Studying for and passing the exam can be a daunting task, but it need not be an impossible one. Approach it in an organized and focused manner.
Preparation Prior to the Examination
An enrolled agent is an individual who is licensed to represent taxpayers before all administrative levels of the IRS. This privilege is reserved only for attorneys, CPAs, certain former IRS employees, and any other individual who passes the Special Enrollment Examination (SEE). Passing this exam is a significant step on the ladder to success and is an invaluable boost to one’s career and self-esteem.
However, studying for and passing the exam can be a daunting task, but it need not be an impossible one. This article includes 24 tips for calming your nerves and approaching the exam in an organized and focused manner. But, when all is said and done, there is a direct correlation between your motivation and your score on the exam, and no set of study tips can substitute for adequate preparation.
The SEE, commonly referred to as the EA Exam, was administered by the IRS until 2005, at which time Thomson Prometric was selected as the exam vendor. The first exam under the new on-demand, three-part, computerized format was given in October 2006. The SEE is now a closed exam; test questions under the on-demand format are no longer available to the public, although copies of all questions for the open-exam period of 1999-2005 are available on the IRS website.
The examination is designed to demonstrate technical competence in tax matters for purposes of representing taxpayers before the IRS. The revised exam consists of the following three parts:
- Part 1 – Individuals
- Part 2 – Businesses
- Part 3 – Representation, Practice, and Procedure
Each part of the examination consists of 100 multiple-choice questions. The length of each part is 3.5 hours, plus an additional half-hour required for a computer tutorial and survey. Questions are in three possible formats: (1) direct questions; (2) incomplete sentences; and (3) “all of the following except” narratives. All three types of questions are in a multiple-choice format, with four possible answers for each question. Each part of the exam may be taken separately and on different dates.
Applicants passing a part of the exam may carry over a passing score for up to two years from the date of passing that part. Thus, a two-year clock starts ticking on the remaining parts of the exam once the first part is passed; such carryover credit is lost after the two-year window closes.
Applying for the Examination
Candidates may take each part of the exam up to four times during the 10-month window of May 1–February 28. The testing fee for each part of the exam is $109. Candidates register online at www.prometric.com/irs by clicking Schedule My Test. Candidates select an appointment time and a site for taking the exam during the registration process. Prometric has approximately 300 test sites in the U.S. For additional details, visit their website and click on Review the Candidate Information Bulletin.
IRS Study Materials
Although there are no particular educational requirements for taking the exam, candidates are expected to answer basic tax questions at an intermediate level of knowledge equivalent to undergraduate courses. When studying for the examination, you may wish to refer to the Internal Revenue Code, Treasury Department Circular 230, IRS publications, and IRS tax forms and their accompanying instructions. Circular 230, current and prior year versions of IRS publications, forms and instructions are accessible online at www.irs.gov/Forms-&-Pubs.
IRS Tax Map may also be useful when studying for the exam. Tax Map gathers IRS forms, instructions, publications, and web pages by topic and organizes links to these sources on a single topic page. IRS Tax Map is available at www.taxmap.ntis.gov. Content on Tax Map is tax year specific. You can’t be expected to master all this information, but some material is more important than others (see the Study Tips section below).
Twenty-Four Study Tips Part I – Preparation Prior to the Examination
1. Know the Two Cardinal Rules of Studying – Rule 1: There are absolutely no shortcuts to passing the SEE. Rule 2: Refer to Rule 1. You must have an organized approach. Plan to study at least 50 hours for each part of the exam, at a pace of at least 10 to 15 hours per week. Take plenty of notes (in your own words) that provide shorthand references to the tax law for the more important provisions. Leave time to take a practice exam at least two weeks prior to the exam to highlight weak spots. Past exams are available at www.irs.gov, although these are in the old format. Still, they’ll give you a feel for the types of questions (and time pressure) you’ll likely see on the real thing. But remember, the entire exam is now multiple-choice; there are no true-false questions as was true on these old exams.
2. Consider a Review Course – There are a number of review courses, both self-study and live, devoted to the SEE. The advantage of such courses is that the authors have usually analyzed the past examinations and have organized the study material in a condensed manner for maximum coverage. In essence, you are paying for an organized approach to studying for the exam, and this may be of some value to you.
The National Society of Accountants offers study courses in various formats:
- NSA Enrolled Agent Exam Self-Study Review Course (Study for the EA exam on your own schedule.)
- NSA Enrolled Agent Exam Live Review Course (A very intensive live course, offered over three days prior to the Annual Meeting this August.)
3. Don’t Worry About the Math of Passing – The grading procedure on the closed exam as described by Prometric is somewhat murky, as the raw score (number right out of total number of questions) will be converted to a scale between 40 and 130, with 105 set as a passing score per mandate by the IRS. Assuming this is a linear scale that starts at a score of 0, a passing score of 105 is 65 points above the lowest score, out of 90 total points. This seems to imply that a score of roughly 73 percent would be passing (65/90), but who really knows? For example, if the minimum score of 40 is given to all scores below a certain level (say, 30 percent), then the required percentage of right answers would decrease.
Under the old open IRS format of the exam, each part had 80 questions of varying point values that totaled 175 points. Parts 1 through 3 of the old exam had 20 true-false questions worth 1 point each, 25 non-computational, multiple-choice questions worth 2 points each, and 35 computational, multiple-choice questions worth 3 points each. Note that 60 percent of this 175-point total is 105 points. This appears to be the source of the 105 points on the new IRS-mandated scale, but the question is whether this scaled score implies a 60- or 70-percent minimum passing score.
The moral of the story? Don’t worry about the possible scale. If you really work at it, you’ll clear either hurdle.
4. Think Like an Examiner – Never lose sight of the purpose of the examination – to ensure that the successful applicant has demonstrated a minimum level of competence necessary to represent a taxpayer before the IRS. For that reason, expect the vast majority of the questions on the exam to test the basic fundamentals of taxation.
For example, the exam may not address the exotic details of a tax straddle, but you can certainly expect questions on the basic netting of capital gains and losses. Ask yourself what are some of the basic tax concepts that every practitioner should know, and make sure that you can answer those questions. These include such items as the basic corporate tax formula, the flow-through nature of partnerships and S corporations, the basic features of an IRA, and the distinguishing characteristics of deductions for and from adjusted gross income.
5. Examine the Exams. The more previous exam questions you review, the better. For one thing, the Prometric Licensing Information Bulletin (available at www.prometric.com/IRS) provides detailed lists of possible topics for each part of the exam (discussed below). These, by and large, mirror questions asked on previous exams under the old IRS format. True, there are some new topics, mainly related to client relations and audit and representation responsibilities, and we’ll discuss this factor next. But you need to get a flavor of the questions and the depth of knowledge expected on the exam under the old format.
More importantly, such reviews will help you consciously and subconsciously prioritize your studying, because you’ll begin to note those topics that appear time and time again on the exam. Again, the National Society of Accountants offers study courses in various formats that include hundreds of updated prior exam questions, as well as sample questions on new topics
The basic core knowledge required for tax return preparation and client representation has not changed; only the format of the exam has been tweaked. The taxation of sales and exchanges of property was extremely important on the old open exam, and will continue to be important on the closed exam, because that’s a big part of practice. These “serial repeaters” occurred on past exams, not because the examiners were waiting for candidates to finally get them right, but simply because they were (and are) part of the minimum core of knowledge expected of an enrolled practitioner. By constantly repeating these questions, the IRS is telling you that they want you to know these things.
Although EAs are writing most of the exam questions these days, the questions will mirror what they deal with every day in practice. And remember, they are likely to examine the old exams when writing new questions as well. Given that all topics are not created equal, it may be useful to examine tendencies on the old exams under the IRS format that are publicly available. In performing this analysis, for example, the NSA EA Review Course divides prior open-exam questions on each of the three parts of the exam into approximately 150 different topics. These analyses provide some interesting insights. Appendix A discloses all of those topics on each part of the exam that appeared in at least seven of the last ten open exams. Note that most of these topics mirror the “think like an examiner” approach discussed earlier, in that most frequently-tested topics are fundamental staples of tax practice.
A Word of Caution – These lists were for exams prior to 2006, so don’t forget that the tax law is constantly changing and important new concepts will be tested regularly as well. Think Affordable Care Act!
6. Don’t Panic When Confronted With the “Softer” Practice Topics of the Closed Format. Many candidates are somewhat anxious about the “soft” topics added when the exam went to a closed format. These include the following new major categories in the examination specification content outlines mentioned earlier:
- Part 1:
- Preliminary Work to Prepare Tax Returns
- Tax Returns for Individuals, Taxpayer Data
- Minimization of Taxes Paid
- Advising the Individual Taxpayer
- Part 2:
- Analysis of Financial Records
- Advising the Business Taxpayer
- Part 3:
- Building the Taxpayer’s Case: Preliminary Work
- Reviewing Taxpayer Information Before the IRS
- Building the Taxpayer’s Case: Reviewing the Financial Situation
- Building the Taxpayer’s Case: Supporting Documentation
- Completion of the Filing Process: Accuracy
- Completion of the Filing Process: Information Shared With the Taxpayer
Incidentally, candidates for the SEE Exam are not the only ones panicking; those of us writing review courses are also trying to figure out just how the examiners can ask decent questions on some of these topics! But everyone needs to step back a minute, relax, and consider these factors:
- A close inspection of these categories reveals that, most likely, a number of the questions can be answered with reference to basic knowledge on many of the technical topics studied for the exam. In most cases, any questions on minimization of taxes or advising taxpayers will invariably be offshoots of basic knowledge of the computation. For example, knowledge of the common adjustments and preferences for the alternative minimum tax would probably provide enough information to answer planning or interview questions on this topic. And knowing the five tests for dependency would probably be enough to answer any “taxpayer data” questions regarding exemption deductions.
- Many of the soft topics in Part 3 relate to taxpayer representation before the IRS, and will necessarily touch on a number of technical issues covered elsewhere in your basic studying. For example, the old exams included a number of questions on recordkeeping and document retention requirements, and these are probably relevant here as well.
- Knowledge of solid office tax practices may help you answer a number of the preliminary work and initial preparation questions. Many of these questions might be answered with knowledge of the typical client questionnaire completed at the beginning of an engagement, the client interview form, or the interview question portions of the typical tax preparation software package). A number of professional organizations offer client checklists or office practice guides on their websites, and these might prove valuable in preparing for these types of questions.
- But what if they still ask a question on one of these topics and you have no idea what they are talking about? Here’s where the scientific guess comes in. Seriously, if you are having problems with a question, other candidates are likely experiencing the same problem, and this may ultimately be reflected in the final scoring adjustments for that part of the exam. Remember, you don’t have to outrun the examiners; you just need to keep pace with the other candidates!
7. Crack Open the IRS Data Vault. I know, I know. You purchased a review course to avoid opening all the IRS Forms & Publications. And most review courses promise that you won’t need to open the package. But if you did not purchase a review course you must examine some of these materials, and even if you did purchase such a course there is still much to be gained by examining selected IRS materials. For one thing, many of the answers to questions are word-for-word from these publications, and your memory can surprise and delight you at times. Not all of these materials are created equally, and some publications (such as Publication 17, Your Federal Income Tax) provide enough basic information to avoid the more tedious and detailed, specific-topic publications such as Publication 501, Exemptions, Standard Deduction, and Filing Information.
At a minimum, the following general publications, forms, and instructions should serve as the core for your studying efforts if you do not purchase a review course (or at least serve as prime supplementary reading for complex topics in a review course):
- Part 1: Publications 17, 463*, 535, 544*, 550, 551*, 559, 590, 950, Inst. 706, Inst. 709, Inst. 1040, Inst. 1041, Inst. 5500EZ.
- Part 2: Publications 15, 225, 334, 463*, 535, 541, 542, 544*, 551*, 560, 946, Form 8832, Inst. 2553.
- Part 3: Publications 5, 216, 552, 556, 947, 1345, Inst. 2848, Forms 8453, 8821.
* Essential for both Part 1 and Part 2.
Note: As electronic preparation of returns becomes virtually mandatory, so does the number of questions regarding this topic on the exam. And electronic filing considerations are mentioned as possible test material under some of the soft topics added to Part 3, such as “Accuracy.” So be absolutely sure to review Publication 1345 before taking the exam. In fact, the two publications you should review in every situation are Publication 1345 and Circular 230. Both are available on the IRS webpage.
8. Know the Various Formats for the Tax Calculation by Heart. In many cases knowledge of the basic formats of the tax computation (e.g., tax formulas) for the various tax entities can pay huge dividends. For example, here are descriptions of past-exam questions on four possible tax entities where format knowledge is essential:
Individuals – More than likely your exam will have several questions that require you to (1) distinguish deductions for adjusted gross income and those from adjusted gross income and (2) determine if an itemized deduction is or is not subject to the 2% of adjusted gross income floor;
C Corporations – A favorite question on the old open exams was to compute the corporate charitable deduction when a corporation has gross dividend income as well. If you know the corporate format, you will remember that the 10% of taxable income limit for corporations is based on an income figure that includes the gross dividend but does not take into account the dividends received deduction.
Partnerships and S Corporations – If you simply remember the definition of ordinary income for a partnership and an S corporation, you will be able to distinguish ordinary income from items that must be separately allocated to owners. The latter items all have one thing is common; they can’t be included in ordinary income because they may affect different partners differently—capital losses, for example.
Estates and Trusts – For these entities, it is important to remember that a distribution deduction is allowed on the flow-through entity so that the party taxed is the beneficiary who ultimately received the distribution, and not the estate or trust. To the extent that distributions are made, estates and trusts are in effect flow-thru entities.
9. Know “What’s New” on the Topics Specification List. Since going to a closed exam, ProMetrics has tried to stay on top of the changing tax landscape. In the Information Bulletin (which is REQUIRED reading for every candidate), a topics specification list for each part of the exam is listed. This is occasionally updated in consultation with practicing EAs and IRS personnel. A revised topics specification list was just added for the 2016-2017 test window, and several new topics appear on this list. Appendix B lists those new topics for each part of the exam, and these items should certainly be reviewed before sitting for the exam.
A note of caution – These lists are fairly long and can be intimidating, but many of the items just clarify topics on the original list and would be items you would study in any case. But some, such as taxpayer identity security issues, are indeed new items for discussion. An asterisk on an item in Appendix B indicates a new topic that is very new and/or was completely ignored on exams in the past. Be sure to review the complete Topics Specification List in the ProMetrics Bulletin to see the breath of the exam and also the areas of most importance; note that the number of questions from each domain is also given in these lists.
10. It’s the Health Care Law and It’s Rising Like a Bullet! Tax provisions of the Affordable Care Act first applied in 2014, and the documented high error rates in reporting the credits and personal responsibility payments insure that this will be a primary area of testing for years to come. Expect fairly basic questions for the first few years of implementation, followed by a move toward more nuanced topics later. Remember that this topic can appear on all three parts of the exam (in Part 3, the emphasis would be on reporting issues and office review procedures). For the first two years, the examiners may mix in a few “experimental questions” on this topic as well; see the discussion of experimental questions below.
11. Practice, Practice, Practice. Prometrics realizes that many individuals have never taken an electronic examination, so they ask that you arrive at the test site at least 15 minutes early to take a tutorial on the computerized exam. But why wait until then? Prometrics offers the same tutorial online on their website. Whatever you do, take this tutorial several times before actually taking the exam. Things will be different enough at the testing center, and this is one way to remove some of the anxiety ahead of time.
The software developed by Prometrics is very user-friendly and quite logical. Be sure to master the calculator function as well before actually taking the exam. Hint: If you take the sample tutorial questions online, be aware that at the end several of the questions are marked for review, even though you may not have marked them as such; Prometrics just wants to demo this feature before you exit the tutorial.
12. Which Parts to Take and When? The electronic format permits candidates to take the exam more or less wherever, and more importantly, whenever they want. Obviously, this means that there is a huge data base of questions for each part of the exam, and more than likely each exam will be randomly generated from this data base (based on the percentages shown on the exam specification outlines). All of the options and requirements are explained in the Licensing Information Bulletin pamphlet available for download at www.prometric.com/IRS.Given these options, which part or parts should you take first? There is no magic answer to this question, as this is an individual decision. Most candidates will simply choose to take each part separately, with a window for studying between each part.
On the other hand, if significant travel is involved in reaching a test center, some candidates may choose to take the entire exam over a two-day period. If more than one part is to be taken in a single day, it would make sense to take Part 3 as one of those two tests. There are less complicated details to master with Part 3, and no numbers at all. In this respect, it might be easy to compartmentalize the studying for each part and do well on both. And if you are taking all three parts, you’d have a break that night to brush up on the next part for the next morning. Many candidates may choose to take Part 1 (Individuals) first, since they are more familiar with the coverage. However, don’t shortchange this portion of the exam. As mentioned earlier, no detail is too insignificant for this part.
Incidentally, what are the pass rates on the exam? Prometrics discloses the average pass rates for the last three years, which are (1) approximately 88% for Part 3, (2) 72% for Part 1, and (3) 57% for Part 2. So perhaps your best confidence booster right out of the box may be to take Part 3 first. But don’t take it lightly.
One other thought: If you are going to take the exam one part at a time, try not to schedule a long interval between Parts 1 and 2. There are a number of topics that overlap these two parts (e.g., travel and entertainment expenses, related party losses, sales of property, nontaxable exchanges), and topics you mastered from studying one part may kick in on the next part.
About the Author
John O. Everett, CPA, Ph.D., is Professor Emeritus of Accounting at Virginia Commonwealth University in Richmond, VA. He has coauthored numerous articles and textbooks and has taught for national CPA firms. John is the author of the NSA Enrolled Agents Exam Review Course, and John and Bill Duncan of Arizona State University co-present the Live Enrolled Agents Exam Review Course each year prior to the NSA Annual Meeting.