E-filing Benefits and Requirements

By Jack Angel and Ganesh M. Pandit

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JANUARY 2006 - Although there is no mandate by the IRS to participate in the federal e-filing program, the number of returns filed electronically has grown dramatically over the past few years. According to the IRS, an estimated 67 million returns were e-filed during the 2005 calendar year. In addition to personal income tax returns, most frequently used forms can be e-filed, including Forms 940 and 941 for employers, Form 1065 for partnerships, Form 1041 for estates and trusts, Forms 1120, 1120S, and 1120-POL for corporations, and Forms 990, 990-EZ, and 990-PF for exempt organizations.

Federal and state e-file programs, which include 37 states and Washington D.C., allow e-filing of both federal and state individual income tax returns at the same time. Various states, such as California, Michigan, Minnesota, Wisconsin, and Oklahoma, have already mandated Form 1040 for e-filing; other states, such as Alabama, Massachusetts, New Jersey, and Virginia, mandate e-filing beginning with tax year 2005. Nine states have no state income tax, and the remaining states have some form of e-filing program in place. New York, New Jersey, and Connecticut are moving to require tax preparers to e-file and to register with the IRS.

The IRS e-file pilot program began in 1986, and the program itself has been operational since 1990. Of the estimated 67 million returns electronically filed as of April 26, 2005, 46.6 million have been submitted by authorized e-file providers. Authorized e-file providers that actively participate in the IRS e-file program and file at least five individual or business tax returns in a calendar year can use the IRS’s e-services.

Benefits for an Electronic Return Originator

There are several benefits, in terms of time, money, convenience, and recordkeeping, for tax preparers that become e-filers.

First, a registered e-filer can log on to the IRS website at any time. Benefits of the website include: resolving taxpayer problems expeditiously through electronic exchange of data; viewing, completing, and filing either Form 2848 (Power of Attorney and Declaration of Representation) or Form 8821 (Tax Information Authorization) online; and inquiring (with an appropriate power of attorney) about an individual’s or business client’s account, problems, refunds, installment agreement, missing payments, or account notices, including transcripts of accounts as well as a new product called “record of account,” which combines the return transcript and the account transcript into one product.

Additionally, the IRS allows electronic return originators (ERO) to save on printing, paper, and storage costs by providing taxpayers with a copy of their return via any media that is acceptable to the ERO and the client. Thus, EROs no longer need to provide clients with a paper copy of the prepared return if they agree to file electronically. EROs may electronically image all paper returns and related papers that they are required to retain.

EROs have an electronic signature option (via the practitioner PIN method) permitting their tax clients to sign their return by entering a five-digit PIN. Individual clients can self-select a five-digit PIN which they can use to sign their e-filed return. This eliminates the requirement for Form 8453 (U.S. Individual Income Tax Declaration for an IRS E-file Return) and makes the filing process completely paperless.

When an ERO files a client’s tax return electronically, the ERO receives an acknowledgement that the IRS received it within 48 hours of filing; thus, individuals can e-file and electronically pay their taxes in a single step. E-filed returns are also automatically checked for accuracy, and if an error is detected, the preparer will receive an electronic message explaining the error, which can then be corrected without paying a penalty.

Refunds are received by e-filers in about half the time as by paper filers, and even faster if direct deposit is used. Businesses that have balances due on their Forms 940 or 941 can, when they e-file, authorize an electronic funds withdrawal from their bank account. They can also enroll in the free Electronic Federal Tax Payment System (EFTPS), which permits all federal tax payments to be handled by phone, by payroll processors, or online.

Registering with the IRS

There is no fee to become an e-filer with the IRS. To register at the IRS e-services website:

Users will receive a registration confirmation code in the mail if the data provided to the IRS is confirmed. Users must log back into the e-services website within 28 days of the original registration and enter the confirmation code to complete the registration process. To become an ERO, users should complete Form 8633 and follow the applicable instructions.

New Forms for EROs

Under federal e-file procedures, each new paid preparer must purchase an approved tax software program to process e-filed returns. A list of the approved software providers can be found at www.irs.gov/taxpros/providers/article/0,,id=97636,00.html. General questions pertaining to the purchase and use of the tax software are answered at www.irs.gov/efile/article/0,,id=120660,00.html.

New EROs must become acquainted with the new forms to be used in conjunction with this process. They include:

  • Form 8453 (U.S. Individual Income Tax Declaration for an IRS E-file Return) is automatically generated by the e-file software and is designed to be signed by the taxpayer after the e-file return has been completed and reviewed. Additionally, the form is designed to be signed by the ERO (and the paid preparer, if any). The form is, however, automatically removed by the software program and is not used where the e-file return will use a practitioner PIN, in which case the software generates Form 8879 (IRS E-file Signature Authorization). Form 8453, however, may still be required to be transmitted to the IRS for certain return attachments, such as Forms 3115, 3468, 8283, 8332, or 8885.
  • Form 8879 (IRS E-file Signature Authorization) is signed by the taxpayer to authorize the ERO to file the individual return electronically and to use a designated PIN for each taxpayer where the practitioner PIN is used to sign the tax return. The form is then signed by the ERO and retained for three years from the due date or the filing date of the e-filed return, whichever is later. This form is automatically generated by the software program whenever a practitioner PIN is used to sign the return.
  • Form 8878 (IRS E-file Signature Authorization for Application for Extension of Time To File) is used when a taxpayer authorizes an ERO to sign the taxpayer’s electronically filed application for an extension of time to file via Form 4868, and also authorizes an electronic fund withdrawal. If Form 4868 is e-filed but no fund withdrawal is authorized, Form 8878 is not required. Additionally, if Form 2688 or Form 2350 is being electronically filed, Form 8878 is required only if the taxpayer authorizes the ERO to enter the taxpayer’s PIN. Form 8878 is signed by the taxpayer and then signed and retained by the ERO for three years from the due date or e-filing date of the application form, whichever is later. Note that Form 8878 is not an application for an extension to file; it merely authorizes the ERO to electronically file for an extension on behalf of the taxpayer.
  • Form 9325 (Acknowledgement and General Information for Taxpayers Who File Returns Electronically) is returned electronically to the ERO by the IRS, after the return is e-filed. It contains an acknowledgement by the IRS of receipt of the e-filed return, and also contains pertinent information relating to the return. Upon receipt by the ERO, a copy should be sent to the client.

E-filers should also become familiar with Publication 3112, IRS E-file Application and Participation, as well as Publication 1345, Handbook for Authorized IRS E-file Providers of Individual Income Tax Returns.

E-file Mandate for New York State

Starting January 1, 2006, tax preparers must e-file if they prepared more than 200 New York State original 2004 tax returns in 2005 and if they used tax preparation software to prepare one or more New York State 2005 personal income tax returns in 2006. Beginning January 1, 2007, the above threshold of 200 returns drops to 100. Once tax practitioners are subject to the e-file mandate, they must continue to e-file all personal income tax returns in all future years regardless of the number of returns filed.

To participate in the New York State e-file program, a tax practitioner must first enroll as an ERO with the IRS. EROs approved by the IRS are automatically accepted into the New York program. No separate state documentation or application is required.

Tax practitioners that fail to file returns electronically when required are subject to a $50 penalty per return unless the client opts out (an opt-out provision allows taxpayers not to e-file), or the tax practitioner establishes another reasonable cause.

Beginning in 2005, New York will eliminate paper signatures for all e-filed personal income tax returns. All taxpayers will instead self-select a five-digit PIN, which will replace a paper signature. For joint returns, each spouse will need a PIN. Preparers will be required to retain Form TR-579 (New York State e-file Signature Authorization Form) for each client who e-filed. Payment of taxes may be made, inter alia, by credit card or direct deposit.

State Mandates and the IRS

It is interesting to note that, while many states have taken aggressive positions by mandating e-filing by tax practitioners, the IRS has taken the “soft sell” approach by introducing helpful services to encourage e-filing by paid preparers and only more gradually introducing requirements for preparers to file electronically and register with the IRS. Because many states with mandatory e-filing requirements make e-filers first register with the IRS before e-filing state tax returns, preparers may find themselves registering with the IRS as a matter of course.


Jack Angel, CPA, and Ganesh M. Pandit, DBA, CPA, CMA, are associate professors in the department of accounting, finance, and economics at the school of business at Adelphi University, Garden City, N.Y. The authors would like to thank Suzanne M. LoBiondo, CPA, Director of Tax Compliance, Marcum & Kliegman, LLP, who helped them prepare this article.


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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