Interesting & Useful Articles on Tax
What is an Enrolled Agent & Do I need one?
“An enrolled agent (or EA) is a federally authorized tax practitioner empowered by the U.S. Department of the Treasury to taxpayers before the Internal Revenue Service (IRS). Enrolled agent status is the highest credential awarded by the IRS.” Enrolled agent – Wikipedia, the free encyclopedia
“An enrolled agent is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee. Enrolled agent status is the highest credential the IRS awards. Individuals who obtain this elite status must adhere to ethical standards and complete 72 hours of continuing education courses every three years.
Enrolled agents, like attorneys and certified public accountants (CPAs), have unlimited practice rights. This means they are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can represent clients before.” — Internal Revenue Service
Do you need an enrolled agent?
f you were going to court and were potentially liable for tens of thousands of dollars or even jail, would you hire an attorney? Or would you represent yourself?
If you had to prepare documents that would determine if you were owed thousands of dollars, or had to pay out thousands of dollars, would you have an expert prepare them or at least review them? Or would you go it alone and hope for the best?
If someone was billing you and demanding payment, and you disagreed with the amount or payment terms, would you only ask them how to sort it out, or would you seek independent informed counsel?
The above questions are analogies as to why you may need an enrolled agent. You would not go to court with the potential of tens of of thousands of dollars loss without an attorney who knows the ropes to advise you and protect your rights. You would not represent yourself in an important court case unless you were a legal expert. You should not go before the IRS without an Enrolled Agent to advise you and protect your rights. You should not represent yourself before the IRS if the matter is serious and you are not a tax expert. But people do this all the time with the IRS. It is not a matter of the IRS being evil. It is matter of the person not being represented by someone who knows the rules.
I will give you a real-life example. One retired gentleman came to see me. He had enter into an instalment agreement to pay off an 8 year old debt with penalties and interest to the IRS. It is true that he had incurred a legitimate debt. He had sold a business and not paid the IRS their due. After a near brush with death and months of hospitalization, he invested his business sale savings into renovating his home for sale. He fully and expected to sell the house and pay off the IRS with plenty of money to spare. Disaster struck in a septic tank failure. The house became unsalable. He lost the house and all his savings. He had no money to pay the IRS what he owed them.
Eight years later, an IRS representative convinced him he had to enter into an Instalment Agreement–that he had no choice. He came to me with a problem as to how he would survive while making this payment. His only income was Social Security, and with the IRS monthly payment, he could not pay the rent for his small apartment, food, utilities, medical and life basics. Being in his late 70s, going back to work was not a realistic option. I had him sign an IRS Form 2848 Power of Attorney so I could represent him before the IRS. I knew what he did not know and the IRS had not told him. His income was below the level that the IRS, by their own regulations and the laws of this country, could collect. He had no property they could legally seize. So his debt goes into un-collectible status, and he continues to live modestly but in reasonable comfort and security. In two years, the debt disappears forever as the 10 year IRS Statute of Limitations is up. (And I feel good and sleep well, because I helped a nice old guy–who had paid plenty of taxes in his decades of work– live out his life in reasonable comfort and dignity.)
Another Real Example
Another friend, with a large tax bill unpaid from 8 years before, wanted to settle with the IRS. I told her to get me certain data. She did not call me back with the data. She called the IRS and asked for help. They recommended an Offer In Compromise. When I talked to her next, she was all set to do an offer and compromise and did not think she needed assistance. Maybe not. But the IRS had not explained to her that by the Statute of Limitations her bill was about to disappear.
Let me expand on this analogy. You are driving on a dark night going downhill, sober, not speeding and your brakes fail and you crash into another car at an intersection, and the drunken felon who was speeding in that car is killed. You feel bad. You should have maintained your brakes better. You realize you should have done something more effective than honk your horn as you approached the intersection with no brakes. Now, if the other driver had not been drunk and speeding himself, he might have been able to avoid the accident. But you still know you did wrong. The DA comes to you and tells you you are being charged with murder in the first degree. You think of your two kids and your wife and and wonder how they are going to get along. You say to the DA “But he was drunk and speeding and a recently-fired 45 caliber gun was found in the car which was linked to a drive-by shooting two miles away two minutes before” The DA says “Those allegations may or may not be true, but are not relevant. You did not stop at a stop sign and he is dead. You are guilty of murder.” You say, “This is terrible. My wife. My kids. You have got to help me. What can I do?” The DA says “Gosh, I feel sorry about your kids. Tell you what, you sign this confession right here and right now, don’t bother with engaging a lawyer as we are giving such a good deal, and I will let you cop a plea for 3rd degree murder. You can be out in ten years, catch your kid’s college graduation.” Since the DA is being so helpful, you thank him for letting you live and do not spoil the deal by engaging a lawyer of your own, as there is no need.
Maybe I am being a bit melodramatic. But if you are having a problem with the IRS about taxes, don’t you think it would be prudent to ask for help from someone who is not part of the IRS and whom you can hire to protect your rights? The IRS says “Per law 4857 and legal precedent of Wacko vs Fruitcake, your statement that the printing press you bought was tax deductible is false and you owe us ___”. You do not know what the IRS is talking about. You don’t speak tax. But you had prudently engaged an EA. Your EA says “Look here. Law 4857 only applies to foreign held corporations and this is a domestic LLC, and Wacko vs Fruitcake was about a KKK member who deducted the wood used for burning crosses on negros’ lawns. This does not apply here …. Let me show you the actual rulings that apply. I have them right here….”
The Price of Not Knowing
One last example. You would not draw up a legal agreement committing yourself to tens of thousands of dollars of payment without knowing fully what you are agreeing to or whether the document was legally correct. Well, what about the guy who files his taxes with Turbo Tax because it is easy to do and he can slip in some nice deductions, but he does not know what all the words mean on the tax form and he does not know exactly where to enter . . .. Besides, his tax bill is only $40,000 and that was already withheld from his wages, so he will even get a refund. “Yeah,” he thinks, “I can do this. No need to hire a pro.”
And then he gets a notice and finds himself under an IRS audit by mail because he entered a forgiven loan correctly as income but in the wrong place. Luckily, he had the good sense to call me, an enrolled agent. When I review his taxes I discover he filed and paid over $10,000 in State Income taxes to a state he no longer worked in. He does not owe that state income tax! Now, this is a real example, It happened. I was able to correct his initial error, put his income in the right place under the right heading, and file an amended return with the IRS and the state and request a $10,000 refund. (By the way, there is nothing wrong with Turbo Tax. But the person using it has to know what he is doing.) Filing his own tax got him an IRS audit by mail and if left uncorrected would have cost him 10 Gs.
One last tip. There are many tax preparers out there with no formal training in tax. And there are many very high-quality computer programs that print out very professional looking completed forms and tax analyses, but are really only as good as the data was input correctly by someone who understands tax. The untrained preparer may have a nice office and friendly manner. An untrained person who is unethical can even get you large refunds. Inflated expenses and spurious deductions and credits are not hard to put into a tax return. If your refund is too good to be true, it may be. Of course, if the IRS audits you, you wind up with penalties and interest and a vastly increased bill. Indeed, if you did not carefully read what you sign, the preparer who made up a fraudulent return may say, “but he told me his start-up company lost 50,000 dollars and these expenses were what he told me. He was lucky he had not quit his day job. Look. He even signed the return.” It is not hard for anyone to call himself a tax specialist. There is no mandatory training or exam they have to pass to say “expert” or “pro” or “specialist”. Lawyers, CPAs and Enrolled Agents DO have to pass rigorous exams and do lots of continuing professional education every year to maintain their license.
And you have to be one to call yourself one, or it is a crime. The EA has the advantage of ONLY doing taxes and so all his exams and continuing education is on taxes. I would personally recommend only using a licensed professional. I am sure some un-licensed tax preparers do a good job even if they are not an EA, CPA or Lawyer. But if they really know taxes, they should be able to take and pass the EA exams.
Lawyers, CPAs and EA also are part of professional organizations and hold a valuable license that they keep by maintaining an ethical standard and quality of product. A competent tax pro knows his long term prosperity is only guaranteed by good ethical work. If you like your un-licensed tax preparer, encourage him to take the exams to become an enrolled agent. He simply has to demonstrate he knows his business on taxes to pass the exams.
Can You Afford Not to Have the Right Representation?
So, do you need an EA? Maybe not. You are single making $10 an hour in wages, have no dependants, no house, are not going to college. Heck, file direct with the IRS or use Turbo Tax. You probably do not need an EA. If you have a CPA who specializes in taxes (not just one who does Corporate Audits), and he always does a good job and he is always helpful, knowledgeable and ethical then fine. If you have a lawyer representing you before the IRS and just won your case, fine. You may not need an enrolled agent (EA).
However, if you are in any of the following categories, you probably DO need an EA, and should call us to schedule a free consultation. We will review your situation and advise you on your options.
- You think your taxes are too high
- You think your taxes may have been done wrong
- You are spending too much time on your taxes
- You have a large tax debt
- You have defaulted on an offer in compromise or instalment agreement
- You want to be represented before the IRS
- You are self-employed and pay a lot of self-employment tax
- You are under audit
- You want someone to stand in your shoes before the IRS
- You have not filed your taxes for some years
- You think some returns need to be amended
- You have received a letter or notice from the IRS
- Your tax preparer has disappeared
- You are confused about your taxes
- You are worried about your taxes
- Your books are a mess and you do not know what to do to file
- The IRS seems to have different records than you have
- You wake up at 3:00 am sweating because of tax nightmares