The Internal Revenue Service has undercut the effectiveness of its electronic filing mandate because of the legal interpretation of the word “file,” according to a new government report.
The report, by the Government Accountability Office, found that the e-file mandate may affect fewer paid preparers and e-file rates may be lower than the IRS originally anticipated because of its legal interpretation of the word "file." The e-file mandate applies to paid preparers who file returns. The IRS interpreted this to mean that a preparer whose clients choose to file finished paper returns themselves will be relieved of the mandate if the preparer does not file more than 10 returns for other clients.
A specified tax return preparer is a preparer who reasonably expects to file 100 or more covered returns in calendar year 2011 (11 or more in 2012 and thereafter), according to the IRS.
Even if the preparer files more than 10 returns, clients can still choose to file paper returns as long as the preparer does not submit them to the IRS. After making its legal interpretation, the IRS revised its initial projection of e-file rates in 2011 from 82 to 75 percent, and its projection for 2012 from 84 to 77 percent. The mandate could have a greater impact if the word “file” were replaced with “prepare or file” or similarly broader language, the GAO noted. Fifteen out of the 22 states with e-file requirements use either the word “prepare” alone or the term “prepare or file” in their requirements.
If Congress wants to expand the applicability of the e-file mandate beyond those preparers who file tax returns, Congress may wish to amend paragraph 6011(e)(3)(B) of the Tax Code by replacing the word “file” with broader language, such as “prepare or file,” the GAO suggested.
The GAO report noted that the IRS has taken several positive steps to implement the e-file mandate, such as communicating the details of the implementation and publishing the proposed regulations for public comment. However, paid preparers raised concerns regarding the proposed regulations, especially with respect to their timing.
The proposed regulations were issued approximately one month before the effective date. IRS officials told the GAO that preparers should have been aware of the mandate's implementation date and that the IRS plans to be flexible with enforcement for the first year.
The GAO report also noted that the need for multiple identification numbers with the IRS may place a burden on paid preparers and raise administrative costs for the IRS. The electronic filing identification number and preparer tax identification number will have similar application processes and suitability tests once the IRS’s new PTIN requirements are fully effective.
Because PTINs identify each preparer, whereas EFINs will not always do so, it might be possible to use only preparers’ PTINs as the authorizing numbers to e-file their taxpayers' returns, with no loss of ability to track preparers. IRS has not studied whether it would be cost effective to do so.
To improve implementation of the e-file mandate, the GAO recommended that the Commissioner of Internal Revenue direct IRS officials to determine whether it would be practical and cost effective to use preparers’ PTINs as the authorizing numbers to e-file their taxpayers' returns. If the IRS determines it is advantageous, it should create a timetable and plan to modify its e-file systems accordingly.
The IRS may be missing opportunities to educate taxpayers about the benefits of e-filing, the GAO noted. Currently, neither the Form 8948, "Preparer Explanation for Not Filing Electronically," nor the statement that the IRS suggests preparers ask taxpayers to sign to assert that they are choosing to file on paper, describes the benefits of e-filing. A few states use such statements on their forms.
The GAO recommended that the Internal Revenue Commissioner should direct IRS officials to update the taxpayer choice statement discussed in Notice 2010-85 as well as Form 8948, "Preparer Explanation for Not Filing Electronically," to include information about the benefits of e-filing.
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