Part 3 - Representation, Practices & Procedures - Unit 4 - Content Flashcards
1
Q
IRS E-File Program
A
- The IRS e-file program allows taxpayers to transmit their returns electronically. More than 84% of American taxpayers file their tax returns electronically. According to the IRS, the processing of e-file returns is not only quicker but is also more accurate than the processing of paper returns. However, as with a paper return, the taxpayer is responsible for ensuring an e-filed return contains accurate information and is filed on time.
- Paid preparers who prepare more than ten individual returns a year are required to e-file income tax returns. The e file mandate covers returns for individuals, trusts, and estates.
- For the purposes of the e-file mandate, members of firms must count their returns in aggregate. If the number of applicable income tax returns is 11 or more, then all members of the firm generally must e-file the returns they prepare and file.
- This is true even if an individual preparer expects to prepare and file fewer than 11 returns. If a single preparer files 11 or more returns for the calendar year, all preparers of a firm must e-file the returns they prepare and file. This is true even if, on an individual basis, a member prepares and files fewer than the threshold.
2
Q
Exempt Tax Professionals
A
- Some preparers are exempt from the e-file mandate.
- The IRS e-file does not accept foreign preparers without social security numbers into their e-file program, so those preparers are exempt.
- Fiduciaries that file returns in their fiduciary capacity are not considered tax return preparers and are also not subject to the e-file mandate.
- Religious exemption: A tax return preparer who is a member of a recognized religious group that is conscientiously opposed to filing electronically is not required to apply for a waiver using Form 8944.
- Preparers who claim a religious exemption to e-filing must attach Form 8948, Preparer Explanation for Not Filing Electronically, to their clients’ paper returns and check the appropriate box.
- Example: Whitney is a licensed CPA who is a Canadian citizen. She lives and works in Canada. Whitney specializes in the preparation of U.S. tax returns for nonresident aliens. She is not a U.S. citizen or U.S. resident and does not have a Social Security number. She is therefore ineligible for an EFIN. She cannot e-file returns, so she is exempt from the e-file mandate. She is required to have a PTIN, and she must report her preparer information and sign the preparer section of her client’s returns.
- Example: Samantha is not a professional preparer. She is the executor of the Estate of Brian Smith, her deceased cousin. In her capacity as executor (a fiduciary), Samantha completes a 1041 return for the estate and signs the return as the taxpayer/fiduciary. Even if she receives fees as an executor for completing the return, this return will not be subject to the e-file requirement, because Samantha is preparing the return as a fiduciary. She will not sign the return as a paid preparer. Instead, she signs the return as a fiduciary of the estate.
- Example: Abraham is an accountant that belongs to a conservative Mennonite community. His faith encourages strict limits on computer use, limiting it to recordkeeping only and forbids Internet altogether. Abraham will prepare returns on a computer, but he is conscientiously opposed to using the internet for any tasks, including filing electronically. He does not have to request a waiver to the e-file mandate, because he automatically qualifies for a religious exemption. When he prepares a return for a client, he should attach Form 8948, marking box 3: “The preparer is a member of a recognized religious group that is conscientiously opposed to filing electronically.” The tax return can be mailed in by the client.
3
Q
Applying to the E-File Program
A
- To begin e-filing tax returns, a preparer must apply and be accepted as an authorized IRS e-file provider. There is no fee to apply, and the process takes up to 45 days. The first step is to create an IRS e-Services account by providing required personal information.
- Be a United States citizen or a legal U.S. alien lawfully admitted for permanent residence, (i.e., green card holder)
- Be at least 18 years of age as of the date of application, and
- Meet applicable state and local licensing and/or bonding requirements for the preparation of tax returns.
- If the responsible official is certified or licensed (such as an attorney, CPA, or Enrolled Agent), the person must enter their current professional status information. All other individuals must be fingerprinted as part of the application process.
- The IRS recently implemented a new electronic fingerprinting process for EFIN applications. Each new Principal and Responsible Official listed on a new e-file application, or added to an existing application, who is not an enrolled agent, CPA, or attorney is required to schedule an appointment to perform LiveScan Fingerprinting, so fingerprint cards are no longer needed.
- A preparer’s e-file application must be current and must list all the form types (1120, 1065, 990, etc.) that he or she will transmit to the IRS. If the preparer does not list a certain form on their application and later attempts to transmit that form, the preparer will receive a rejection for the return type.
- Note: An EFIN is not transferable; if you sell your businesses, the new owner must obtain their own EFIN. An EFIN identifies a tax practice location—in other words, there must be an EFIN application for each office location. If you expand your business to multiple locations, an application is required for each location where e-file transmissions will occur.
- Example: Michelle is a professional bookkeeper. She mainly does bookkeeping for small businesses but has never prepared tax returns for clients. She has always prepared her own returns and the tax returns for her family, but she has never charged them. This year, Michelle decides to start preparing tax returns for compensation. She needs to request an EFIN. Michelle first creates an IRS e-services account. Michelle is not an attorney, CPA, or enrolled agent, so she is required to provide fingerprints to the IRS. She makes an appointment to be fingerprinted through the IRS’ official provider. She must also go through a suitability check. About two months later, Michelle gets her acceptance letter from the IRS with her Electronic Filing Identification Number (EFIN).
- Example: Sadie is a tax preparer that has worked for an accounting firm for several years. She has an AFSP certificate and a PTIN but has never had her own EFIN because she has never had her own clients. In May, she sits for all three parts the EA exam and passes the exam. She submits Form 23 to the IRS and receives her EA license number and Treasury Card about eight weeks later. Sadie decides that she wants to pursue her own clients working from home part-time. She applies for an EFIN. Since she is already an enrolled agent, she will not have to be fingerprinted as part of the application process. A week after she submits her application, the IRS issues Sadie an EFIN. Now she has a PTIN, as well as an EFIN. She does some research on available software options, and on December 26, she purchases an affordable professional software suite. Now she can e-file returns from her home office during the next filing season, using her own EFIN and PTIN. She can also continue working for her employer, if she wishes.
4
Q
Electronic Return Originators (EROs)
A
- An ERO is an authorized IRS e-file provider who originates the electronic submission of tax returns to the IRS. Although EROs typically engage in tax return preparation, (most do), tax preparation is a distinct and separate activity from the electronic submission of tax returns to the IRS. An ERO may submit a taxpayer’s return only after the taxpayer has authorized the e-file transmission. The return must be either:
- Prepared by the ERO; or
- Collected from a taxpayer who has self-prepared his or her own return and is asking the ERO to e-file it for him or her.
- An ERO is required to:
- Timely submit returns.
- Submit any required supporting paper documents to the IRS.
- Provide a copy of the return to taxpayers.
- Retain records of each return filed and make those records available to the IRS.
- Work with the taxpayer to correct a rejected return.
- Enter the preparer’s identifying information (name, address, and PTIN).
- Be diligent in recognizing fraud and abuse, reporting it to the IRS and preventing it when possible.
- Cooperate with IRS investigations by making documents available to the IRS upon request.
5
Q
E-Signature Requirements
A
- Electronically filed returns have signature requirements, just as paper tax returns do. There are two methods of signing individual income tax returns with an electronic signature available for use by taxpayers. Both methods allow taxpayers to use a Personal Identification Number (PIN) to sign the return and the Declaration of Taxpayer.
- Self-Select PIN Method: The Self-Select PIN method requires taxpayers to provide their prior year Adjusted Gross Income (AGI) amount or prior year PIN for use by the IRS to authenticate the taxpayer’s signature. This method may be completely paperless if the taxpayers enter their own PINs directly into the electronic return record using keystrokes after reviewing the completed return. Taxpayers may also authorize EROs to enter PINs on their behalf, in which case the taxpayers must review and sign a completed signature authorization form after reviewing the return.
- Practitioner PIN Method: This method is the most commonly used method and does not require the taxpayer to provide their prior-year AGI amount or prior year PIN. Instead, taxpayers must sign a completed signature authorization form (Form 8879, IRS e-file Signature Authorization.)
- Form 8879 includes a taxpayer’s consent to electronic filing as well as a jurat.
6
Q
Electronic Signatures
A
- Practitioners who accept electronic signatures must take additional steps to authenticate the identity of the taxpayer. For in-person transactions, the preparer must inspect a valid government-issued picture ID, compare the picture to the applicant, and record the name, Social Security number, address, and date of birth. A credit check or other identity verification is optional.
- For remote transactions, the preparer must verify that the name, Social Security number, address, date of birth, and other personal information on record are consistent with the information provided through record checks with applicable agencies or institutions, or through credit bureaus or similar databases.
- The IRS has clarified that an electronic signature via remote transaction does NOT include handwritten signatures of Forms 8879 sent to the ERO by hand delivery, U.S. mail, private delivery service, fax, email, or an Internet website.
- Verification of a client’s identity must be done every year; if a preparer cannot verify identity after three attempts, he or she must obtain a handwritten signature instead of an electronic one.
7
Q
E-File Rejections
A
- If the IRS rejects an e-filed return and the preparer cannot rectify the reason for the rejection, the preparer must inform the taxpayer of the rejection within 24 hours.
- The preparer must provide the taxpayer with the IRS reject codes accompanied by an explanation. If the taxpayer chooses not to have the electronic return corrected and retransmitted to the IRS, or if the IRS cannot accept the return for processing, the taxpayer must file a paper return.
- The due dates for filing paper income tax returns also apply to electronic returns, however, if an e-filed return is rejected, the taxpayer does have time to rectify the problem.
8
Q
Perfection Periods
A
- The due dates for filing paper income tax returns also apply to electronic returns, however, if an e-filed return is rejected, the taxpayer does have some time to rectify the problem. This is officially called the “perfection period.” During the perfection period, the preparer can either correct the return and re-transmit it electronically or, they can paper-file the return.
- The Transmission Perfection Period: Sometimes, a taxpayer cannot correct the e-filed return to resubmit it electronically and is therefore forced to file a paper return. This happens most commonly in the case of identity theft. In order to timely file after an e-file rejection, the taxpayer must either correct the return and attempt to resubmit it electronically, or file the return on paper, by the later of:
- The due date of the tax return, or
- For business returns: ten calendar days after the date the IRS gives notification that it rejected the e-filed return. This is called the “ten-day transmission perfection period.” It is additional time the IRS gives a preparer and taxpayer to correct errors in the electronic filing and resubmit a tax return without a late filing penalty.
- For individual returns: five calendar days after the date the IRS gives notification that it rejected the e-filed return. This is called the “five-day transmission perfection period.” It is additional time the IRS gives a preparer and taxpayer to correct errors in the electronic filing and resubmit a tax return without a late filing penalty.
9
Q
Resubmitting Rejected Returns
A
- If a taxpayer is forced to file on paper after an e-file rejection, the following information must be included:
- An explanation of why the paper return is being filed after the due date
- A copy of the rejection notification
- A brief history of actions taken to correct the electronic return
- The taxpayer should write in red at the top of the first page of the paper return: “REJECTED ELECTRONIC RETURN-(DATE)”
- The date should be the date of the first e-file rejection. The paper return must be signed by the taxpayer. The PIN that was used on the rejected e-filing may not be used as the signature on the paper return. If an e-file submission is rejected, a return can be corrected within the ten-day (or 5 day) transmission period and not be subject to a late filing penalty, but this is not the case for a late payment penalty. If a return is rejected on the due date, an electronic payment should not be transmitted with the return, because a tax payment must still be submitted or postmarked by the due date.
- Rejected individual e-filed returns can be corrected and retransmitted without new signatures or authorizations if the changes do not differ from the amount on the original electronic return by more than $50 to “total income” or “AGI,” or more than $14 to “total tax,” “federal income tax withheld,” “refund,” or “amount you owe.”
10
Q
Paper Returns
A
- A taxpayer may choose to file a paper return that has been prepared by a paid preparer. A preparer is required to attach Form 8948, Preparer Explanation for Not Filing Electronically, to a client’s paper return.
- Some returns are impossible to e-file for various reasons and are therefore exempt from the e-file requirement. The following tax returns cannot be processed using IRS e-file:
- (Older) amended tax returns
- Individual tax returns with fiscal year tax periods (very rare)
- Returns containing forms or schedules that cannot be processed by IRS e-file
- Returns with rare or unusual processing conditions
- Estate tax returns (Form 706)
- Example: Charlie Hanover died on June 30. When Charlie died, he owned over $39 million in assets, so an estate tax return must be filed for his estate. The executor of Charlie Hanover’s estate hires an enrolled agent, Aletta, to file the estate tax return, (Form 706). Estate tax returns cannot be e-filed. Therefore, Aletta is required to paper file the estate tax return. This tax return is not subject to the e-file mandate. Aletta has no choice but to submit the return on paper.
- Example: Gregory files as head of household and claims his two daughters as dependents. He attempts to e-file his tax return on March 3. His e-filed return is rejected because one of his dependent’s SSN has already been used on another return. Gregory is widowed and there is no one else who can legally claim his daughters. He is forced to file his return on paper. He should also complete and file Form 14039, Identity Theft Affidavit and submit it with his paper tax return.
11
Q
Form W-2 Requirements for E-Filing
A
- An e-file provider is prohibited from submitting electronic returns prior to the receipt of all Forms W-2s from the taxpayer. A provider also cannot advertise that he or she can file a tax return using only pay stubs or earning statements.
- If the taxpayer cannot provide a Form W-2, the return may be filed using Form 4852, Substitute for Form W-2. This is the only time information from pay stubs or earnings statements is permitted.
- The taxpayer must first make an attempt to obtain all the necessary forms from the employer. Form 4852 should only be used as a last resort.
12
Q
E-File Advertising Standards
A
- Once accepted to participate in IRS e-file, a firm may represent itself as an “Authorized IRS e-file Provider.” A practitioner must not use improper or misleading advertising in relation to IRS e-file, including promising a time frame for refunds.
- Practitioners may not use the regular IRS logo (the eagle symbol) or IRS insignia in their advertising or imply any type of relationship with the IRS. They may use the IRS e-file logo but cannot combine the e-file logo with the IRS eagle symbol, the word “federal,” or with other words or symbols that might suggest a special relationship with the IRS.
- Advertising materials must not carry the FMS, IRS, or any other Treasury seals, but may use the IRS e-file logo. Use of any type of logo or insignia that copies of the IRS “eagle” logo is strictly prohibited.
- If an e-file provider uses radio, television, Internet, signage, or other methods of advertising, the practitioner must keep a copy and provide it to the IRS upon request if any fee information is included in the advertising.
- Copies of any advertising containing fee information or a fee schedule must be retained for a period of at least 36 months from the date of the last transmission or use.
13
Q
Data Security Plan
A
- Protecting taxpayer data is the law. Federal law now requires all tax preparers to create and implement a data security plan (also called a WISP, a Written Information Security Plan).
- Failure to do so may result in an investigation. Additionally, any failures that lead to an unauthorized disclosure may subject the preparer to penalties.
- A sample plan is available in IRS Publication 5708, Creating a Written Information Security Plan for your Tax & Accounting Practice.
14
Q
IP Pins
A
- As part of its crackdown on identity theft, the IRS is now allowing all taxpayers to request an identity protection personal identification number (IP PIN). An IP PIN is a six-digit number.
- The IP PIN will be provided on a CP01N Notice. If a spouse also has an IP PIN, only the person whose SSN appears first on the tax return needs to input his or her IP PIN.
- If the taxpayer loses their IP PIN and decides to submit a paper return, there will likely be a delay in processing, as the IRS will have to validate the taxpayer’s identity. The IP PIN is only valid for a single year.
15
Q
Identity Theft
A
- Identity theft occurs when someone uses another individual’s personally identifiable information, such as their name, Social Security number, or credit card number, without permission to commit fraud or other crimes. ID theft can also happen to business entities.
- Employment-related identity theft occurs when someone other than the valid owner of an SSN uses that SSN or other personal information for the purpose of obtaining employment.
- Fraudulent refunds have become a major issue, and identity theft is considered one of the biggest challenges facing the IRS.
- Safeguarding taxpayer data has become a top priority for the IRS.
- Example: Alan is the sole shareholder of a C corporation in the State of California. On January 25, he receives a notice from the IRS about a large refund for an amended return that had been filed for his corporation. Alan never filed or signed an amended return. He later discovers that his former bookkeeper, who had worked for him in the prior year, had filed the return and directed the refund to her home address, intending to illegally cash the check using stolen documents that she took from the business. Alan immediately contacts the IRS to report the fraud.
- Example: Sandra receives an IRS notice regarding her previous year’s tax return. The notice includes a proposed adjustment for unreported wages. The IRS notice includes a transcript for wages from a company in another state where Sandra has never lived or worked. Sandra is a victim of employment-related identity theft.
- Note: A tax practitioner must have a valid power of attorney (Form 2848) on file and authenticate the taxpayer’s identity before any IRS employee can provide the practitioner with any taxpayer information regarding a fraud issue.
