The Internal Revenue Service has provided guidance to tax preparers on the circumstances under which they can be exempted from the electronic filing mandate and mail paper copies of their clients’ tax returns instead.

Starting this year, tax preparers who file 100 or more tax returns are expected to file electronically. Next year, the number goes down to 11 or more tax returns.

On Monday, the IRS released TD 9518, final regulations providing guidance on the requirement for “specified tax return preparers” to file individual income tax returns using magnetic media pursuant to Section 6011(e)(3) of the Tax Code (Code). The publication and effective date is March 30.

Also on Monday, the IRS released two additional notices and a revenue procedure related to electronic filing exemptions and waivers. Notice 2011-26 informs tax return preparers of administrative exemptions from the new electronic filing requirement under Section 6011(e)(3) of the Tax Code and Sections 1.6011-7 and 301.6011-7 of the Regulations on Procedure and Administration.

Notice 2011-27, solely for calendar year 2011, provides transitional guidance relating to the new electronic filing requirement under Section 6011(e)(3) of the Tax Code and corresponding regulations, specifically regarding the filing restrictions placed upon specified tax return preparers by that Code section and Section 301.6011-7(a)(4)(i). The notice allows a specified tax return preparer to mail any individual income tax returns in paper format to the IRS, at the request of a taxpayer, if the preparer obtains a signed statement containing the taxpayer’s choice to have the return filed in paper format, and the taxpayer’s request to have the preparer mail the return to the IRS.

Revenue Procedure 2011-25 provides guidance to specified tax return preparers regarding the time for filing and manner (form and content) of requests for waiver of the electronic filing requirement due to undue hardship, under section 6011(e)(3) of the Tax Code and Sections 1.6011-7 and 301.6011-7 of the Regulations on Procedure and Administration.  The revenue procedure also provides guidance regarding how to document a taxpayer’s choice to file the taxpayer’s individual income tax return in paper format when the return is prepared by the preparer but filed by the taxpayer.

Among the groups of exempted tax preparers are those who are members of a recognized religious group that is conscientiously opposed to its members using electronic technology, including for the filing of income tax returns electronically, and that has existed continuously since Dec. 31, 1950.

Foreign preparers without Social Security numbers can also be exempted.  A specified tax return preparer who is a foreign person without a Social Security number and is therefore ineligible to file electronically because the IRS e-file program currently does not accept foreign tax return preparers without social security numbers who live and work abroad.  To qualify for this exemption, the specified tax return preparer (1) must not be a member of a firm that is eligible to e-file, and (2) must have applied for a Preparer Tax Identification Number and either submitted Form 8946, PTIN Supplemental Application For Foreign Persons Without a Social Security Number or qualify for the relief provided by Section 5 of Revenue Procedure 2010-41, 2010-48 I.R.B. 781.

Certain preparers may also be ineligible for IRS e-fle due to an IRS e-file sanction.  To qualify for this exemption, the tax return preparer must have received a letter from the IRS enforcing the sanction and the sanction must be in effect for some or all of the calendar year in which the individual income tax return or returns are being filed.  This exemption ends on the date the sanction period ends or the date the IRS accepts the tax return preparer into the IRS e-file program, whichever date occurs first.  If, however, the tax return preparer has a pending application for the IRS e-file program filed with the IRS at the time the sanction period ends, the exemption will continue until the date the IRS renders a decision on the tax return preparer's application.

Individual income tax returns may also be exempted due to the preparer’s technological difficulties. The following individual income tax returns are exempt from the electronic filing requirement under Section 6011(e)(3) and the corresponding regulations, due to technological difficulties experienced by a tax return preparer or specified tax return preparer, as applicable, who meets the identified criteria for an exemption:

1. Rejected Returns.  A return that a specified tax return preparer attempted to e-file but was unable to e-file because the return was rejected and the specified tax return preparer attempted but could not resolve the reject condition or code.

2. Forms or Schedules Not Supported by Preparer’s Software Package.  A return prepared by a tax return preparer whose e-file software package does not support one or more forms or schedules that are part of the return.

3.  Other Technological Difficulties.  Returns prepared by a tax return preparer who experiences a short-term inability to electronically file the return or returns due to some other verifiable and documented technological problem.

Exempt Individual Income Tax Returns Due to IRS e-file Limitations. For all tax return preparers and specified tax return preparers, the following individual income tax returns and attachments to returns are exempt from the electronic filing requirement under Section 6011(e)(3) and the corresponding regulations, due to IRS barriers or other systemic limitations that currently prevent the returns and attachments from being filed electronically:

1. Returns Currently Not Accepted Electronically.  Any individual income tax return that is not currently accepted electronically by IRS e-file or that the IRS has instructed taxpayers not to file electronically.  This includes Form 1040-NR (U.S. Nonresident Alien Income Tax Return), Form 1041-QFT (U.S. Income Tax Return for Qualified Funeral Trusts), Form 990-T (Exempt Organization Business Income Tax Return), and all amended individual income tax returns, such as Form 1040X (Amended U.S. Individual Income Tax Return).  This also includes a fiscal year return for Form 1040 (U.S. Individual Income Tax Return) and a fiscal year return for Form 1041 (U.S. Income Tax Return for Estates & Trusts) for certain periods (fiscal year Form 1041 returns ending during any month after June 30 of the current processing year); Form 1041 claiming a refund amount equal to or greater than $10,000,000; Form 1041 with a dollar amount over $99,999,999,999; and other Forms 1041 not accepted by IRS e-file for any other limitation listed in IRS Publication 1437 (Procedures for the Form 1041 e-file Program U.S. Income Tax Returns for Estates and Trusts).  See IRS Publication 1346 (Electronic Return File Specifications and Record Layouts for Individual Income Tax Returns) for forms in the Form 1040-series that the IRS currently accepts electronically at www.irs.gov/efile/.

2. Required Documentation or Attachments Not Accepted Electronically. Any required documentation or attachments that the IRS does not yet provide the capability to file electronically such as documentation for Section 6707A disclosures or required appraisals to support charitable contributions are exempt.  Some returns can be filed electronically and the attachments mailed to the IRS using a transmittal Form 8453 (U.S. Individual Income Tax Transmittal for an IRS e-file Return) or Form 8453-F (U.S. Estate or Trust Income Tax Declaration and Signature for Electronic Filing).  The associated return must be filed electronically if prepared and filed by a specified tax return preparer and otherwise capable of being e-filed, and the attachments mailed to the IRS using a transmittal Form 8453.  See the instructions to Form 8453 and instructions to Form 8453-F.

Exemptions are Automatic.  A tax return preparer or specified tax return preparer who qualifies for an exemption does not have to request an exemption from the IRS or otherwise obtain the IRS’s approval. These exemptions are automatic for those who meet the criteria provided in this notice.  Although there is no need to apply for an administrative exemption or to maintain any specific information, the burden is on the tax return preparer or specified tax return preparer to show entitlement to an administrative exemption, and the preparer will be required to demonstrate the applicability of an administrative exemption or exemptions upon request by the IRS. Note that undue hardship waiver requests are unnecessary for purposes of claiming an administrative exemption and should not be submitted by or for an exempt specified tax return preparer, or for an exempt individual income tax return. 

The IRS has created Form 8948, Preparer Explanation for Not Filing Electronically, for specified tax return preparers to explain why an individual income tax return that is able to be filed electronically was prepared and filed in paper format.  Among the reasons listed, Form 8948 includes the exemptions listed in paragraphs A. and B. of this notice. For further information, see the instructions to Form 8948, which, among other things, provide that Form 8948 is to be attached to the paper copy of the tax return that a specified tax return preparer prepares and furnishes to the taxpayer.

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