| 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.
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 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.
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.
E-FILE HAS ARRIVED
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
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
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
|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
In 2001 taxpayers
filed electronically —and the
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
Source: IRS, www.irs.gov
PROCESS AND PROCEDURES
For most CPA firms,
after they register as electronic return
originators (EROs) the e-filing process is a
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.
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.
BECOMING AN ERO
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.
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.
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
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
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
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.
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
The firm’s addresses, telephone and
Service centers receiving the firm’s
Adding federal/state e-file to the
firm’s list of services.
permitted by letter can also be made by telephone
by either a firm principal or a responsible
STATE E-FILING PROGRAM
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.
RULES AND REGULATIONS
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
Unable to be processed because they
include forms or schedules listed in publication
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.
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
FUTURE BENEFITS OF E-FILING
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.
With Sanctions |
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