Virtual operation of a tax prep service offers a number of money-saving temptations, but security of documents transmitted electronically remains a major concern for preparers considering this route.

Many preparers, for instance, rely on portals for storing documents for their own and clients’ viewing and use. “I’ve used CrossLoop Pro for several years, which provides a great alternative to the standard portal,” sad EA Michael Harvey Baum of Baum Accounting, Tax & Computer Help, Naples, Fla., and a member of the National Association of Tax Professionals. “I can use the software to remotely connect to a client’s computer and pick up their information, including QuickBooks files, and also deliver the finished product. The annual cost for the service is substantially less than most portals.”

One key to a successful virtual practice is recognizing that a given client may be uncomfortable with the concept, comfortable with it, or somewhere in between. Trojan said he tends to “shape” service offerings based on the age, “offering both options to the older crowd and just expecting the younger crowd to expect the PDF, e-mail and portal solutions.”

Baum also recognizes that some clients just “don’t want to remotely access their computers or don’t feel comfortable with a download link. I have used most of the other cloud services such as Box, DropBox, Cubby, Sugar Sync. Almost all can be set up to allow for a secure folder that only they or I can access. I don’t usually use the service for delivery, but it does provide them with a low-tech but secure method for sending me their information.”

“Strongly consider using Skype or a similar product, especially for new clients. Understand that for now, tax advisors will limit themselves as far as who the clients are,” advised EA Theodore Prioleau of Teddy the Tax Man in Parkton, Md. “Most seniors will probably not go the virtual route. And secure every PDF that you send out.”

Security Worries

Frank Hagan, CEO of Acumen Consulting, warns that treating electronic transmission of PDFs and other e-documents, however, may violate financial industry regulations even if the PDF is password-protected.

“Dodd-Frank lumped tax preparers into the ‘financial industry’ subject to all industry regulations, and the Graham-Leech-Biley Act applies some standards as well,” Hagan writes on the Tax Business Owners of America LinkedIn discussion board. “One of those acts seems to require us to meet the same standards banks do when transmitting personal financial information, and that means it can't be done by regular e-mail.” Use of a secure e-mail and file transfer portal meets the standard, he added.

“I use a two-step process initially, with the first e-mail a request for them to sign up at the portal; then, when I separately confirm that it was indeed them who responded to that first, insecure e-mail, I send the information. In the absence of specific financial-industry standards for this sort of thing, I’ve chosen to use only HIPAA-compliant services,” Hagan wrote.

He added that it was his impression that tax prep software vendors are not always using password-protected PDF files and that many preparers believe that a password-protected PDF file is encrypted. “It is not,” Hagan pointed out. “You can find hundreds of free and relatively inexpensive programs that will break the password protection of a PDF file in a few seconds.”

Lakisha Barclay, president of SOS 1040 Plus in Fairlawn, Ohio, calls the transmittal and security question “very interesting. I have (through software and Outlook) sent hundreds of returns to clients on request. We also use EchoSign from Adobe for electronic signature. I specifically asked this question at an IRS tax forum a few years ago and was told that it was fine. It’s odd that this [question)] has not been added to our Circular 230 or addressed by the IRS.”

Replied Hagan, “I think the danger is a civil action from a client, rather than an action from the IRS.” Hagan added that clients often sending him documents “they shouldn’t through e-mail even though I provide a portal.” Ironically, he added, “The younger the [client], the more likely they are to copy and paste their information into a plain text e-mail.”

A Google search can also quickly net several tips for securing transmitting financial documents.

(Click here to see the Part 1 of this article.)