Wednesday, April 6, 2011

New Rules Close Loophole for Tax Preparers Looking to Avoid E-Filing

By Diane Freda

Tax preparers looking for an escape from mandatory e-filing by saying they did not “file” a tax return for a client were thwarted by final rules issued March 28 by the Internal Revenue Service.

Rules proposed by IRS in December (REG-100194-10) said if a tax preparer did not mail a return for a client they were not subject to the e-file mandate.

Many tax preparers were thinking they could wiggle out of the rules by saying they prepared tax returns but did not file them for clients, Cindy Hockenberry, National Association of Tax Professionals tax supervisor, said March 30. This would have released them from the designation of a “specified tax preparer” under tax code Section 6011, and the requirement to e-file.

However the final rules (T.D. 9815) clarified that the e-filing mandate will apply to any tax preparer who “prepares and/or files” a tax return. The final rules “closed a few windows that were flapping open,” Hockenberry said.

The package of guidance included final rules that will require tax preparers who prepare 100 or more individual income tax returns in 2011 to e-file those returns, while adjusting the threshold to 11 or more returns prepared in 2012.

IRS also issued Revenue Procedure 2011-25, which outlined how preparers are to go about getting a hardship waiver; Notice 2011-26, which reviewed the qualifications for automatic administrative exemptions; and Notice 2011-27, which allowed tax preparers, just for the 2011 filing season, to get a signed statement from clients expressing their wish to have their return filed on paper and to have that particular tax preparer mail the return to IRS.

The proposed rules did not define what filing was, John Ams, executive vice president of the National Society of Accountants, told BNA March 31, and that was part of the problem. “Is providing a self-addressed envelope part of the filing process, or is just dropping it into the mail the filing process? Where does the filing process begin?” he said.


However, IRS was not as transparent to tax preparers on the subject of whether the rules are retroactive. According to IRS, the final rules are retroactive. While the rules became effective as of March 30, their date of publication in the Federal Register, they will apply to individual income tax returns filed as of Jan. 1, 2011, the guidance said.

Making the final rules retroactive to January when it is now April is like “starting a ballgame and you're at the bottom of the second,” said Larry Gray, a certified public accountant with AGC-Alfermann Gray & Co. in Rolla, Miss. While the proposed and temporary regulations indicated the direction in which IRS was going, he said practitioners could not rely on them until they become final.

Several preparers told BNA they were counting on IRS not being too severe with them this year, since the rules were not issued until the tax filing season was almost over. “I don't expect that IRS will send out legions of enforcement police on this,” Ams said. The expectation is that IRS will give some leeway to tax preparers who make a reasonable effort to comply this year.

Gray said tax season is a difficult time for preparers to be trying to understand new rules. “When you put all four of these documents together, you can kind of figure out what's going on,” he said. “It's a decision tree.” But the average tax return preparer is not used to making that kind of analysis.
Hardship Waivers

IRS will allow some hardship waivers under Rev. Proc. 2011-25, but they will not be granted solely on the basis of a preparer not owning, or desiring to own, a computer.

“That issue is crystal clear and it shows an understanding by the Treasury Department and IRS that this is a community of late adopters,” said Robert Kerr, senior government relations director for the National Association of Enrolled Agents. Some preparers will want to continue preparing returns on paper. “But what this says is, your preference to keep scribbling away with pencils is of no interest to us,” he said.

IRS will grant hardship waivers based on a practitioner's ability to file returns electronically without incurring an undue financial hardship, the revenue procedure said, including but not limited to incremental costs. Hardship waivers will be granted sparingly, IRS said.
Unresolved Issues

The American Institute of Certified Public Accountants told BNA March 31 that it plans to revisit some of the provisions of the guidance with IRS. It will ask that the temporary relief provided in the final rule allowing tax preparers to file paper returns on behalf of their clients in 2011 be made permanent.

“We will continue to request to have the consent form modified to address certain circumstances where the issue is that the preparer cannot mail the return as a service on behalf of his clients,” said Benson Goldstein, AICPA senior technical manager. AICPA will urge IRS to allow tax preparers to file returns on behalf of their clients on a permanent basis. The final rule allowed that only for the 2011 filing season.

The list of automatic exemptions was positive, Goldstein said. This included that returns do not have to be e-filed in a number of different situations: if a return is rejected, if a software package does not support one or more forms, and for some returns that are generally not accepted for electronic e-filing.

The handling of foreign preparers also was positive, Goldstein noted. A foreign preparer who lives abroad and who is not an affiliate of a U.S. firm does not have to deal with the electronic filing rules. However the preparer must have applied for a preparer tax identification number, he said.

The complete text of this article can be found in the BNA Daily Tax Report, April 5, 2011.

© 2011, The Bureau of National Affairs, Inc.


Peter Reilly said...

What is the Wandering Tax Pro going to do ?

Kenneth Reid said...

What do you mean by "wandering" tax pro?

If you work on your own, you are required to e-file all returns if you prepare 100 or more tax returns (in 2011). The are only two exceptions to this:

One exception is if the taxpayer specifically signs a document that states that the taxpayer does not want to file electronically. The form to use is Form 8948.

The second exception is if the tax return cannot be e-filed because of certain forms, or if there are e-file errors which cannot be resolved.

Tax returns which cannot be e-filed include tax returns for prior years.

The rule changes to 11 or more tax returns beginning in 2012. In 2012, taxpayers will not be able to opt out of e-filing their returns.

The IRS MEF program will eventually be fully functional so that prior year returns can be e-filed. The MEF program is not there yet, but is moving in that direction. Once this happens, there will be NO excuse for tax return preparers to not file returns electronically.

If you are referring to tax return preparers that work for more than one tax return practice, or who frequently move from one practice to another, the rule is that tax returns must be e-filed if the practice files 100 or more tax returns per year (11 or more tax returns starting in 2012).