An individual with income below the appropriate filing threshold may still need to file a tax return to get a refund of federal income tax withheld, or to claim an Earned Income, Additional Child Tax, American Opportunity or other refundable Credit. And a person may also be required to file a federal income tax return to calculate and pay an additional federal tax or penalty other than income tax.
An individual or couple may engage a tax professional, such as me, to prepare the federal income tax return that he/she/they is/are required to file. While, as is the case with just about every situation where a person or company provides goods or services for compensation, the preparer has certain legal and ethical responsibilities regarding the preparation of the return, the tax pro is hired by the taxpayer to simply prepare the return.
My obligation as a paid tax preparer ends when I complete the return properly and, upon being paid, give the finished return to the client for signature and filing. The taxpayer client is responsible for filing the return. The client may choose not to file the return I have prepared, opting to get a “second opinion” from another preparer if not satisfied with my result, and may actually file a return prepared by another tax professional.
A taxpayer may decide to file his/her/their return electronically instead of mailing a paper return. In order to file electronically most taxpayers must use tax software (although the IRS does offer a Free File program through outside vendors for certain low-income taxpayers with simple returns). A professional tax preparer may have the capability, via the expensive tax preparation software package he/she uses, and by registering as an “Electronic Return Originator” (ERO), to submit returns electronically, and the taxpayer client may request that the tax pro submit the return he/she has prepared electronically as an additional service.
But the bottom line is that the requirement to file a return lies solely with the taxpayer. A professional tax preparer has absolutely no obligation to file a client’s tax return. If a required return is not filed, or filed late or incompletely, it is the taxpayer, not the tax preparer, who is responsible to and penalized by the Internal Revenue Service (although there may also be preparer penalties is part or all of the “incompleteness” is proven to be the fault of the preparer).
As a paid tax preparer the only federal income tax return that I am required to file (and the only return that I actually file) is my own!
What am I getting at here?
Congress passed a law, via an amendment to the Worker, Homeownership, and Business Assistance Act of 2009, that says. “The Secretary shall require that any individual income tax return prepared by a tax return preparer be filed on magnetic media if (i) such return is filed by such tax return preparer, and (ii) such tax return preparer is a specified tax return preparer for the calendar year during which such return is filed”. It goes on to say that, “For purposes of this paragraph, the term ‘specified tax return preparer’ means, with respect to any calendar year, any tax return preparer unless such preparer reasonably expects to file 10 or fewer individual income tax returns during such calendar year”.
The probable intent, and popular interpretation, of this law is that professional tax return preparers are required to submit all returns they have prepared electronically. Presumably if the return is not submitted electronically it is the preparer, and not the taxpayer, who will be penalized. This is wrong!
The text of the law states – “if (i) such return is filed by such tax preparer”. To reiterate what I discussed above, as a professional tax preparer I do not “file” any tax return other than my own. I “prepare” a tax return, and may, as a convenience for and at the request of the client, actually put the signed return in an envelope addressed to the IRS, seal and stamp it, and deposit the envelope in the outgoing mail slot at the Post Office. But the taxpayer client is the one who actually “files” the return. To be sure no “such return” is ever filed me, the “such tax preparer”.
So as I read this law, the requirement to electronically file a federal income tax return that has been prepared by a tax preparer falls on the taxpayer and not the tax preparer.
This is as it should be. If Congress wants federal income tax returns to be filed electronically then the responsibility to do so should fall on the individual whose responsibility it is to actually file the return – the taxpayer.
I certainly understand, and agree with. the reasons why Congress and the IRS, and the state tax authorities, want tax returns filed electronically. It is cheaper and more efficient to process returns that have been submitted electronically. I have no problem with submitting tax returns electronically, although some of my clients do not completely trust the process of electronically filing anything.
Prior to the passage of the federal law many states, New Jersey included, required resident paid tax preparers to file state income tax returns electronically. While I have not counted, I expect that I “submit on behalf of my clients” (I do not file) about 2/3 of my NJ returns electronically. I do it because I can do so free of charge directly on the NJ Division of Taxation website using the state’s NJWebFile system. The 1/3 that are still submitted via postal mail are done so because of the restrictions of the system (all NJ-1040s cannot be submitted via NJWebFile) or because the client specifically does not want me file electronically.
Filing NJ returns electronically, while certainly beneficial to the State of New Jersey, also has a benefit for the taxpayer. Only electronically submitted returns can request direct deposit of a refund – so the taxpayer gets his money quicker. There is really no additional benefit to the taxpayer for filing federal returns electronically, as refunds on paper-filed returns can request direct deposit.
I do not file federal income tax returns electronically because I do not use expensive and flawed tax preparation software to prepare returns. I prepare all my federal income tax returns manually – always have and always will. Tax return software is really the only option for submitting returns directly to the IRS electronically. The current “traditional” FreeFile program offered by the IRS, which I pointed out is extremely limited, and an apparently very flawed “Free File Fillable Forms” option, use outside vendors to submit the return.
If the IRS offered a system for electronically submitting federal returns equal to the NJWebFile system I would gladly, as a convenience for my clients, “submit on their behalf” finished 1040s and 1040As electronically, unless they specifically chose to “opt-out” as they apparently will be permitted to do.
Many states, again NJ included, now require that all business filings and returns be done electronically. The only way to submit these filings and returns, and applicable payments, is online. There are no longer any more paper, for example, WR-30s, NJ-927s, NJ-500s, or ST-50s or 51s. And these states provide a free way to directly submit all filings and payments online. The business is not required by the state to purchase potentially flawed and expensive commercial software.
In these cases the requirement is placed on the individual business owner, and not on the outside accountant or tax professional for the business. As it should be. I gladly “submit” the payroll and sales tax filings and payments for my few remaining business clients via the NJ Division of Taxation website as a service.
So I believe that, as the law is written, I am not required to submit the 2010, and subsequent, federal income tax returns that I prepare for clients electronically.
I am very sincerely interested in the comments of my fellow tax professionals, and especially my fellow tax bloggers (are you listening Annette, Kay, Kelly, Mary, Trish, Bruce, Dan, Jim, both Joes, Russ, etc?) on this post. You can respond “on the record” by submitting a comment, or “off the record” by email to email@example.com.