By: Lori T. Williams, Owner/Managing Attorney of Your Legal Resource, PLLC
Most of us know an accountant who can help us with our personal tax returns or business tax matters. Some may also know a tax attorney, or know how to find one, when serious tax issues arise. However, there is another category of tax professional that isn’t as widely known. It is the Enrolled Agent (EA), a federally licensed professional who can represent a client before the IRS to deal with all tax matters, even if the EA did not prepare the original tax return at issue.
Francis (Frank) St. Onge is a unique financial and tax professional. Throughout his career he has obtained the credentials to work as a CFP (Certified Financial Planner), an Internal Auditor/Compliance Officer, an Enrolled Agent (EA), and a CFE (Certified Fraud Examiner). Today he focuses on 2 primary services in his business: helping taxpayers as an Enrolled Agent before the IRS, and assisting individuals and small business owners with financial planning as a fee based planner. Frank says he’s been a ‘numbers guy’ since high school, and he enjoys “playing Sherlock Holmes by figuring out what the story is for the client about their tax filing needs. By breaking down the issues and thinking through what should have been happening, I am able to help clients with their tax challenges.”
Most lay people don’t realize how complex the tax laws have gotten over time. 100 years ago the first tax form and instructions consisted of four pages. This year, the US Master Tax Guide is over 1,000 pages, and that doesn’t include the numerous IRS publications and forms and tax court rulings impacting taxpayers. Frank sees it as his responsibility to help his clients navigate through the maze of the current tax reporting system, so that they don’t pay any more taxes than the law requires them to pay.
WHEN IS AN ENROLLED AGENT NEEDED OR HELPFUL?
- When there is a problem with a State or Federal tax return, whether it is a business return or a personal return, including 1040′s, 1120S returns, or 1065 returns.
- When there are tax withholding and remittance issues, involving a 941, W-2 , or 1099.
- When ERISA reporting is required, such as a 5500 return.
If the client has already filed returns for the current or prior tax years, a review of the returns by the EA may indicate that the return needs to be amended to more accurately and correctly reflect the true tax liability. The EA would also seek to resolve how the amounts owed will be paid, and perhaps to appeal penalties that have been assessed.
If the returns in question have not been prepared and filed, then the EA will assist the client in getting the returns filed in a timely, complete, and correct manner.
WHY IS IT IMPORTANT TO KNOW THE BACKGROUND OF YOUR TAX PROFESSIONAL?
- For many EA’s, their only work effort is preparing and filing tax returns, or representing a client on tax matters before the IRS or State or local tax entity. They can handle an IRS dispute of a client in any State, since the laws are Federal and apply everywhere in the United States. Attorneys and CPA’s tend to have a more local practice and are usually licensed in one state, although Attorneys may be licensed in multiple states if their practice area requires it. Attorneys either have reciprocity after 5 years of practice in other states, or they must sit for the Bar Exam in each state they wish to become licensed in.
- Other EA’s, like Frank, may also be providing financial planning and tax planning services to the same clients for whom they are preparing tax returns.
- Most general Attorneys, some tax attorneys, and some CPA’s do not have tax preparation or representation as their primary work product, because they focus in other areas of their professions. They also may not have the same Tax Law continuing education requirements as EA’s. An EA has preparation of tax returns as the main focus of their profession and has to maintain a certain number of continuing education (CE) hours every year to keep this license (16 hours minimum per year and 72 hours during the 3 year licensing period). The CE subject matter must include 2 hours of ethics each year and the remaining hours have to be on federal tax updates and federal tax laws.
CPA’s have a 40 hour CE requirement each year in Michigan, of which two hours are ethics and 8 hours are in accounting and auditing. No specific requirements dictate that a CPA have CE credits on tax, though they may voluntarily choose to obtain them if tax is a significant portion of their practice.
Attorneys in Michigan have no CE requirements, yet there are numerous continuing education programs available for them on any and all practice areas. Most of the attorney’s mandatory education is done during the 3 years of law school and the 4 years of undergraduate work. Their ethics work is done in law school, and they need to pass a character and fitness exam before being admitted to the Bar in Michigan.
- Tax Attorneys, CPA’s and EA’s all have equal standing before the IRS, when it comes to IRS issues. They receive their authority through the client signing a Form 2848, Power of Attorney (POA). This POA provides authorization to represent the client before the IRS, to inspect and receive taxpayer tax information, negotiate or advocate on behalf of the taxpayer, and to execute waivers and consents on the taxpayer’s behalf.
- Tax preparers who do not have a license as a Tax Attorney, CPA, or EA are very limited as to what they can do for a taxpayer. For instance, a new designation the IRS has established, Registered Tax Return Preparer (RTRP) can only represent the taxpayer for the return that the RTRP prepared for that year and only to answer questions about the content of that return. They cannot deal with any prior year returns of that taxpayer or with any collection activity related to the taxpayer.
COMMON MISCONCEPTIONS OF TAXPAYERS WHEN DEALING WITH THE IRS:
1) Some taxpayers mistakenly conclude they don’t have to file a tax return.
In many cases, a taxpayer may not have filed returns for several years and will receive a letter from the IRS about an unfiled tax return. In these cases, the IRS may have calculated a tax due based on the information they have about the taxpayer’s income. Rarely is this substitute tax return correct, but it is what the IRS has calculated. So the first step is to determine what the correct tax liability is, and prepare a correct return to submit to the IRS. This will in some cases result in the tax liability being substantially reduced or eliminated because of the information that the EA is able to obtain by working with the client.
2) Some taxpayers believe the IRS will be putting them in jail.
This is not the IRS’s desire. They want all taxpayers to be compliant with the laws of the USA, file returns as required each year, and pay the taxes owed in the required time frames through either tax withholdings from wages or other income, or by paying estimated taxes as required each quarter. If the IRS determines that the taxpayer has committed fraud, then we are dealing with an entirely different issue.
3) Some taxpayers think there’s nothing they can do once the IRS levies their assets and wages, or that the matter will go away if they ignore the IRS communications.
Many times the notices from the IRS on these issues get ignored until the taxpayer’s employer, or their bank lets them know that the IRS is taking money from these accounts. There are steps the EA and taxpayer can take to prevent this from happening, but it is not wise to ignore these notices.
4) Some taxpayers believe that the IRS will settle for pennies on the dollar of what is owed.
This is not going to happen in most cases. There are specific rules in place to look at the ability of the taxpayer to repay what is owed from current assets and future income streams. This process also has provisions for the taxpayers to be able to have sufficient income excluded to meet expenses for daily living. In many cases the allowances are based on national and local standards for things like food, rent, auto expenses, and certain other debts. If these allowed expenses exceed the future income stream, the IRS has provisions to put the account into an uncollectible status and be reviewed each year based on filed tax return information.
5) Some taxpayers believe that the IRS will not work with them to resolve a tax dispute.
In the last few years, the IRS has been much more willing to work with a taxpayer who has been impacted by the economy. If a client has balances owing of less than $50,000, there are expedited processes to establish a payment plan to resolve the balance owing that does not have a lot of paperwork involved to set one up to make monthly payments. In some cases, it only takes a phone call to get the payment plan in place.
POTENTIAL PITFALLS OF TAXPAYERS WHO CHOSE NOT TO WORK WITH AN EA, CPA, OR TAX ATTORNEY:
1) A taxpayer who owes money or has not filed for several years and thinks or hopes their tax issue will go away, is in for a rude awakening.
If the IRS has received tax documents showing you have income in any year, they are eventually going to send you a notice of a tax due for the year of non-filing, including a penalty calculation for not filing and not paying, plus interest on the amounts due. These are separate penalties that can total 50% of the tax owed, so the penalty is severe.
2) The IRS treats all delinquent filers the same way: as a single, with no dependents, and a standard deduction.
This results in the highest tax burden for the taxpayer and does not reflect what the true tax liability will be if the return is prepared and submitted.
3) An EA, CPA, or tax attorney can work with the taxpayer and figure out what the correct tax liability for any tax year in question.
These professionals have the necessary tax software, training, tax knowledge, and experience to think through and resolve the problems most taxpayers face.
The IRS is normally only going to review the last six years, unless fraud is suspected. In a fraud situation, there is no statute of limitations on how far back they can go to require returns and taxes due.
4) If a taxpayer has entered into a payment arrangement, EA’s, CPA’s and tax attorneys can help them to remain compliant with tax withholding and tax reporting so that their payment arrangement stays current.
Missing payments or not filing future year returns will cause the payment arrangement to default. This causes the whole process to start over again, which is not a good thing to have happen.
AN EXAMPLE OF HOW AN EA HELPED AN ACTUAL CLIENT:
- Frank had a client whose relative passed away, and the client was trying to resolving the estate on behalf of the deceased.
- There were numerous letters from the IRS indicating that the deceased owed $125,000 in taxes, plus penalties, and interest for a total of $150,000 for a tax year 5 years prior to the deceased person’s death.
- Upon further investigation by Frank, he discovered that the deceased liquidated her entire portfolio in one year, and had failed to file a tax return to show what the gain or loss was for this portfolio.
- A broker statement confirmed 11 different mutual fund investments from different companies with dividends and capital gains reinvested each year/quarter since the account was opened.
- Frank was able to substantiate the $125,000 of sales resulted in a loss for most of the funds sold.
- After preparing the tax return as it should have been filed, Frank was able to get the $150,000 total tax bill calculated by the IRS reduced to $100.
“Given the knowledge that I had about how dividend reinvestment programs work, the ability to find information on the internet or from the mutual fund companies about each fund (great help was provided by each mutual fund about their history of payments), and knowing the tax rules and having the tax software for all years, it was fairly easy to assist this client with his tax dilemma,” says Frank.
Francis St. Onge, CFP®, EA, is the president of Total Financial Planning LLC. He provides tax planning, tax preparation and financial planning (fee-only) services to his clients in Brighton, Mich., and surrounding communities. He is licensed to represent clients before the IRS to resolve tax issues and bring clients into compliance in filing prior year tax returns. Francis is also serving as the President of the Michigan Society of Enrolled Agents. For more information, visit his blog site.