the flip side of contributing, we’re also looking at someone’s withdrawal strategy. What is their plan to how much to generate the income that they’re going to need for the year? Where’s that money going to come from? What are those withdrawals looking like? Where are they coming from in the aspect of what type of taxation from each account, and then, really, adding that all up to give you a good projection of what the year is going to look like.
	Also, planning for RMDs, required minimum distributions, right now that is a forced withdrawal that happens at the age of 73 or 75 under current law and it’s all taxable. We want to stay ahead of that. We want to plan for it and also potentially think through strategies around trying to reduce that number or getting rid of that number altogether through Roth conversion strategies, so a couple elements there that we’re looking at.
Radon Stancil:	The next section is tax deductions. This one’s an interesting one because there’s a lot of people who’ll say, “I’ve got a real simple plan. I just use the standard deduction. I don’t itemize.” The standard deduction is $28,000, right around that number right now. It moves a little bit year by year. If you say, “Okay. That’s all I’m going to do, I don’t do much more than that,” here’s a big part of tax planning, tax strategy, is it may be that we can strategize on how to get you into an itemization and save you money on your tax return. There’s a few different strategies. We’ve done episodes on using donor-advised funds and you can go look that episode up, but that’s a big one that we could use that would save you a few thousand bucks and we can actually push you into itemization, so that’s a really big thing to consider. Another thing that would be in there, too, would be looking at things that we might be able to do with our distributions out of an IRA to get tax benefit if we are charitably inclined.
Murs Tariq:	All right. The next category that we’re looking at is tax loss harvesting and really asking the question, “Is there any space to do any tax loss harvesting?” What that really means is we’re looking at brokerage accounts that have appreciated assets and maybe we’re trying to unwind those appreciated assets, but we don’t want to pay the capital gains on them just by selling them. We look at, well, what else is in the portfolio that we could sell for a loss so that we can offset some gain, and that’s essentially what that strategy is. Typically, we’re going to look at that somewhere closer to the end of the year, I would say in fourth quarter, where we’re having that tax conversation and also applying some strategies like harvesting to that conversation.
Radon Stancil:	Another thing that’s going to be considered are changes in tax laws. You might think about this. If I know a tax law is changing and I know that I’m going to have this coming up, there might be things I want to do right now. One of those, by the way, is not a tax law change, but an age change. I go back to what Murs said about required minimum distributions. If I know that’s coming up, I might take some distributions this year to plan for that, same thing with tax law.
Murs Tariq:	All right. And then the next one is timing, and really, multi-year planning in particular. We want to be looking forward, not just saying … While a big question is what can we do this year to make this year a little bit better from a tax perspective, we also want to say, “Well, what can we do this year to make our next year’s much smoother from a tax perspective?” That could be utilizing Roth conversion strategies to stay within a certain taxable bucket or percentage. It could be just being smart about our withdrawal strategy and spreading it. Sometimes people would just say, “Well, I’ve got 401 K money or IRA money, so let me just start my withdrawals from there.” And it could mess up their tax scenario if they just take however much they need, but we could say, “Well, there’s also other money. There’s cash. There’s brokerage accounts that are taxed differently. What if we blend these together so we have a much smoother withdrawal plan over our retirement life rather than overloading our tax return in a couple of different years,” so forward-looking, planning, trying to be as efficient as possible with our tax brackets.
Radon Stancil:	The other thing here that I think is a pretty good one is just thinking about life changes, family life changes. Obviously, if we, unfortunately, lost a spouse and death, then that’s going to be something that we have to consider. In, again, a divorce, new children, all those things could create scenarios that we need to plan for, so just really keeping track of all that.
Murs Tariq:	Yeah. I think that is the bulk. Now, there’s going to be one-offs here and there. Sometimes families have different situations or unique things, but that is the bulk of what we’re looking at when it comes to a formal tax strategy meeting that we are gearing up to go into for the next couple months with our clients. I think it’s not something that everyone does, but we believe it should be the tax return and the tax scenario should be looked at every year because there’s always going to be opportunities. In worst case, you say, “There is no opportunity to this year, but at least we took a look at it,” and that’s going to be more than most can say.
Radon Stancil:	Yeah, absolutely. Here’s the takeaway from this particular episode. If you’re listening to this and you don’t have tax planning, tax strategy in your plan, try to see if you can get it as part of your planning process. It’s really, really crucial. We have seen some fantastic outcomes because of that, so make sure you check that out and make sure you understand what it really means. As always, we’ve got a blog written on this, so you can go to the website, pomwealth.net … pomwealth.net, that’s right.
Murs Tariq:	Yep. You said it.
Radon Stancil:	That’s my brain … And then go to the blog page. You can also, top right-hand corner, if you’d like to have a conversation with myself or Murs, click on Schedule Call, and we’re glad to hop on a call with you and answer any questions that you have. We’ll talk to you again next week.