IRS Explains Exemptions And Undue Hardship Waiver From Preparers' Electronic Filing

Rev Proc 2011-25, 2011-17 IRB, Notice 2011-26, 2011-17 IRB

In a Notice, IRS has provided administrative exemptions to the Code Sec. 6011(e)(3)(B) electronic filing requirement for return preparers. These exemptions are applicable retroactively, as of Jan. 1, 2011. IRS has also provided guidance to return preparers in a Revenue Procedure, effective Jan. 1, 2011, on the format, content, and time for filing a request for waiver of the electronic filing requirement because of undue hardship.

For final regs on return preparers' electronic filing requirements, see the discussion at ¶6. For guidance to return preparers where taxpayers choose to file a paper return, see the discussion at ¶24.

Background. Under Code Sec. 6011(e)(3)(B), tax return prepares must electronically file individual income tax returns (which for this purpose includes estate and trust returns) after 2010, unless the return preparer neither files nor reasonably expects to file 10 or more individual income tax returns in a calendar year (a specified tax return preparer). However, under transitional relief, IRS provided that solely for the 2011 calendar year, a specified tax return preparer is any person who reasonably expects to file 100 or more individual income tax returns in the calendar year.

In December of 2010, IRS issued Notice 2010-85, 2010-51 IRB 877, which contained a proposed revenue procedure that set out guidance on how to submit an undue hardship waiver request. (Ann. 2010-96, 2010-52 IRB 936)

Final regs (see ¶6) authorize IRS to grant to a specified tax return preparer a waiver of this requirement in the case of undue hardship. (Reg. §301.6011-7(c)(1)) Under Reg. §301.6011-7(c)(2), IRS may provide administrative exemptions for certain classes of specified tax return preparers or types of individual income tax returns, as the IRS determines necessary to promote the effective and efficient administration of Code Sec. 6011(e)(3) and the regs. Notice 2011-26 sets out administrative exemptions to the electronic filing requirement, which are to remain in effect until modified or superseded.

Exemptions to electronic filing. Notice 2011-26 provides administrative exemptions for certain types of exempt preparers and for certain returns due to either the return preparer's technological difficulties or IRS e-file limitations. A tax return preparer's classification as a specified tax return preparer is based upon the number of non-exempt individual income tax returns he reasonably expects to file in a given calendar year, and exempt returns do not count towards the more than 10 (100 or more in 2011) individual income tax return filing threshold. Further, specified tax return preparers are affected by administrative exemptions because they are not required to electronically file any individual income tax return that qualifies for an administrative exemption. An exemption, however, is not needed for any tax return preparer who is not required to file individual income tax returns electronically, i.e., tax return preparers who reasonably expect to file, or if a member of a firm whose firm's members in the aggregate reasonably expect to file, fewer than 100 individual income tax returns during calendar year 2011 (10 or fewer in calendar year 2012 and thereafter).

Exempt return preparers. The following categories of tax return preparers and specified tax return preparers are exempt from the electronic filing requirement under Code Sec. 6011(e)(3) and the corresponding regs:

... Members of certain religious groups. A tax return preparer who is a member of a recognized religious group that is conscientiously opposed to its members using electronic technology, including for the filing of income tax returns electronically, and that has existed continuously since Dec. 31,’50.

... Foreign preparers without Social Security Numbers. A specified tax return preparer who is a foreign person without a Social Security number and is so ineligible to file electronically because the IRS e-file program currently doesn't accept foreign tax return preparers without Social Security numbers who live and work abroad. The specified tax return preparer (1) must not be a member of a firm that is eligible to e-file, and (2) must have applied for a preparer tax identification number (PTIN) and either submitted Form 8946, PTIN Supplemental Application For Foreign Persons Without a Social Security Number or qualify for the relief provided by Rev Proc 2010-41, 2010-48 IRB 781, Sec. 5.

... Preparers ineligible for IRS e-file. A tax return preparer who is currently ineligible for the IRS e-file program due to an IRS e-file sanction. The exemption ends on the date the sanction period ends or the date the IRS accepts the tax return preparer into the IRS e-file program, whichever date occurs first. If, however, the tax return preparer has a pending application for the IRS e-file program filed with the IRS at the time the sanction period ends, the exemption will continue until the date the IRS renders a decision on the tax return preparer's application.

Returns exempt due to preparer's technological difficulties. The following individual income tax returns are exempt from the electronic filing requirement due to technological difficulties experienced by a return preparer:

... Rejected return. This is a return that a specified tax return preparer attempted to e-file but was unable to e-file because the return was rejected and he attempted to but could not resolve the reject condition or code.

... Forms or schedules not supported by preparer's software package. A return prepared by a tax return preparer or specified tax return preparer whose e-file software package does not support one or more forms or schedules that are part of the return.

... Other technological difficulties. A return or returns prepared by a tax return preparer or specified tax return preparer who experiences a short-term inability to electronically file the return or returns due to some other verifiable and documented technological problem.

Returns exempt due to IRS e-file limitations. The following individual income tax returns and attachments to returns are exempt from the electronic filing requirement, due to IRS barriers or other systemic limitations that currently prevent the returns and attachments from being filed electronically:

... Returns currently not accepted electronically. Any individual income tax return that is not currently accepted electronically by IRS e-file or that IRS has instructed taxpayers not to file electronically.

... Required documentation or attachments not accepted electronically. Any required documentation or attachments that IRS doesn't yet provide the capability to file electronically such as documentation for Code Sec. 6707A disclosures or required appraisals to support charitable contributions are exempt.

A return preparer who qualifies for an exemption described in Notice 2011-26 does not have to request an exemption from IRS or otherwise obtain IRS's approval. These exemptions are automatic, but the burden is on the preparer to show entitlement to an administrative exemption. Undue hardship waiver requests are unnecessary for purposes of claiming an administrative exemption and should not be submitted by or for an exempt preparer or return.

IRS has created Form 8948, Preparer Explanation for Not Filing Electronically, for specified tax return preparers to explain why an individual income tax return that is able to be filed electronically was prepared and filed in paper format. Form 8948 is to be attached to the paper copy of the tax return that a specified tax return preparer prepares and furnishes to the taxpayer. But returns currently not acceptable by IRS electronically do not require the use of Form 8948.

Undue hardship waiver. Rev Proc 2011-25 provides IRS will ordinarily grant undue hardship waivers only in rare cases. A waiver may be granted for a specified period of time or for a series or class of individual income tax returns, although it will not ordinarily be granted for more than one calendar year period. IRS will generally grant an undue hardship waiver only when the specified tax return preparer can demonstrate the undue hardship that would result by complying with the electronic filing requirement, including, but not limited to, any incremental costs to the preparer.

The fact that a preparer doesn't have a computer or appropriate software or doesn't desire to obtain or use a computer or software doesn't, standing alone, constitute an undue hardship. An undue hardship waiver request based solely on this fact or personal desire, without any further explanation or justification (e.g., disability or financial hardship), will be denied.

An undue hardship waiver is requested by submitting a signed and dated Form 8944, Preparer e-file Hardship Waiver Request, to IRS. Form 8944 and any IRS notice granting an undue hardship waiver should not be attached to a taxpayer's paper return. A return preparer must ordinarily submit a request for an undue hardship waiver between October 1 of the calendar year preceding the applicable calendar year and February 15 of the applicable calendar year, or within the time-frame specified in the instructions to Form 8944. Untimely requests for undue hardship waivers will not be considered absent the existence of unusual or unforeseen and unavoidable circumstances.

References: For when return preparers must file electronic returns, see FTC 2d/FIN ¶S-1601; United States Tax Reporter ¶60,114.075; TaxDesk ¶572,002; TG ¶60802.