CPA and EA exam terms, explained

Each term starts with a two-sentence answer, then the detail and a worked example.

Adjusted gross income (AGI). Adjusted gross income is gross income minus the adjustments allowed on Schedule 1, such as educator expenses, HSA contributions and half of self-employment tax. Many credits and deductions phase out based on AGI.
AICPA Blueprint. The AICPA Blueprint is the official outline of what each CPA Exam section tests. It lists content areas, representative tasks and the skill level each task is tested at.
Alternative minimum tax (AMT). The alternative minimum tax is a parallel tax system that adds back certain deductions and preferences so that higher-income taxpayers pay at least a minimum tax. You pay the larger of regular tax and tentative minimum tax.
Audit risk model. The audit risk model says audit risk equals the risk of material misstatement times detection risk. Auditors assess the first and lower detection risk by doing more or better tests.
Basis. Basis is the amount the tax law treats as your investment in property, used to figure gain or loss when you sell it. It usually starts at cost and changes with improvements and depreciation.
Circular 230. Circular 230 is the set of Treasury rules that governs practice before the IRS. It applies to CPAs, attorneys, enrolled agents and others who represent taxpayers.
COSO internal control framework. The COSO framework defines internal control in five components: control environment, risk assessment, control activities, information and communication, and monitoring. It is the standard reference for designing and evaluating internal control.
CPA Exam Core and Discipline model. The CPA Exam has three Core sections every candidate takes, AUD, FAR and REG, plus one Discipline chosen from BAR, ISC and TCP. Each section is 4 hours and needs a score of 75 to pass.
Deferred tax asset. A deferred tax asset is the future tax saving from deductible temporary differences and carryforwards. It arises when book income exceeds taxable income later, such as with accrued warranty costs.
Depreciation recapture (Section 1245). Depreciation recapture treats gain on the sale of depreciated business equipment as ordinary income, up to the depreciation taken. It stops taxpayers turning ordinary deductions into lower-taxed capital gain.
Earned income tax credit (EITC). The earned income tax credit is a refundable credit for low and moderate income workers. Its size depends on earned income, filing status and the number of qualifying children.
Enrolled Agent (EA). An enrolled agent is a tax professional licensed by the IRS to represent any taxpayer before the IRS on any tax matter. You earn the license by passing all three parts of the Special Enrollment Examination and a background check, or through qualifying IRS work experience.
Failure-to-file penalty. The failure-to-file penalty is 5% of the unpaid tax for each month or part of a month a return is late, up to 25%. It is reduced by the failure-to-pay penalty for the same months.
Form 2848 (Power of Attorney). Form 2848 is the IRS form a taxpayer signs to let a CPA, attorney or enrolled agent represent them before the IRS. It names the tax matters, form numbers and years the representative may act on.
Going concern. Going concern is the assumption that a company will keep operating for the foreseeable future. If there is substantial doubt about that, management must disclose it and the auditor adds a paragraph to the report.
Head of household. Head of household is a filing status for unmarried taxpayers who pay more than half the cost of keeping up a home for a qualifying person. It gives a larger standard deduction and wider tax brackets than single status.
Innocent spouse relief. Innocent spouse relief frees a spouse from tax on a joint return that was understated because of the other spouse's errors. The requesting spouse must show they did not know, and had no reason to know, of the understatement.
Lease classification (ASC 842). Under ASC 842 a lessee records a right-of-use asset and a lease liability for nearly every lease over 12 months. The lease is classed as a finance lease or an operating lease, which changes how expense is shown.
Like-kind exchange (Section 1031). A like-kind exchange lets you defer gain when you trade real property held for business or investment for other such real property. Since 2018 it applies only to real property, not to equipment or vehicles.
Materiality (audit). Materiality is the size of a misstatement that could change the decisions of people who rely on the financial statements. Auditors set it at the planning stage and use it to judge what errors matter.
OBBBA (One Big Beautiful Bill Act). OBBBA is the tax law signed on July 4, 2025 (H.R. 1). It made most of the 2017 tax cuts permanent and added new deductions for tips, overtime, car loan interest and seniors.
Offer in Compromise. An offer in compromise is an agreement in which the IRS accepts less than the full tax debt to settle it. The IRS usually accepts only when the offer equals what it could reasonably collect.
Partner outside basis. A partner's outside basis is their tax investment in the partnership interest. It goes up with contributions, income and their share of liabilities, and down with distributions, losses and liability relief.
Passive activity loss. A passive activity loss is a loss from a business you do not materially take part in, or from a rental. It can generally offset only passive income, and the excess carries forward.
PTIN (Preparer Tax Identification Number). A PTIN is the number every paid tax return preparer must have and put on the returns they sign. It is renewed every year through the IRS.
Qualified business income deduction (Section 199A). The Section 199A deduction lets owners of pass-through businesses deduct up to 20% of their qualified business income. It covers sole proprietors, partners, S corporation shareholders and some trust beneficiaries.
Qualifying child. A qualifying child is a dependent who meets the relationship, age, residency, support and joint return tests. Many benefits, including the child tax credit and the earned income credit, depend on this definition.
Revenue recognition (ASC 606). ASC 606 recognizes revenue when a company transfers promised goods or services to a customer, in the amount it expects to be entitled to. It follows five steps: identify the contract, the performance obligations and the price, allocate the price, and recognize revenue as each obligation is met.
S corporation. An S corporation is a corporation that elects to pass its income, losses and credits through to its shareholders, who pay the tax. It files Form 1120-S and gives each shareholder a Schedule K-1.
SOC 1 and SOC 2 reports. A SOC 1 report covers a service organization's controls that affect its clients' financial reporting. A SOC 2 report covers controls related to security, availability, processing integrity, confidentiality or privacy.
Special Enrollment Examination (SEE). The SEE is the three-part IRS exam you pass to become an enrolled agent. Part 1 covers individuals, Part 2 businesses, and Part 3 representation, practices and procedures.
Standard deduction. The standard deduction is a flat amount that reduces taxable income for taxpayers who do not itemize. For 2025 it is $15,750 single, $31,500 married filing jointly and $23,625 head of household.
Statute of limitations on assessment. The IRS generally has three years from the later of the due date or the filing date to assess more tax. The period is six years if gross income was understated by more than 25%.
Task-based simulation (TBS). A task-based simulation is a case-style CPA Exam question in which you work from exhibits such as emails, schedules and contracts. You fill in amounts, choose options or complete a document.