Friday, June 25, 2010


Since writing to IRS Commissioner Shulman about the tax preparer e-filing mandate (see yesterday’s post DEAR COMMISSIONER SHULMAN) I have been giving the topic a great deal of thought – and I decided to share some of my thinking with you.

The requirement for filing an income tax return falls on the individual taxpayer. A person, or couple, with income that exceeds a certain threshold is required to file an income tax return.

An individual, or again couple, that is required to file an income tax return may decide to use the services of a professional tax preparer, like myself. They are hiring the preparer not to actually file the return, but to prepare the required return(s) based on the information they provide. I will prepare the return, manually in my case, and give it to the taxpayer(s), who then must sign and either mail it, or file it electronically through a service.

As a professional tax preparer, I have no obligation to assure that the return I have prepared is filed, or that any return is filed. I work for the taxpayer and not the Internal Revenue Service. I prepare an income tax return, federal and/or state, and give it to the taxpayer(s). It is then the responsibility of the taxpayer(s) to submit the return, with any necessary payment, to the Internal Revenue Service and/or the appropriate State tax authority.

So why is the requirement to transmit the tax return electronically placed upon the professional tax preparer and not the individual taxpayer?

It is true that in most cases the tax preparer will use tax return software to complete the return, and included in the software is the ability to electronically transmit the return to the IRS and state agency. And in most cases the taxpayer(s) will request or permit the tax professional to do so.

The State of New Jersey (and, I believe, other states as well) wants all sales tax and state payroll tax returns submitted electronically, so it requires it to be so. A business can no longer submit a paper ST-50 (sales tax return) or a paper NJ-927 (payroll tax return). All sales and payroll tax returns must be submitted electronically.

New Jersey does not say that all accountants, bookkeepers or tax professionals are required to submit the sales and payroll tax returns of their business clients electronically. It says that all applicable taxpayers (in this case the taxpayer is a business) must do so.

I have no problem, upon their request, submitting the sales and payroll tax returns for my few remaining business clients, returns that I had previously done by hand, online – and do so gladly. This is because I can submit these returns free of charge very easily via the NJ Division of Taxation website. And so can the business owner himself/herself, or an officer or employee of the business.

New Jersey does not require the business, or I, to purchase an expensive, otherwise unnecessary, and flawed software package, with annual updates, in order to file the required forms electronically.

Because the State requires it to be done electronically the State provides a way to do so that is free and easy. And because of that there is compliance.

Now I suppose if a business owner’s legitimate religion forbid him/her from transmitting information electronically, or if he/she had a legitimate mental disability or infirmity that caused him/her to fear electronic transmittal, or if a business owner was very seriously afraid of or opposed to transmitting data electronically the State of NJ may, after carefully reviewing the specific facts and circumstances, permit a manual return to be filed – but I cannot say for sure.

Congress, and the IRS, wants all Americans to file federal income tax returns electronically. Yet it places the requirement upon the return preparer and not the taxpayer.

And, currently, while the IRS has experimented with limited-availability “free-file” scenarios, it first requires tax preparers to apply, and be accepted, as an “Electronic Return Originator” (ERO) and to purchase expensive and flawed tax preparation software in order to transmit 1040s (and 1040As) electronically.

If Congress, and the IRS, wants all federal individual income tax returns submitted electronically then why does it not require all taxpayers to so do, as New Jersey does with sales and payroll tax returns.

I do not believe that Congress can do that yet. There are still many individuals who have serious and legitimate concerns, justified by reality or not, about the security of electronically transmitted information of such a private and personal nature.

What Congress should do is to is strongly request that all Americans file their 1040s and 1040As electronically, and assure the public that doing so is perfectly safe and secure (or as safe and secure as humanly possible). Those who do not wish to do so must attach a signed statement to the manually submitted return.

And Congress must allow all taxpayers, and their tax professionals, to submit all 1040s and 1040As free of charge directly to the IRS, without need for a middle-man or 3rd-party contractor as is the case with the “free-file” program and without special software, via the IRS website.

The State of New Jersey does exactly that with its NJWebFile program (although NJWebFile is not available for all NJ-1040s due to system deficiencies). And NJ offers an additional incentive to use NJWebFile. Manually submitted returns cannot request direct deposit of any refunds – but one can do so if the return is filed using NJWebFile. Even when direct deposit is not requested taxpayers receive refund checks quicker if the return is submitted via NJWebFile.

Congress should follow NJ’s lead, for a change (not something that I would normally recommend), and provide electronic filers with some kind of incentive – not a punishment for filing manually but a premium for filing electronically. Perhaps a $25.00 ($50.00 married filing joint) tax credit.

Why does Congress place the requirement upon the tax preparer and not the taxpayer? Because it is easier to do so, and because they can. Neither are legitimate reasons!

I will only file federal income tax returns electronically if I can do so free, and fairly easy, via the IRS website.

So – what do you think?



Trish said...

I will only file federal income tax returns electronically if I can do so free, and fairly easy, via the IRS website.
Robert, I am sorry to read you are planning on retiring.
Mandatory e-filing is coming. The IRS might slow down the timetable but it won’t be stopped. And with everything else happening, I don’t expect to see the IRS come up with their own online filing system anytime soon.
The mandate targets the preparer and not the taxpayer because it’s the preparer that is the hold up. Presented with the advantages of e-filing, I have found few clients who still insist on paper filing. How many of your clients would like the added convenience of e-filing but stick with you because they trust your work? Are there any who take the return you prepare and go to a 3rd party for filing electronically? Like doctors, it hard to change a tax preparer unless there is a big problem. If they like you, they will handle a little in inconvenience over the unknown of changing preparers.
As for the software issue, I am sure all tax software has flaws but so do all tax preparers. No matter which package you choose, you will disagree with how they handle some issues. Just as you and I can disagree about the interpretation of a tax rule. The key is finding the software that is the best fit to you and to check the returns it produces. My software generates the return; I prepare it, sign it and stand behind the results. If I can’t do that, I’ll find a new software vendor.
Robert, I can’t imagine dealing with all the changes you will have to in the next few months (e-filling mandate and tax preparer registration/testing). You can say “No!” it’s not worth it and give up a job you like. Or you can the make changes. Think of all the blog posts the transitions will generate. Good luck!

Bruce said...

Interesting my friend.

Sadly I have been wonder the same things that Trish has mentioned here. You cannot stop the mandate. I do fore see there will be an “opt out” for the individual taxpayer but not for the tax preparer. We will be required to at least offer it. I say at least because although the odds are against it, I could see all of your clients actually opting out of the e-file mandate.

I am not sure where you are in your efforts to retire but I feel confident that the IRS is on a much quicker pace than you might be.

I would agree with Trish, that no matter what software you obtain (if you do) I am happy with three that are still available. (There was another at one point but Inuit bought it many years ago.) The truly nice thing is if the software doesn’t act accordingly or does something you don’t like there is usually away to over ride its calculations. So, in your case, you would merely need to re-input you calculations. That’s what I do.

I hope there is some way to get you to change your mind as I can assure you as Trish has, the change is coming, and in order to stay afloat, we’ll need to change as well.