IRS Provides Guidance On Preparer's E-File Mandate And Taxpayer's Choice To File A Paper Return

Rev Proc 2011-25, 2011-17 IRB, Notice 2011-27, 2011-17 IRB

In a Notice, IRS has provided transitional guidance on when an individual return is considered “filed” by a return preparer for the 2011 requirement that preparers who reasonably expect to file 100 or more returns must file electronically, where the preparer submits the return to IRS on the taxpayer's behalf. IRS has also provided guidance to return preparers in a Revenue Procedure, effective Jan. 1, 2011, on how to document a taxpayer's choice to file a paper return that's prepared by the preparer.

For final regs on return preparers' electronic filing requirements, see the discussion at ¶6. For guidance on exemptions and undue hardship waivers from the preparers' electronic filing requirement, see the discussion at ¶20.

Background. The Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA, P.L. 111-92) provides that for returns filed after Dec. 31, 2010, IRS must require that any individual income tax return prepared by a tax return preparer who reasonably expects to file more than ten individual income tax returns in a calendar year (a specified tax return preparer) must be filed on magnetic media (that is, filed electronically). For this purpose, an individual income tax return also includes income tax returns for estates and trusts. (Code Sec. 6011(e)(3))

However, under transitional relief, IRS provided that solely for the 2011 calendar year, a specified tax return preparer is any person who is a tax return preparer (as defined in Code Sec. 7701(a)(36) and Reg. §301.7701-15) who reasonably expects to file 100 or more individual income tax returns in a calendar year. If a person who is a tax return preparer is a member of a firm, that person is a specified tax return preparer if the person's firm members in the aggregate reasonably expect to file 100 or more individual income tax returns in a calendar year. Beginning in calendar year 2012, however, the filing threshold is lowered from 100 to 11 individual income tax returns (i.e., income tax returns for individuals, estates, and trusts, such as the Form 1040 series and Form 1041).

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 and how to document a taxpayer's choice to file the taxpayer's individual return in paper format when the return is prepared by a tax return preparer but filed by the taxpayer.

Under the final regs (see ¶6), an individual income tax return is considered “filed” by a return preparer if he submits the individual income tax return to IRS on the taxpayer's behalf. Submission of a tax return in non-electronic (paper) form includes the transmission, sending, mailing or otherwise delivering of the paper return to IRS by the preparer, any member, employee, or agent of the preparer, or any member, employee, or agent of the preparer's firm. (Reg. §301.6011-7(a)(4)) In Frequently Asked Questions (FAQs) on its website, IRS has said that submission includes the preparer or a member of his firm dropping the return in the mailbox for the taxpayer. Acts such as providing filing or delivery instructions, an addressed envelope, postage estimates, stamps, etc., do not constitute filing by the return preparer as long as he actually mails or otherwise delivers the paper individual income tax return to IRS.

Under the final regs, an individual income tax return will not be considered to be filed by a return preparer (or the preparer's firm), if the preparer who prepared the return obtains a hand-signed statement from the taxpayer that states that the taxpayer chooses to file the return in paper format and that the taxpayer, and not the preparer, is filing the paper return with IRS (e.g., submitting it by mail to IRS). (Reg. §301.6011-7(a)(4)(ii)) Rev Proc 2011-25 provides guidance on how preparers can document a taxpayer's choice to file in paper format.

Interim guidance on when returns are “filed.” Notice 2011-27 provides that solely for calendar year 2011, a specified tax return preparer who prepares individual income tax returns may mail the return in paper format to IRS, at the request of the taxpayer. The specified tax return preparer must obtain and retain a hand-signed (by either spouse if a joint return) and dated (on or before the date mailed) statement containing the taxpayer's choice to have the return filed in paper format, and the taxpayer's unambiguous request to have the preparer mail the return to IRS. The following language in the statement will be sufficient to show that a taxpayer chooses to have his return filed in paper format and has requested that the preparer mail the return on the taxpayer's behalf: “I do not want to have my income tax return electronically filed, and I choose to have my return filed on paper forms. I have asked my tax return preparer to mail my paper return to IRS on my behalf.”

If the taxpayer, and not the specified tax return preparer, intends to mail or otherwise file the taxpayer's individual income tax return with IRS, the return preparer should not obtain the above statement. Instead, the preparer should obtain a taxpayer choice statement in Rev Proc 2011-25, Sec. 9.04.

Documenting taxpayer's choice to file paper return. If a return preparer obtains a hand-signed and dated statement documenting a taxpayer's choice to file in paper return in the manner and format described in Rev Proc 2011-25, Sec. 9, it will demonstrate compliance with the regs. The taxpayer's choice must be in writing, must affirm that the taxpayer is choosing to file the return in paper format and that the taxpayer, and not the preparer, is filing the return (e.g., submitting it by mail to IRS). This statement (to be retained by the preparer) must be hand-signed and dated by the taxpayer (by either spouse if a joint return) on or before the date the taxpayer's return is filed with IRS. An e-mail message from the taxpayer is insufficient to demonstrate a taxpayer's choice to file a return in paper format, but a scanned attachment to an email that complies with the above requirement will suffice. A sample statement is provided:

My tax return preparer [INSERT PREPARER'S NAME] has informed me that [INSERT s/he] may be required to electronically file my [INSERT TAX YEAR] individual income tax return [INSERT TYPE OF RETURN: Form 1040, Form 1040A, Form 1040EZ, Form 1041, Form 990-T] if [INSERT s/he] files it with the IRS on my behalf (e.g., submits it by mail to the IRS). I understand that electronic filing may provide a number of benefits to taxpayers, including an acknowledgement that the IRS received the returns, a reduced chance of errors in processing the returns, and faster refunds. I do not want to have my return electronically filed, and I choose to file my return on paper forms. I will mail or otherwise submit my paper return to the IRS myself. My preparer will not file or otherwise mail or submit my paper return to the IRS.

IRS says that neither the fact that IRS receives a taxpayer's paper return in the mail nor the fact that the preparer's general business practice is to not mail paper individual income tax returns for clients necessarily establishes that the preparer did not file a particular individual income tax return with IRS.

Rev Proc 2011-25, Sec. 9, doesn't apply either to returns or return preparers that meet the criteria for an administrative exemption in Rev Proc 2011-25, Sec. 4 (see ¶20).

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.