Prospectively Effective Final Regs Detail E-Filing Mandate For Specified Tax Return Preparers

Preamble to TD 9518, 03/29/2011; Reg. §1.6011-7, Reg. §301.6011-7

IRS has issued prospectively effective final regs explaining the Worker, Homeownership, and Business Assistance Act of 2009 (WHBBA, P.L. 111-92) requirement for specified tax return preparers to e-file individual, estate, or trust returns. For 2011, the rule applies only if a specified tax return preparer expects to file 100 or more such returns. After 2011, e-filing will be required for those who expect to file 11 or more individual, estate or trust returns. In accompanying guidance, IRS explains how preparers may obtain hardship waivers, how to document an exception for paper returns filed by clients, and administrative exemptions that may apply (see ¶20 and ¶24).

Background. Under Code Sec. 6011(e)(3), as amended by WHBAA, P.L. 111-92), for returns filed after 2010, “specified tax return preparers” who expect to file more than 10 individual returns must file them electronically. For this purpose, an individual income tax return also includes income tax returns for estates and trusts. (Code Sec. 6011(e)(3))

Last summer, IRS informally indicated that it was phasing in the new e-filing requirement over 2 years. Last December, IRS formally announced the transitional relief in proposed regs explaining the e-file mandate. In addition, IRS issued a notice containing a proposed revenue procedure on hardship waivers and documenting an exception for paper returns filed by clients.

Now, IRS has finalized the proposed regs explaining the e-file mandate, making a few changes in response to practitioner comments. Separately, it issued two Notices and a Revenue Procedure explaining administrative exemptions, transitional guidance, and waiver requests (see ¶20 and ¶24).

Required filings. With certain exclusions (e.g., for undue hardship, covered below), any individual income tax return prepared and filed by a specified tax return preparer must be filed using magnetic media, which generally includes magnetic tape, tape cartridge, and diskette, as well as other media, such as electronic filing, specifically allowed under the applicable regs, procedures, or publications. (Reg. §301.6011-7(a)(1), Reg. §301.6011-7(b)) An individual income tax return is any return of income tax imposed by subtitle A on individuals, estates, and trusts, including any income tax return in the Form 1040 series and Form 1041 series. It also includes Form 990-T, Exempt Organization Business Income Tax Return, when the exempt organization is a trust subject to the Code Sec. 511(b) tax on unrelated business taxable income. At this time, certain individual income tax returns such as Form 990-T, Form 1040-NR (U.S. Nonresident Alien Income Tax Return), Form 1041-QFT (U.S. Income Tax Return for 4 Qualified Funeral Trusts), and all amended individual income tax returns, such as Form 1040X (Amended U.S. Individual Income Tax Return), cannot be filed electronically and, therefore, currently are exempt from the electronic filing requirement. (Reg. §301.6011-7(a)(3), Preamble to TD 9518, 03/29/2011)

Specified return preparer. For calendar year 2011, a specified tax return preparer is a tax return preparer who reasonably expects to file—or if the preparer is a member of a firm, the firm's members in the aggregate reasonably expect to file—100 or more individual income tax returns during the year. Beginning Jan. 1, 2012 a specified tax return preparer will be a tax return preparer who reasonably expects to file 11 or more individual income tax returns in a calendar year. (Reg. §301.6011-7(a)(3))

Definition of preparer. A tax return preparer is any person who is a tax return preparer under Code Sec. 7701(a)(36) and Reg. §301.7701-15. (Reg. §301.6011-7(a)(3)) Thus, the regs do not apply to individuals described in Code Sec. 7701(a)(36)(B)(i) through Code Sec. 7701(a)(36)(B)(iv) and Reg. §301.7701-15(f) who aren't defined as tax return preparers—such as an individual who provides tax assistance under a Volunteer Income Tax Assistance (VITA) program, a person who merely prepares a return of the employer (or of an officer or employee of the employer) by whom the person is regularly and continuously employed, or a person who prepares a return as a fiduciary for any person.

Meaning of “filed.” An individual income tax return is treated as “filed” by a tax return preparer or a specified tax return preparer if the preparer submits the tax return to IRS on the taxpayer's behalf, either electronically (by e-file or other magnetic media) or in non-electronic or non-magnetic media (paper) form. (Reg. §301.6011-7(a)(4))

The proposed regs said that submission in non-electronic (paper) form would include the direct or indirect transmission, sending, mailing or otherwise delivering of the paper tax return to IRS by the preparer and would include any act or acts of assistance beyond providing filing or delivery instructions to the taxpayer. In response to commentators' concerns about the broad wording of the proposed regs, the phrases “direct or indirect” and “and includes any act or acts of assistance beyond providing filing or delivery instructions to the taxpayer” were deleted from the final regs. Acts such as providing filing or delivery instructions, an addressed envelope, postage estimates, stamps, or similar acts designed to assist the taxpayer in his efforts to correctly mail or otherwise deliver an individual income tax return to IRS do not constitute filing by the tax return preparer or specified tax return preparer as long as the taxpayer actually mails or otherwise delivers the paper individual income tax return to IRS. (Preamble to TD 9518, 03/29/2011)

Exception for client filed returns. Under Reg. §301.6011-7(a)(4), an individual income tax return isn't treated as filed by a tax return preparer or specified tax return preparer if the tax return preparer or specified tax return preparer who prepared the return obtains, on or before the date the return is filed, a signed and dated written statement from the taxpayer stating that the taxpayer chooses to file the return in paper format, and that the taxpayer, and not the preparer, will submit the paper return to IRS. If it's a joint return, only one spouse needs to sign (the proposed regs would have required both spouses to sign). Notice 2011-27, 2011-17 IRB, provides guidance for calendar year 2011 only, on how to document a taxpayer's choice to file in paper format (see ¶24).

Waiver of e-file mandate. Under Reg. §301.6011-7(c), the overall e-filing mandate is waived for:

1. Specified tax return preparers who request an undue hardship waiver, in the manner prescribed in IRS forms, instructions, or other appropriate guidance. Rev Proc 2011-25, 2011-17 IRB, explains how to submit an undue hardship waiver request (see ¶20).

2. IRS-provided administrative exemptions, for certain class of preparers or returns. Notice 2011-26, 2011-17, carries currently applicable administrative exemptions (see ¶20).

Meaning of “reasonably expect to file.” The determination of whether a tax return preparer (or if the preparer is a member of a firm, the preparer's firm members in the aggregate) reasonably expects to file 10 or fewer individual income tax returns (or, for the 2011 calendar year, fewer than 100 individual income tax returns) is made by adding together all of the individual income tax returns (as defined above) the tax return preparer and, if the preparer is a member of a firm, the firm's members, reasonably expect to prepare and file in each calendar year. In making this determination, returns that are excluded from the electronic filing requirement due to taxpayer choice or under the administrative exemption exclusion, are not counted. (Reg. §301.6011-7(d)(1))

The “reasonably expected” determination is made separately for each calendar year to determine whether the e-filing requirement applies to a tax return preparer for that year. For each calendar year, the “reasonably expected” determination is made based on all relevant, objective, and demonstrable facts and circumstances before the time the tax return preparer and the preparer's firm first file an individual income tax return during the calendar year. (Reg. §301.6011-7(d)(2))

Effective date. The news regs are effectively on Mar. 30, 2011, and apply to individual income tax returns filed after Dec. 31, 2010. (Reg. §301.6011-7(g))

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.