IRS Issues Final Regs. and Guidance on Mandatory E-Filing Requirements

Regulations

The IRS issued final regulations (T.D. 9518) and several pieces of guidance relating to the requirement that return preparers e-file tax returns, starting this year. The final regulations adopt, with minor amendments, proposed regulations (REG-100194-10) that were published last December, and they require specified tax return preparers to e-file if they reasonably expect to file 100 or more income tax returns in 2011.

The final regulations clarify the definition of “specified tax return preparer,” define the term “file,” allow taxpayers to opt out of having their returns e-filed if they follow prescribed procedures, provide for undue hardship waivers and administrative exemptions, and provide a two-year transition rule. The final regulations are effective upon their publication in the Federal Register.

The mandatory e-filing requirement applies to any income tax return for an individual, estate, or trust. However, certain returns that the IRS cannot accept electronically are currently exempt from the requirement. These exempt forms include Form 990-T, Exempt Organization Business Income Tax Return; Form 1040-NR, U.S. Nonresident Alien Income Tax Return; Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts; and all amended individual income tax returns.

The IRS received 53 written comments on the proposed regulations and made amendments to the final regulations based on some of the comments.

Specified Tax Return Preparer and Two-Year Transition

For 2011, the regulations define a “specified tax return preparer” as a tax return preparer who reasonably expects to file 100 or more individual income tax returns during the year. If the return preparer is a member of a firm, the 100-return limit applies in the aggregate to all the firm’s members. Starting in 2012, the 100-return limit will be reduced to 11 returns.

The final regulations specify that the determination of whether a return preparer reasonably expects to file enough returns to fall within the e-filing mandate is made each calendar year for that year. The determination is “based on all relevant, objective, and demonstrable facts and circumstances prior to the time the tax return preparer and the preparer’s firm first file an individual income tax return during the calendar year” (Regs. Sec. 301.6011-7(d)(2)).

The regulations provide five examples of when a return preparer reasonably expects to meet the return-filing threshold.

Mailing by the Preparer

Some commentators opposed the e-filing requirement because they sometimes mail paper returns to the IRS as a service to their clients. The commentators cited situations such as when clients are elderly, incapacitated, or traveling and it is not practical or convenient for them to mail their returns themselves.

Responding to these comments, the IRS has provided a transition rule, for 2011 only, to allow return preparers to mail returns for clients under specified circumstances, which are spelled out in Notice 2011-27. The return preparer must obtain a hand-signed and dated statement from the taxpayer containing both the taxpayer’s choice to have the return filed on paper and the taxpayer’s “unambiguous request” that the return preparer mail the return for the taxpayer. The notice provides sample language for this statement.

The proposed regulations defined submission in paper form by a return preparer to include “any act or acts of assistance beyond providing filing or delivery instructions to the taxpayer.” Commentators asked for clarification of what acts of assistance would amount to filing by the return preparer. In response, the IRS has removed the phrase from the final regulations and clarified in the preamble that “providing filing or delivery instructions, an addressed envelope, postage estimates, stamps, or similar acts designed to assist the taxpayer in the taxpayer’s efforts to correctly mail” the return will not constitute filing by the return preparer, “as long as the taxpayer actually mails” the paper return to the IRS.

Taxpayer Opt Out

Under the proposed regulations, taxpayers would be able to choose to file their own returns on paper, but the return preparer must obtain from any taxpayer who wishes to do this a signed and dated written statement from the taxpayer stating that the taxpayer chooses to file the return in paper format and that the taxpayer, not the return preparer, will submit the paper return to the IRS. The final regulations adopt this rule.

The IRS received several comments suggesting alternatives to the signed taxpayer statement; however, the IRS did not adopt these suggestions. One suggestion it did incorporate into the final regulations was that for married taxpayers who wish to paper file a joint return, one spouse’s signature on the taxpayer choice statement will be sufficient.

The IRS issued guidance on documenting the taxpayer’s choice to paper file in Rev. Proc. 2011-25, which includes sample language to use for the taxpayer statement. The statement should not be attached to the taxpayer’s return, but should be kept by the return preparer. An e-mail message from the taxpayer is not a sufficient statement for these purposes, but a copy of the taxpayer’s hand-signed and dated statement can be sent as an e-mail attachment.

Hardship Waivers

The final regulations adopt a provision allowing the IRS to waive the e-filing requirement where the requirement would create an undue hardship for the return preparer. The IRS provided guidance on hardship waivers in Rev. Proc. 2011-25. The hardship waiver rules apply immediately.

A hardship waiver request must be made on Form 8944, Preparer E-File Hardship Waiver Request. The form must generally be submitted between October 1 of the year preceding the year for which the waiver is requested and February 15 of the applicable year.

The IRS noted in the revenue procedure that it will ordinarily grant hardship waivers only in rare circumstances. It also noted that when technological issues affect a range of return preparers, it will generally provide an administrative exemption (see below) and not a hardship waiver. The fact that a return preparer does not have a computer or appropriate software will not, standing alone, constitute grounds for a hardship waiver.

The IRS will review hardship waiver requests and send written notice of their approval or denial. Return preparers can send a written request for reconsideration if the IRS denies their hardship waiver request.

Administrative Exemptions

The final regulations also allow the IRS to provide administrative exemptions to the e-filing requirement. In Notice 2011-26, the IRS has provided those exemptions. Specifically, administrative exemptions are created for:

• Specified tax return preparers who are members of certain religious groups that are conscientiously opposed to electronic technology;
• Certain foreign preparers without Social Security numbers (but such preparers must have applied for a preparer tax identification number);
• Specified tax return preparers who are currently ineligible to e-file because of an IRS e-file sanction;
• Returns that have been rejected by the IRS e-file system where the preparer attempted to but could not resolve the reject condition or code;
• Returns prepared using software that does not support e-filing of one or more forms or schedules that are part of the return;
• Returns not e-filed due to short-term, verifiable, and documented technological problems; and
• Returns the IRS currently does not accept electronically (as noted above) or returns with attachments or required documentation that the IRS cannot accept electronically.

These administrative exemptions are automatic and are applicable retroactively to January 1, 2011.