THIS JUST IN - GOOD NEWS FROM NEW JERSEY!

Miracles can happen!

 

I found the following good news on the New Jersey Division of Taxation website - almost as if it were a response to the comment I made in this morning's earlier post about the NJ-NATP Famous State Tax Seminar (highlights are mine) -

 

“NJ will continue to accept paper corporate business tax returns for the current filing year; however, all corporate payments are required to be submitted electronically.

We are in the process of developing a free filing option for corporate business tax returns so corporations can meet the efile requirement without additional cost. When free file becomes available, the mandate requiring all taxpayers and tax preparers to submit corporate business tax returns and payments electronically, will apply to all corporate taxpayers.”

My clients already gladly make all NJ state payments online - so that is not a problem. 

 

For the first time I can remember I am actually impressed by the NJ Division of Taxation!

COMMENTING ON A COMMENT

Before leaving for the shore I received a comment from NY TAXPAYER on the following statement I made in my post on NYS Developments -   

"If a taxpayer wants to take a risky chance and prepare his/her own state tax return using software, I expect that the ability to submit the return electronically is included in the package at no additional cost. So why not submit the return electronically?"

Here is what NY TAXPAYER had to say -

“Here is one reason why a taxpayer might be willing to use software to prepare his tax return, but might NOT be willing to efile it.

He would like to file a neat typed return that is easy for the state to process, but would like to limit access to the information on his return so that ONLY federal and state tax authorities see it, and does not want his financial information passing through the hands of a commercial intermediary.

Not everyone has terrific handwriting like you do, RDF.

Using software creates a neatly typed tax return with OCR-readable characters in the proper boxes.

Furthermore, although tax software is flawed and capable of making mistakes, self-prepared returns are also full of mistakes. For many taxpayers, the best approach is a combination of the two--with careful manual cross-checking of the software, and/or using several different software programs to cross-check the calculations.

In addition, NYS used to provide tax software publishers with the ability to create 2-D barcoded version of tax returns which were very cheap to process via OCR-readers. I assume that capability will go the way of the dinosaur in the light of the new law.

However, the fact that a taxpayer is willing to use software to assist in preparing his return does not necessarily mean that he is willing to share his family's sensitive financial data with the software company.

Efiling a return does not mean sending it directly to the IRS. It has to go through an intermediary. That means that Intuit, H&R Block, or some other commercial intermediary gets access to a huge treasure-trove of sensitive financial information (names, SSNs, bank account and routing numbers, amounts of different types of income, etc.)

A taxpayer who purchases a downloaded version of tax software to use on his own machine to assist in preparing his tax return does not have to share any information with the software company UNLESS he efiles the return, in which case all information passes through the software company.

So the new NYS tax law forces taxpayers who would prefer not to share their information with a third-party software company to handwrite their own tax returns. This is likely to add transcription errors to the process for those taxpayers who decide to handwrite their tax returns.

I understand that filing a paper return does cost the state a little bit more to process (but probably not all that much, given the 2-D barcode) and I believe some taxpayers would be willing to pay a small fee to cover that cost in exchange for the privilege of keeping their financial information out of the hands of software companies. (Such taxpayers already pay a significant amount to the Post Office, which surely helps with their mounting deficit problems.)”

I agree with NY TAXPAYER when he says –

“. . . the fact that a taxpayer is willing to use software to assist in preparing his return does not necessarily mean that he is willing to share his family's sensitive financial data with the software company.”

And I certainly sympathize with a taxpayer, regardless of state of residence, who would “like to limit access to the information on his return so that ONLY federal and state tax authorities see it, and does not want his financial information passing through the hands of a commercial intermediary”.

I have never used commercial tax preparation software to either prepare a federal or state tax return or to “e-file” any such returns.  I have no first-hand experience or knowledge to verify that –

“E-filing a return does not mean sending it directly to the IRS. It has to go through an intermediary. That means that Intuit, H&R Block, or some other commercial intermediary gets access to a huge treasure-trove of sensitive financial information (names, SSNs, bank account and routing numbers, amounts of different types of income, etc.)

A taxpayer who purchases a downloaded version of tax software to use on his own machine to assist in preparing his tax return does not have to share any information with the software company UNLESS he e-files the return, in which case all information passes through the software company.”

However, I certainly would not want to benefit Henry and Richard or any other commercial entity by providing them with personal information that will be used for marketing or any other purpose.  If NY TAXPAYER is correct this is another reason not to use commercial tax preparation software.

As I have often publicly stated in the past, when possible, and when the client agrees, I will electronically submit NJ state income tax returns via the State’s NJWebFile system.  There is no additional “out of pocket” cost to use NJWebFile.  It is my assumption (hopefully I am not making an “ass” out of “u” and “me”) that because this is done through an extension of the NJ Division of Taxation website the data is going directly to Trenton and not filtered through any commercial software processor. 

I have also said I would submit federal returns electronically, again of the client agrees, if I could similarly transmit the information directly to “Sam” via the IRS website free of charge.

As an aside, one thing I have noticed with NJWebFile is that printing out the completed return wastes more than twice as much paper as photocopying a manual NJ-1040.  Copies of software generated federal returns show to me by clients also included a lot of wasted paper.

The bottom line – a New York taxpayer, or one from any other state for that matter, should not use a flawed and expensive tax preparation software package to self-prepare his/her federal or state tax returns.  No one can dispute that a “box” is a proper substitute for actual knowledge of the Tax Code. 

If a taxpayer wants to submit “a neat typed return that is easy for the state to process” (I agree not everyone has the flawless handwriting that I do - I have seen some horrible handwriting on tax returns in the past) he/she can first prepare the return manually with a pencil and then triple-check the return. The next step it to type in the numbers from the “penciled” return onto the appropriate lines on the blank forms available at the state tax agency website, and print-out the return.  The IRS and most states offer “fill-in” pdf-format version tax forms on their websites – and one could use these forms as a sort of a “word-processor”.

The best idea is to use a professional paid preparer who has registered with the IRS and received a PTIN.  If the taxpayer does not want to submit the return electronically because of concerns about potential abuse by commercial software companies, he/she can take the finished returns from the tax pro and mail them to Uncles “Sam” and “Andy” (or whoever).

If NY TAXPAYER is correct when he says that using tax preparation software to e-file returns provides the commercial software company with access to personal taxpayer information - then I will change my mind and strongly object to New York’s new e-file mandate for self-prepared returns where software is used.

So what do you have to say?  I look forward to receiving comments on my above comments on a comment.

TTFN

I AM NOT AN ERO!

Tax season officially (for me) begins next week. FYI, I have not registered as an ERO (Electronic Return Originator), and I do not intend to submit any 2010 Form 1040s (or 1040As) electronically this tax season, regardless of the new “mandate”.

I have listed below the reasons why I am “exempt” from the mandate. Obviously item #6 is the most important.

(1) I do not object to electronically submitting federal or state income tax returns to the IRS or state tax authorities. I acknowledge and sympathize with the Internal Revenue Service’s desire to have returns submitted electronically. I also acknowledge that submitting returns directly to the IRS electronically reduces the potential for error by eliminating the “middle-man” step of having someone transcribe a written 1040 into the IRS software system. I would gladly submit, on my client’s behalf and if they do not choose to “opt-out” based on personal preferences, the federal income tax returns I prepare electronically if I could. I currently, whenever possible, and when not specifically told not to by my client, submit full-year resident NJ-1040 state income tax returns electronically directly to New Jersey via the NJWebFile system available at the website of the New Jersey Division of Taxation

(2) I have been preparing 1040s for a fee since February of 1972. During the past almost 39 years I have never used flawed and expensive tax preparation software to prepare a federal income or payroll tax return, and I have no intention of unnecessarily incurring substantial expense to purchase such flawed tax preparation software.

(3) The very minor advantages to me that tax preparation software might provide does not justify the additional substantial expense. On average, I would not save any time by using tax preparation software instead of preparing the returns manually. The resulting 1040 or 1040A would be no more accurate, as the finished return would need to be subject to the same checking and verification process as a manually prepared return. Using tax preparation software would substantially waste paper and printer ink, adding to the cost of purchase and annual update. I find that with the NJWebFile system I use at least twice as much paper, and ink, in printing out copies of the submitted return than when prepared manually.

(4) The only way I can currently, properly, and efficiently submit completed federal income tax returns directly to the Internal Revenue Service is by using flawed and expensive tax preparation software. As I do not use tax preparation software I therefore cannot submit my returns to the IRS electronically.

(5) Several states that mandate e-filing currently exempt preparers who do not use tax preparation software.

(6) I do not “file” my clients’ income tax returns. I prepare the return manually and give/send the finished returns to the client, with a non-stamped addressed envelope, and the client(s) sign(s) the return and mails it directly to the IRS themselves. For purposes of §6011(e)(3) and these regulations only, an individual income tax return is considered to be "filed" by a tax return preparer or a specified tax return preparer if the preparer submits the tax return to the IRS on the taxpayer’s behalf, either electronically (by e-file or other magnetic media) or in non-electronic or non-magnetic media (paper) form. Submission of an individual income tax return by a tax return preparer or a specified tax return preparer in non-electronic form includes the direct or indirect transmission, sending, mailing or otherwise delivering of the paper tax return to the IRS by the preparer, any member, employee, or agent of the preparer, or any member, employee, or agent of the preparer's firm, and includes any act or acts of assistance beyond providing filing or delivery instructions to the taxpayer. If the preparer files no returns whatsoever on the client’s behalf, the preparer would never meet the definition of a specified tax return preparer. I file no returns whatsoever on the client’s behalf, so I do not meet the definition of a specified tax return preparer under the regulations for the e-file mandate.

So – does anyone have any comments?

I AM RIGHT - BUT A LOT OF GOOD IT WILL DO ME!

As requested, I received many comments on my post “The New E-File Mandate” from fellow taxpros and tax bloggers.

Joe Kristan was the first to weigh in on the subject in his post “A Line in the New Jersey Sand” at the ROTH AND COMPANY TAX UPDATE BLOG.

“I think Robert is right as a policy matter, and the IRS shouldn't require e-filing unless it provides a reliable and cheap mechanism for it. As a practical matter, though, I think Robert will lose this battle. The IRS is bent on forcing through more e-filing, and they are bigger than he is.”

Russ Fox, an EA from California, discusses my opinion in the post “It Depends on What the Meaning of the Word ‘Is’ Is” (referring to Slick Willy) at TAXABLE TALK.

“Technically, he’s likely correct that he does not have to file returns electronically.”

However Russ feels, and I agree, that it would be expensive for me to prove I am correct in court – which I have no intention of doing.

Peter Reilly, author of the blog PASSIVE ACTIVITIES AND OTHER OXYMORONS, submitted the following comment at TWTP –

“Interesting problem. I appreciate your distinction between preparing and filing. I'm worried it may be lost on Congress though. The Committee report says:

Explanation of Provision

The provision generally maintains the current rule that regulations may not require any person to file electronically unless the person files at least 250 tax returns during the calendar year. However, the proposal provides an exception to this rule and mandates that the Secretary require electronic filing by specified tax return preparers. ‘Specified tax return preparers’ are all return preparers except those who neither prepare nor reasonably expect to prepare ten or more individual income tax returns in a calendar year. The term ‘individual income tax return’ is defined to include returns for estates and trusts as well as individuals.”

Professor Mary O’Keefe, of BED BUFFALOES IN YOUR TAX CODE, also submitted a comment-

“I agree with Riles. You make an important distinction between preparing and filing.

(The confusing reference to who is "filing" the return reminds me of the word play in Shakespeare's Much Ado About Nothing in the interchange with the friar about who is "marrying" who. Does the friar marry the bridge and groom or do they marry one another.)

The legal usage of the term "filing" to refer to what the preparer does when he submits a return on behalf of a taxpayer does appear to require more clarification.”

Enrolled Agent Elizabeth R commented -

“You do make an interesting distinction in your post. I wonder, do you plan to have all your clients sign the electronic filing opt out that is supposed to be available?”

The answer is yes, if I cannot receive an exemption from the IRS. Or look for an E-Filing service that will submit all my returns electronically for a small fee, passed along very vocally to the client.

Bruce MacFarland, aka the MISSOURI TAX GUY, also submits a comment agreeing with me-

“Your interpretation of the wording of this new requirement is just and in my own mind sound.”

However he also agrees with our colleagues concerning practicality-

“Sadly, my friend, ‘playing the game’ is just what you will have to do.”

He suggests an alternative to an E-File mandate-

“Hey, Mr. Congress person and IRS man. Instead of going at it the way you are why not try mandating ERO status, thus prepares being able to offer E-file but leaving the choice up to the individual taxpayer.”

Bruce also comments on my manual preference-

“I agree on certain fronts it {tax preparation software – rdf} is ‘potentially flawed and expensive’, however there is software out there that is inexpensive and would suit your needs and allow you to comply with the new coming rules. You would basically prepare your clients returns by hand has you always have, then type your numbers into your software and transmit.”

In such a situation software would not reduce the time it took me to prepare a return but increase it by adding an additional unnecessary step to the process.

A word to Bruce – my 50th tax season is 10 1/3 years away and not 1. I am not that old yet!

Hal Leahy, an Enrolled Agent from Florida, provided a history of the mandate to show –

“There is a very good case to be made that by Congressional intent – ‘file’ includes ‘prepare’.”

Please take the time, at your leisure, to read through all of the comments submitted to my post in full.

A fellow member of the National Association of Tax Professionals had the following to say about my post over at the Association’s Member2Member site –

“If you are still preparing returns manually, I don't believe you will be required to submit them electronically. I believe there will be an exception for non-computer produced returns.

Most states requiring e-file have taxpayer 'opt out' forms. The taxpayer just gives a good excuse. Right now my excuse for all California returns is "preparer not set up to EF California returns." Maybe you can come up with a 'conscientious objector' status for all of your clients.”

I hope he is right about an automatic exception for non-computer produced returns.

My sincere thanks to my fellow tax pros who have provided me with their thoughts on the issue. As always I value your opinions. And I apologize for leaving Monica, Stacie and Michael out of my blogroll call for comments – I would love to hear your opinions.

The consensus seems to be that what I have said in my post is right. I am technically correct in my interpretation of the law as written – but that this doesn’t matter in the long run.

The bottom line is simple. It is obvious that, regardless of how the law was worded, it was the intent of Congress to force tax preparers to submit their clients’ returns electronically.

The IRS would not be able to enforce an e-file mandate placed where it should be placed – on the individual taxpayer. So it tries to get its way by aiming the mandate where it can be enforced – on the tax preparer. They require that we submit our returns electronically because they can. The IRS has the taxpro by the balls – it a preparer does not comply the IRS can fine him/her and, with the new regulation regime, threaten to take away his/her PTIN.

To be honest, most tax preparers do use tax preparation software, no matter how expensive and flawed, and can very easily submit the completed return electronically at no, or minor, additional cost. I expect that most taxpros using software already do submit as many of their returns as possible this way.

But I don’t – and therefore I can’t. I hope the IRS exempts from the requirement those few of us left who still do it the old-fashioned way.

TTFN

THE NEW E-FILE MANDATE

Every US citizen and resident is required to file a federal income tax return, regardless of age (a subject for another post), if the individual/couple has gross non-exempt income in excess of a certain threshold, based on the individual’s, or married couple’s, filing status and situation.

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 rdftaxpro@yahoo.com.

TTFN

WORDS FROM THE WISE

I have always said that blog post COMMENTS often get “lost in the shuffle”. Individuals who read a post do not always read through the comments. And, as comments are posted after the fact, sometimes days later, readers do not usually go back to see subsequent comments, unless they have posted one themselves or are keenly interested in the topic.

I received several responses to my posts on the e-file mandate for paid tax preparers – via Comment, email, posts by fellow tax bloggers, and “tweets”.

+ Paul C. Cinquemani, the National Association of Tax Professionals’ government affairs man, and I exchanged several emails on the subject. Here is what Paul had to say-

“I really haven’t heard anything at all about the IRS providing free online filing to tax preparers who are now required to do so under the “mandate.” I’ve heard a whole heckuva lot about free online filing for taxpayers though!

My guidance on e-filing would be to learn how…seriously. Feedback is that it’s easy and efficient, saving preparers lots of time and expediting processing for clients. I know some preparers are going to have clients fill out “opt out” forms. Some are going to just prepare returns and give them to their clients to file. In either case, documentation is mandatory for your safety in showing good faith. The IRS will have your PTIN number and will quite probably ask why returns were not e-filed. We’ve asked about the “opt out” provision as regards the mandate, and we’ve not received any answers. We do know that the IRS will take a dim view of it. It wouldn’t surprise me to learn that the IRS will likely investigate it. They are very determined to get returns electronically.

We’ll just have to wait and see where that goes. We will continue to press for an answer. We are not alone. Many organizations have the exact same question.”

+ Among those who submitted comments on the posts was TAX MAMA Eva Rosenberg – a well-respected long-time member of the “Tax Blogosphere”, who offers “Tax Information With A Mother’s Touch”.

Eva assured me that tax software was not all that expensive and would not substantially increase my per-return costs.

She also stated –

“The fact is, using professional tax software reduces your errors. It saves you time over preparing returns by hand - changes can be made to all relevant forms at one time, without lots of erasures. They include tools and calculators to quickly help you test scenarios - like MFS vs MFJ. The time it saves you more than makes up for the extra $10 per client - and gives you more time to take on more clients.”

(1) Tax preparation software will not reduce errors. In theory it will limit math and carryforward errors, but that is not always true. It has the potential to create different kinds of errors. One must do a thorough check of a return that the computer spits out in the exact same manner as one would with a manually prepared return.

(2) Tax preparation software will not save me time over preparing returns by hand. Over the years I have developed a certain style and rhythm so that I can prepare manual returns quickly without sacrificing accuracy.

Decades ago when I worked for one of the then ‘big-8” accounting firms we would use Computax to prepare returns. I would fill out an input sheet which would he given to a data entry clerk. At the time I felt that by the time I finished preparing the input sheet I could have completed the manual return.

(3) I do agree that tax preparation software does save time in terms of “rewrites”. If an error on one or two lines is discovered the correction can be made quickly without having to rewrite the entire return. And software applications can make it easier to review different scenarios. However I find that I can compare filing jointly to filing separately quickly by hand using a worksheet I have developed.

There are disadvantages of tax preparation software.

At every single continuing education workshop I attend either the instructor or a participant will say – “Your software will not, or cannot, do this properly – so you will have to ‘force’ the answer”.

Tax preparation software generates mountains of unnecessary subsidiary and auxiliary print-outs (as does the NJWebFile system as well). It wastes tons of paper.

+ Another well-respected member of the tax blogging community, and practicing tax professional, Trish McIntire of OUR TAXING TIMES posted this comment –

“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!”

Not to worry, Trish. I don’t plan to retire until I can say I have prepared taxes for 50 years (or unless I win big in the lottery – which I do not play – or at Atlantic City). Besides, my clients would let me retire yet! Once you’ve had Flach you never go back.

I do not believe that it is the tax preparer that is holding up the progress of electronic filing. I believe the only reason so many returns are currently filed electronically is because of tax professionals. Many individuals are wary of electronic transmittal of private and personal information.

None of my clients, past or present, have ever balked about my not filing returns electronically. A couple of newer ones, usually the finally grown children of existing clients, have asked if I do – but have not shown concern when I tell them I cannot. I do not know if any client who has taken my completed manual return to an e-file “service”.

The only advantage to the taxpayer for filing NJ state returns electronically is that they can get their refund quicker. Many of my clients, at my strong suggestion, elect direct deposit, which is available on paper returns. And still, many of my clients still prefer to get a check in the mail.

Why must I be forced to turn to a software package when the “best fit” is my brain?

I look forward to registration and licensure, and have been a vocal advocate for registration and licensure during the entire decision-making process – although I still strongly disagree with no grandfathering and with exempting CPAs and attorneys from testing and CPE. Licensure and registration will certainly not be giving me any changes with which to deal.

And if the IRS does not “do the right thing” I will simply have to find a bulk e-file service provider and charge my clients the extra $10 or so it will cost to have the return transmitted electronically by this service, loudly blaming Congress for the imposition of the additional fee.

+ Echoing Trish’s comments was Bruce, the MISSOURI TAX GUY, another practicing pro and blogger, whose help I have called upon in the past.

“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.”

Hey, guys, I know full well that I cannot personally OPT OUT as a tax preparer. Only the client can OPT OUT.

If I cannot find a way to comply that does not involve purchasing flawed tax preparation software I would ask all of my clients to do so.

The NJ OPT OUT form has an optional line where the taxpayer can explain, if they wish, why he/she is opting out. If a similar option appeared on the federal form my clients would all write –

“The IRS does not provide a free way for my tax preparer to directly submit returns online at its website. I do not want to increase my preparer’s expenses, and ultimately my fee, by forcing him to purchase flawed tax preparation software.”

+ Joe Kristan told me like it was in a post on my letter to Shulman -

“Remember, Robert, it's for their convenience, not yours or your clients, and they are bigger. That's all they care about.”

+ Elizabeth Rue (@Eligabiff) of Personal Financial Services in Indiana “tweeted” me the following -

“I suspect if you had to file your returns in Fresno CA you would change your mind on e-filing! They have incorrectly processed & seriously delayed processing almost EVERY paper return we submitted this year.”

While I have obviously had to deal with lots of IRS FU’s over the years (and what tax pro hasn’t) I have not found excessive incorrect or delayed processing with my manual returns. But then I don’t send my returns to Fresno.

Thanks to all of the above for taking the time to provide their more than 2 cents on the subject. I always welcome comments from my colleagues “in the trenches”.

Let me end with some more of my own rambling thoughts on the subject -

Tax preparation software appeared long before the ability to submit returns electronically. I remember seeing computer-generated returns as early as the late 1970s. Tax professionals elected to use such software because they believed that doing so would benefit their individual practice. Others, like my mentor and myself, chose not to use tax preparation software, because they saw no substantial benefit to their practice.

When electronic transmittal of tax information to the IRS became available, software companies incorporated this into their tax preparation products. Specialized software was needed to accomplish the transmittal.

If tax return preparers will be required to submit 1040s electronically, the requirement should only apply to those preparers who have the ability to do so. If you currently use tax preparation software and therefore have the ability to transmit the resulting tax return electronically you should be required to do so, unless the client specifically forbids you.

But what of the tax preparer who does not currently have the ability to submit returns electronically. Why must they incur the burden of paying for the ability?

If the government wants something done in a certain way – the only purpose of which is for the convenience of the government (and not for public safety or protection) they should make it as easy and inexpensive as possible to comply. They should not force otherwise unnecessary and excessive costs on those who are required to comply.

TTFN

SHOULD TAX PREPARERS BE REQUIRED TO FILE THEIR CLIENTS’ RETURNS ELECTRONICALLY?

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?

TTFN

MANUAL LABOR

A manually prepared tax return is not automatically inferior to or less accurate than a tax return prepared using software. Just the opposite can be true. The basic law of software applies here - Garbage In, Garbage Out. Individuals and tax preparers alike should not rely on tax software as a substitute for knowledge of Tax Law and experience in actually preparing tax returns.

Each tax season I prepare about 400 sets of returns manually. In my 37 years as a paid tax preparer I have never used tax software to generate a 1040, 1040A, or, for that matter, a 990, 1065 or 1120.

Whenever I attend a tax seminar and the instructor asks who still prepares returns manually my hand is among the two or three that go up (on occasion it is the only hand). This is usually followed by a statement by the instructor to the effect – “Well you are the only people here who really know tax law”, or “who really know how to prepare tax returns.” At a National Society of Tax Professionals seminar a few years back the instructor, the Society’s Executive Director, wanted to shake my hand.

Whenever someone asks me what tax software I use I simply point to my head – indicating my brain.

During the session on common mistakes made by preparers at the IRS Tax Forum I attended two years ago the instructor went so far as to say that those who use tax software to generate 1040s have basically become nothing more than glorified data entry clerks. I totally agree!

While I have no problem with tax practitioners using preparation software in their practice, I very strongly believe that all tax preparers must first learn how to prepare 1040s (and 1040As) by actually preparing a variety of different returns manually – either in classroom education or via on the job training – and then, and only then, after they "know what they are doing", learn how to use specific tax preparation software.

I am not alone in this opinion. In a comment to one of my TWTP posts Charles E McCabe, founder and CEO of Peoples Income Tax, Inc, which operates The Income Tax School, said (the emphasis is mine), “I believe computerized tax return preparation is better as long as the preparer first learns how to prepare returns manually, as they do in our courses in The Income Tax School.”

And it is very, very, very important for tax practitioners at all levels of experience and proficiency who use 1040 preparation software to thoroughly check the finished return before signing it – as thoroughly as one would check a manually prepared return. One should never assume that just because a return is prepared using software it is automatically either legally or mathematically correct.

Because I do not use tax preparation software I cannot file federal returns electronically.

As for the advantage of an electronically filed return over a manually submitted one - Russ Fox, E.A. explains in a post at his blog TAXABLE TALK, “I have been told that the process for a printed return (this would include those that are manually done) is that they are transcribed by clerk-typists and then follow exactly the same path as electronically filed returns”.

The reason Russ prefers electronically submitted return, and I agree with his thinking, is – “I trust my ability more than a clerk-typist's. I think that there's a slight advantage for electronic filing versus paper filing for audits, but that's mainly because of the possibility of transcription errors by the clerk-typist.”

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Once I am able to submit federal income tax returns electronically without having to purchase expensive and flawed software, and without having to give my fingerprints to the government and undergo a background check, I will happily do so.

TTFN

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UPDATE - Joe Kristan has added his 2+ cents in the post "Last of the Mohicans" at THE ROTH AND COMPANY TAX UPDATE BLOG. Be sure to read my comment!

TO FILE ELECTRONICALLY OR NOT TO FILE ELECTRONICALLY

An article on WebCPA.com reports “Committee Wants to Fine Tax Preparers Who Don't E-file”. It seems that the IRS Electronic Tax Administration Advisory Committee has listed this as its No. 1 recommendation.

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"At this time, ETAAC believes that all reasonable voluntary means have been exhausted with respect to encouraging preparers to e-file individual tax returns, and it is time to take a stance by announcing an e-file mandate for tax return preparers," the Committee stated in its annual report to Congress.

According to the article - “The mandate would apply to all paid preparers who use tax software and file more than 50 individual returns, with minimum penalties set for non-compliance.”

Those of you who know me know that in my 37 years of preparing 1040s I have never used tax software. I prepare all of the approximately 400 federal income tax returns that I do each year by hand.

I therefore do not file federal income tax returns “electonically”.

It is not that I am against electronic filing because of privacy concerns or any other such reasons. I file the majority of my full-year resident NJ-1040s via the NJ Division of Taxation’s “NJWebFile”, as I am required to do by state law unless the client elects to “opt-out” of electronic filing. I do this because it is free and easy to do. There is no tax software to buy and no need to register - you just go online and do it. I also do it because there is a benefit to my client – it gets a refund check to the client faster, and it is the only way that I can have a NJ state refund directly deposited to the client's bank account

The IRS currently does not offer a free method of filing returns online similar to NJWebFile. In order to file federal returns electronically a tax professional must first spend thousands of dollars to purchase a tax preparation software package, and continue to spend hundreds more each and every year for updates and support. One must then apply to the IRS to become an ERO (Electronic Return Originator). As I understand it the application processs includes providing the federal government with copies of your fingerprints.

I have no intention of wasting thousands of dollars on flawed tax preparation software. For me this is a truly unnecessary expense. When highly publicized tax software errors lead clients and friends to ask me what tax software package I use I simply point to my temple – indicating my brain. When I have raised my hand in response to the question of “who here still prepares 1040s by hand” at tax update seminars I am told by both speakers and participants things like, “You are the only one in the room who really knows how to prepare tax returns.”

I also have no intention of adding my fingerprints to some “big brother” national data base. What if I decide to murder an especially annoying client sometime in the future?

The article indicated that the requirement would apply to “all paid preparers who use tax software”. Since I do not use tax software perhaps I would be exempt from the requirement if passed.

If the Internal Revenue Service allows all taxpayers, and tax professionals, to file 1040s and 1040As for free online at the IRS website – and not via some Free File coalition of fast food tax preparation chains – then I will gladly join the bandwagon and file federal returns electronically.

TTFN