PRACTICE SAFE EFILING
by Jay Starkman, CPA
Since 2012, efiling generally has been mandatory for tax preparers or firms that anticipate filing 11 or more federal individualor trust returns in a calendar year. However, efiling presents a variety of dangers and unintended consequences not present with paper filing. Here are tips to make efiling as safe and painless as possible:
Tax returns should be transmitted to clients only via secure fax, encrypted email, or secure portals. Many practitioners violate the Gramm-Leach-Bliley Act by sending unencrypted personally identifiable client information via unencrypted email (see Transferring Client Data Securely, The Tax Adviser, Dec. 2012, page 842).
Exercise extreme caution when inputting the taxpayers refund routing number. The IRS position is that the refund was paid according to instructions it received. Unless the bank returns the erroneously transferred funds to the IRS or corrects the error internally and transfers the funds to the taxpayer, the taxpayers sole recourse is a lawsuit against the return preparer. With a paper check, the IRS would issue a replacement check once it verified that the original refund check was lost or stolen and therefore uncashed by the taxpayer.
Take similar care with Electronic Federal Tax Payment System account information for a tax payment via an automated clearing house (ACH) debit. In addition to other costs, a new 2% Section 6657 penalty applies to a bounced ACH debit payment, along with potential legal liability for the preparer.
Make sure a return efiled on April 15 and rejected with error codes is corrected within the requisite five days. Otherwise, it is treated as an unfiled return. Some practitioners file an extension request on all efiled returns for which a no-error-code confirmation has not been received by April 15. For an efiled return with error codes that cannot be corrected, the IRS generally allows a 10-day grace period for a paper return. If you file on paper, be sure to include Form 8948, Preparer Explanation for Not Filing Electronically. If the taxpayer requests paper filing, the preparer must document the request, following Rev. Proc. 2011-25.
To protect the confidentiality of the electronic filing identification number (EFIN), a preparer that is an electronic return originator should not include the EFIN on the copy of Form 8879, IRS e-file Signature Authorization, submitted to the client. Rev. Rul. 78-317, issued to safeguard preparer social security numbers in a prior era, says, "a tax return preparer is not required to sign or affix an identification number to the taxpayer's copy of the federal income tax return," and can probably relied on to safeguard PTIN and EFIN numbers. Unfortunately, most tax preparation software provides no means for a preparer to mask these on From 8879.
File a multiyear Form 2848, Power of Attorney and Declaration of Representative. This will help to protect your client when someone has fraudulently changed the clients physical address. If this occurs and the IRS has a valid power of attorney on file, you will also receive notices the IRS tries to send your client.
If a client has become a victim of identity theft, help make a referral to the IRS Identity Protection Specialized Unit or the Taxpayer Advocate Service. It can take over a year to resolve a case. Also, in cases of identity theft, taxpayers should consider filing Form 14039, Identity Theft Affidavit, for additional return screening or an identity protection PIN.
Obtain an efiling PIN to proactively protect yourself or a client from identity theft. Request an Electronic Filing PIN at www.irs.gov as soon as it becomes available in early January. The link is prominent on the main IRS web page. You won't be able to efile without the PIN that IRS assigns and neither will an ID thief. If you lose the PIN, you will need to obtain a replacement in order to efile (but not to file on paper) which IRS will supply by mail.
Be aware that efiling makes targeted audits easier. The annual IRS Publication 17, Your Federal Income Tax, Table 1-4, Benefits of IRS e-file for the years 2003 - 2007, announced, The chance of being audited does not differ whether you efile or file a paper tax return. This announcement was dropped from Table 1-4 in the 2008 and subsequent Publication 17s. Congress says efiling allows the IRS to target returns with audit potential (Report JCS-1-08), and the IRS estimated four years ago that if [paper return] screeners could be reallocated to performing audits, they could bring [in] an additional $175 million annually (Government Accountability Office, Rept No. GAO-08-38).
Jay Starkman is a sole practitioner in Atlanta. He is the author of the book The Sex of a Hippopotamus: A Unique History of Taxes and Accounting. A version of this article was originally published in The Journal of Accountancy, January 2013. ©2013 American Institute of Certified Public Accountants.