|EXECUTIVE SUMMARY |
| AS THE IRS MOVES TOWARD ITS GOAL OF HAVING 80% of all tax returns filed electronically by 2007, the time has come for CPA firms to take steps to register themselves as electronic return originators (EROs).
THERE ARE BENEFITS TO USING ELECTRONIC FILING. They include the perception by clients that a CPA firm is current with today’s technology, acknowledgement from the IRS of filed returns and an error check that can reduce IRS notices resulting from input errors.
CPA FIRMS ALSO FACE HURDLES TO PARTICIPATING in the e-filing program. Electronic filing generally involves more steps for a firm to complete in preparing and filing a client’s return. To make the process truly paperless, CPAs must use a personal identification number (PIN) for the taxpayer. Since most firms don’t prepare a return with the taxpayer sitting in front of them, using this PIN may be cumbersome.
TO BECOME ELECTRONIC RETURN ORIGINATORS, CPA firms must file IRS form 8633. It requests basic information about the firm and its principals. The IRS will conduct a suitability check on all principals that includes an FBI background check, credit history and a check of IRS records to make sure all individual and business tax returns have been filed. All principals must pass the check for the firm to be accepted into the program.
THE IRS HAS A COOPERATIVE PROGRAM WITH ALL STATES that have income taxes, which enables taxpayers to file both federal and state income tax returns electronically at one time. Some states also have a direct state e-file program.
|MICHAEL CULLIGAN, CPA, is a tax manager for HJ Jump, Scutellaro and Co. LLP in Toms River, New Jersey. He is a member of the state tax and litigation committees of the New Jersey Society of CPAs. His e-mail address is email@example.com . JOSEPH F. SCUTELLARO, CPA, is a tax partner at HJ Jump, Scutellaro and Co. LLP in Toms River. He is chairman of the AICPA e-file task force and a member of the tax practice responsibility committee. He also serves as treasurer of the New Jersey Society of CPAs. His e-mail address is firstname.lastname@example.org . LISA A. SZARGOWICZ, CPA, is a tax manager at Rosenfield Raymon Restivo pc in New Bedford, Massachusetts. She is a member of the AICPA e-file task force. Her e-mail address is email@example.com . |
hange, in the words of British theologian Richard Hooker, does not come without inconvenience—even when it is to better from worse. CPA firms that see themselves as anchors of fiscal stability and project an image of timeless continuity often are among the enterprises that have the most trouble contemplating such change. Nevertheless, how accounting firms prepare income tax returns is evolving, and all firms will need to give serious consideration to the role they will play in the IRS e-filing program.
Galvanized by a 1997 report by the National Commission on Restructuring the IRS titled A Vision for a New IRS, Congress passed the IRS Restructuring and Reform Act of 1998 (RRA). The IRS added the Electronic Tax Administration (ETA) as an integral part of that vision.
In the RRA, Congress gave the IRS this charge:
Make paperless filing the preferred and most convenient means of filing federal tax and information returns.
Set the goal of having all computer-prepared returns filed electronically by 2002 and at least 80% of all returns filed electronically by 2007.
Encourage competition in the private sector to increase electronic filing of tax returns.
To improve private-sector acceptance, initiative and cooperation, the restructuring act required the IRS to create the electronic tax administration advisory committee (ETAAC) to offer input from this group. This committee must report annually to Congress on
IRS progress toward meeting the goal of receiving electronically 80% of tax and information returns by 2007.
The status of the committee’s strategic plan to eliminate barriers, provide incentives and use competition to increase electronic filing gradually over the next 10 years.
The legislative changes necessary to help the IRS meet such a goal.
The effects on small businesses and the self-employed of electronically filing tax and information returns.
|As an outgrowth of this congressional mandate, the e-file logo now is familiar to nearly all Americans, yet seldom seen in CPA offices. With the arrival of the 2002 deadline, the accounting profession is moving from merely acknowledging the existence of e-filing to conceding that CPA firms must incorporate this technology into their day-to-day business.
|Over 40 Million and Counting! |
In 2001 taxpayers filed electronically —and the IRS accepted—40,245,455 individual income tax returns. Of these, 29,987,998 were “practitioner accepted,” meaning the taxpayer took the return to an approved electronic return originator, who also likely prepared it.
Source: IRS, www.irs.gov .
For most CPA firms, after they register as electronic return originators (EROs) the e-filing process is a simple procedure:
Obtain and process tax information from clients in the traditional manner, with a few added steps. Firms must give additional care to verifying taxpayer identification numbers. CPAs always should enter the “nonstandard form” code when clients present forms W-2, W-26 or 1099R that are altered or handwritten (as opposed to computer generated) and confirm that the address on the return matches the address on W-2s and other documents. CPAs can help speed up refunds by advising taxpayers to be current with tax liabilities, making sure bank account information is up-to-date and ensuring Social Security Administration records are current.
Sign the return using an electronic or paper signature.
Submit the electronic return using an IRS-approved software program developed in-house or through the firm’s tax software provider.
Adhere to the duties of an ERO after submitting the return, including recordkeeping and documentation requirements, resubmission of rejected returns, acknowledgement of transmitted returns data, the use of Form 9325, Acknowledgement and General Information for Taxpayers Who File Returns Electronically, and sending paper signatures and attachments using Form 8453, Individual Income Tax Declaration for an IRS E-File Return.
Obviously, when a CPA firm files a paper return in the traditional manner, it eliminates most of these steps. Given the savings in time and labor dollars, why should a firm participate in the e-file program at all?
The electronic tax administration advisory committee has identified a number of benefits to using electronic filing.
Clients perceive that the CPA firm is current with today’s technology.
The IRS acknowledges e-filed returns and extensions with an electronic receipt.
Approximately 97% of all returns can now be e-filed.
Electronic returns go through an “error check” process. A valuable result of this increased precision is fewer IRS notices resulting from input errors.
Taken together, these benefits provide CPA/EROs with a competitive edge over practitioners who cannot e-file.
Unfortunately, for all the advantages, there are some daunting barriers to successful e-filings. The most notable is the difficulty a CPA firm faces in executing the self-selected personal identification number (PIN) to make electronic filing truly “paperless.” The process by which e-filers select their PIN is designed for high-volume national, regional and local income-tax-preparation firms where the taxpayer sits in front of the preparer as he or she inputs the return. The taxpayer can then immediately review the return and either enter a PIN herself or sign a consent form allowing the ERO to do so for her. The preparer then hits the e-file button, and the return is on its way.
To remain competitive, most of these mass-market firms provide free e-filing as part of their tax preparation service. Conversely, most CPAs do not prepare returns with clients sitting in front of them. Firms need to get client signatures on returns by fax, mail or having the client drop by—adding steps and a built-in time delay. Yet given the time delay, more and more firms are beginning to look at e-filing as an option for at least some clients, most notably those with large refunds, where filing electronically will get the money in their hands faster.
What, then, is an electronic return originator, and what does a CPA need to do to become one? Each firm must apply to become an authorized e-file provider. This process is explained in Publication 3112, The IRS E-File Application Package. Practitioners must file form 8633, giving basic information about the firm and its principals and naming a “responsible official” to serve as the IRS contact person. He or she has the authority to sign revised applications and is responsible for ensuring the firm adheres to all requirements of the e-file program.
Form 8633 requires the firm to select from the available e-file-provider options such as e-filing automatic extensions, participating in the federal/ state program and others. While a firm may choose more than one option per form, the IRS requires a separate form for each business location from which electronic tax returns will originate.
Absent professional status (CPA, attorney, enrolled agent) for all principals and responsible officials of the firm, fingerprint cards must accompany the signed form 8633. The IRS will acknowledge receipt of the application by letter and return incomplete applications.
Once a firm has submitted form 8633, the IRS conducts a suitability background check on all firm principals and responsible officials. It will determine suitability by checking
FBI criminal files.
IRS records to ensure all individual and business returns are filed, all payments are up-to-date and there aren’t any fraud or preparer penalties.
Prior history for noncompliance in the electronic filing or IRS e-file programs.
To be accepted as an authorized IRS e-file provider, all firm principals and responsible officials must pass these tests. If any one individual fails, the IRS will reject the application. A firm may appeal the rejection and, if denied, may not reapply for two years.
To maintain the integrity of the e-file program, the IRS will perform suitability checks annually to determine whether
All personal income tax returns are filed and timely.
All business tax returns are filed and timely.
All tax liabilities are paid or appropriately addressed with the IRS.
Penalties have been assessed.
There is evidence of disreputable conduct or other facts that would reflect adversely on the IRS e-file program.
Failure to meet any of these checks may result in the CPA/ERO being sanctioned (see box on page 82).
The application period to become an ERO begins each August 1 and ends May 31. Processing applications and completing suitability checks can take the IRS up to 45 days. Therefore, to insure participation in the e-file season that starts each January 1, the IRS encourages all firms to submit form 8633 by December 1. Finally, if questions arise during the application process, the IRS provides information in the electronic services section of its Web site, www.irs.gov . CPAs also can call 800-691-1894.
A firm must notify the IRS within 30 days of any and all changes made to the information it originally submitted on form 8633. The IRS has the right to temporarily drop a CPA/ERO from the e-file program until it receives updated information.
CPAs can submit revisions on form 8633; they can also submit certain changes on the firm’s letterhead:
The firm’s addresses, telephone and fax numbers.
Service centers receiving the firm’s return data.
Adding federal/state e-file to the firm’s list of services.
Most changes permitted by letter can also be made by telephone by either a firm principal or a responsible official.
The IRS also has a cooperative program with all of the states that have income taxes. It lets taxpayers file both federal and state income tax returns electronically at one time. An authorized IRS e-file provider places a client’s federal and state tax return data in separate files and transmits them to the IRS. Once the IRS processes the federal return, it acknowledges it has accepted the federal data and received the state information. The state will then separately acknowledge receipt and acceptance when it receives the data. CPAs can find a list of the 37 states (plus the District of Columbia) in the program at http://www.irs.ustreas.gov/efile/article/0,,id=97915,00.html .
In addition to participating in the federal/state e-file program, the following states currently support a direct state e-file program: California, Illinois, Maine, Maryland, Massachusetts, Minnesota and New York.
Whether a state participates in direct state e-filing or in the federal/state e-filing program, every jurisdiction requires that a practitioner be authorized by the IRS as a condition of eligibility to e-file. Based on federal acceptance, many states will automatically register the practitioner as an e-filer. Taxpayer signature requirements may vary from state to state. Some allow the federally accepted one to suffice for state purposes; others require a separate signature form. Still others require the ERO to retain the signature document for a specified number of years.
Once a firm is authorized as an ERO, it must comply with the guidelines in revenue procedure 2000-31, which sets forth rules governing the IRS e-filing program and defines the types of participants. Revenue procedure 2000-31 also outlines the responsibilities of an authorized e-file provider and the penalties associated with disclosure and misuse of taxpayer information.
Publications 1345 and 1345A are, respectively, the handbook and filing season supplement for authorized IRS e-file providers. They do not supersede revenue procedure 2000-31 but should be used in tandem.
Before an authorized provider can file a return, it must first determine whether the type of return is eligible. The IRS has made great strides in removing barriers by expanding the number of forms and attachments that can be filed electronically. However, it still prohibits e-filing certain returns. They include returns that are
Other than current-year.
From married taxpayers filing separate returns.
Unable to be processed because they include forms or schedules listed in publication 1345A.
Subject to certain rare or unusual processing conditions, such as elections that are made using a disclosure statement or returns that exceed the number of allowable forms, such as no more than one schedule A and B per taxpayer.
From taxpayers with invalid identification numbers. The IRS defines these as Social Security numbers that fall in the range of 900-00-0000 to 999-99-9999.
Tax preparation software should alert CPAs to returns that cannot be e-filed by noting the disqualification on the diagnostic report. If practitioners transmit an ineligible return to the IRS, the agency will reject it and the taxpayer will ultimately have to file a paper return.
Both the taxpayer and the paid preparer/ERO must sign the electronically filed returns. Two methods are available: a paper declaration form 8453 and an electronic signature form 8879 that uses a PIN. The IRS created an e-file PIN authorization form that allows the taxpayer to give the ERO authority to input his or her PIN. Once the taxpayer has reviewed the completed return, the ERO can transmit it to the IRS. This option, however, is not available to everyone, such as filers whose Social Security numbers are not valid for employment, taxpayers under age 16 and those required to file paper documents. These individuals must file a paper declaration. When using the paperless method, the IRS requires the ERO to retain the signed form 8879 for three years.
Although it may seem like too much work for a 1040 practice, there are some changes on the horizon that may encourage CPAs to become EROs. Legislation is pending in Congress—HR 586, the Taxpayer Protection and IRS Accountability Act of 2002—spurred by President Bush’s budget proposal to change the due date for electronically filed returns to April 30. The House passed the bill in May, and it may be law by the time this article is published. Although this extended due date could cause other problems, it might encourage CPAs to become EROs to allow clients with large balances-due to receive the extra “float” from paying their taxes two weeks later. In addition, both the electronic tax administration advisory committee and the Electronic Tax Administration have proposed special e-services for EROs that e-file a certain number of returns (currently proposed at 100). Provided the CPA has a valid power of attorney, these services may include the ability to go online and look at a client’s payment history, check on estimated tax payments, request a full transcript and other electronic services. In short, the time has come for accountants to put their clients’ interests first and become part of the electronic filing program.
|Dealing With Sanctions
Internal Revenue Service sanctions range from letters of reprimand for infractions that have little or no adverse impact on the e-file program all the way up to expulsion without opportunity to participate in the program in the future in cases of fraud or criminal conduct.
When the IRS advises a CPA/ERO of a proposed sanction, he or she has the right to an administrative review. The CPA/ERO should provide a written appeal within 30 days of receiving the proposed sanction. The appeal should provide a detailed explanation as to why the proposed sanction should be withdrawn and include supporting documentation. If the IRS affirms the sanction by issuing a recommended sanctioning letter, the CPA/ERO may appeal to the IRS Director of Practice. This appeal also must be in writing and mailed within 30 days to the IRS office that issued the recommended sanctioning letter.