Since 2012, e-filing generally has been mandatory for tax preparers or firms that anticipate filing 11 or more federal individual or trust returns in a calendar year. However, e-filing presents a variety of dangers and unintended consequences not present with paper filing. Here are tips to make e-filing as safe and painless as possible:
Tax returns should be transmitted to clients only via secure fax, encrypted email, or secure portals. Many practitioners violate the Gramm-Leach-Bliley Act by sending unencrypted personally identifiable client information via unencrypted email (see “Transferring Client Data Securely,” The Tax Adviser, Dec. 2012, page 842).
Exercise extreme caution when inputting the taxpayer’s refund routing number. The IRS position is that the refund was paid according to instructions it received. Unless the bank returns the erroneously transferred funds to the IRS or corrects the error internally and transfers the funds to the taxpayer, the taxpayer’s sole recourse is a lawsuit against the return preparer. With a paper check, the IRS would issue a replacement check once it verified that the original refund check was lost or stolen and therefore uncashed by the taxpayer.
Take similar care with Electronic Federal Tax Payment System account information for a tax payment via an automated clearing house (ACH) debit. In addition to other costs, a new 2% penalty applies to a bounced ACH debit payment, along with potential legal liability for the preparer.
Make sure a return e-filed on April 15 and rejected with error codes is corrected within the requisite five days. Otherwise, it is treated as an unfiled return. Some practitioners file an extension request on all e-filed returns for which a no-error-code confirmation has not been received by April 15. For an e-filed return with error codes that cannot be corrected, the IRS generally allows a 10-day grace period for a paper return. If you file on paper, be sure to include Form 8948, Preparer Explanation for Not Filing Electronically. If the taxpayer requests paper filing, the preparer must document the request, following Rev. Proc. 2011-25.
To protect the confidentiality of the electronic filing identification number (EFIN), a preparer that is an electronic return originator should not include the EFIN on the copy of Form 8879, IRS e-file Signature Authorization, submitted to the client.
File a multiyear Form 2848, Power of Attorney and Declaration of Representative. This will help to protect your client when someone has fraudulently changed the client’s physical address. If this occurs and the IRS has a valid power of attorney on file, you will also receive notices the IRS tries to send your client.
If a client has become a victim of identity theft, help make a referral to the IRS Identity Protection Specialized Unit or the Taxpayer Advocate Service. It can take over a year to resolve a case. Also, in cases of identity theft, taxpayers should consider filing Form 14039, Identity Theft Affidavit, for additional return screening or an identity protection PIN.
Be aware that e-filing makes targeted audits easier. Congress says e-filing allows the IRS to “target returns with audit potential” (Report JCS-1-08), and the IRS estimated four years ago that “if [paper return] screeners could be reallocated to performing audits, they could bring [in] an additional $175 million annually” (Government Accountability Office, Rep’t No. GAO-08-38).
—By Jay Starkman, CPA, (firstname.lastname@example.org) a sole practitioner in Atlanta. He is the author of the book The Sex of a Hippopotamus: A Unique History of Taxes and Accounting.