E-File and Digital Signatures: Where Are We Now?

In 2005, I started e-filing tax returns for clients. I ­initially offered e-file as an option but did not e-file as a matter of routine. I quickly realized that offering e-file while maintaining my standard paper assembly/delivery process took more time, cost more money, and sometimes confused clients.

So, after two years of offering e-file as an optional service, I shifted to it as a standard process. All returns were e-filed, all returns were delivered electronically (via email or portal), and I charged a fee if clients wanted paper copies or PDF files on a CD. By the time I sold my practice, I was entirely paperless. I sent organizers and received client documents via secure email or portal. I scanned all client documents upon receipt, then sent them back to the client. I delivered all returns by email or through the portal. However, one step in the process still had to be done on paper: The e-file authorization form required a pen-on-paper signature.

That is no longer the case. On March 11, the IRS issued updated guidance on electronic signatures. As a result, the e-file process can now be completely digital and paperless. Because the change was announced during filing season, most firms likely did not change their e-file administrative process midstream. So, now is a good time to review the new guidance and consider what changes to implement, in both process and technology.

Mandatory e-filing for tax practitioners began with the 2011 filing season and was phased in over two years. Today, a tax return preparer who reasonably expects to file 11 or more returns during the year is required to transmit them electronically. Practitioners cannot mail returns as a courtesy to clients. Practitioners also cannot direct clients to opt out of electronic filing as a matter of routine or process. The IRS provides guidance for taxpayers who want to opt out of electronic filing, allows practitioners to apply for hardship waivers, and provides for some administrative exemptions. However, submitting tax returns electronically is now routine for most firms.

One of the biggest challenges with e-filing has been managing the process of obtaining the signed e-file authorization form so that the return can be transmitted to the IRS. E-filing shifts the burden of submitting the tax return to the tax practitioner, whereas it was formerly the client's responsibility. Electronically submitting returns to the IRS benefits both clients and the Service because it results in faster processing, fewer errors, and quicker refunds. At the same time, as firms and work flow procedures adapt to new technologies and become increasingly paperless, the e-file mandate has created unexpected administrative processing burdens on tax preparers.

In the old days, a return was considered complete when it was delivered to the client. Practitioners provided original returns for clients to sign and mail in pre-addressed envelopes with clear instructions for mailing as an added convenience, along with a paper copy to keep for their records. As technology improved and firms worked to streamline their work flow and become less paper-based, many firms scanned documents and tax returns before returning them to clients so that they retained no "paper file" once the return was complete. Today, many firms are completely paperless either because they receive information electronically directly from their clients or they immediately convert all paper source documents into an electronic format. Then, they manage the preparation, review, and delivery of the tax return using digital technology without printing anything on paper.

However, because of e-file, delivering a return to the client in any format (paper or electronic) is not the last step. Today, e-file has shifted the burden of submitting the tax information to the IRS to tax practitioners but only after the client has signed a form acknowledging that he or she has reviewed the return, approved it for filing, and specifically authorized the preparer to transmit it to the government. This final step, regardless of how paperless the firm's return preparation process was, included one paper-based step. The IRS required the client to print the form, sign it with pen on paper, and return it to the tax preparer. While the signed copy returned to the preparer could be in an electronic format (e.g., fax or scan and email), the document had to contain a "pen and ink on paper" signature to be valid.

On March 11, the IRS updated Publication 1345, Handbook for Authorized IRS e-File Providers of Individual Income Tax Returns (the updated publication is available only on the IRS's website). Additional modifications were made on March 20. Combined, these revisions clearly authorize taxpayers to sign, and practitioners to accept, e-file authorization forms containing an electronic signature.

To be clear, practitioners must still obtain a signed e-file authorization form before transmitting the return to the IRS. The form must have a five-digit personal identification number (PIN), an acceptable signature, and a date. The new guidance clarified what constitutes an "acceptable signature" on Form 8879, IRS e-file Signature Authorization . Until the IRS clarified the guidance on March 20, it was unclear whether a digital signature was sufficient or if practitioners would still need to obtain a "pen and ink on paper" signature.

What is a digital signature? The IRS identified several acceptable methods:

• A handwritten signature input on an electronic signature pad;
• A handwritten signature, mark, or command input on a display screen by means of a stylus device;
• A digitized image of a handwritten signature that is attached to an electronic record;
• A typed name (e.g., typed at the end of an electronic record or typed into a signature block on a website form by a signer);
• A shared secret (e.g., a secret code, password, or PIN) a person used to sign the electronic record;
• A digital signature; or
• A mark captured as a scalable graphic.

Practitioners who accept electronic signatures must take additional steps to authenticate the taxpayer-validating the taxpayer's name, Social Security number, address, and date of birth by visually inspecting a government identification. This check must be done every year.

The new guidance is an opportunity to consider ways to streamline the final step of the tax return preparation process—obtaining the authorization to transmit a return to the IRS. Now that digital signatures are allowed on Form 8879, practitioners can consider a number of new technologies for clients to sign and return the e-file authorization form. Using a process that clients are already familiar with increases the likelihood they will easily adapt to it. Below are some of the more common forms of digital signatures in today's marketplace.

Electronic Signature Pad

An electronic signature pad captures a written signature, which is then converted to a digital image or format. These devices, available in a variety of sizes and formats, are ubiquitous at the mall where they are used to sign for purchases or at the pharmacy to sign for prescriptions. Many stores use them routinely to process credit card purchases. While the technology behind each device may vary, they all perform the task of capturing a written signature and transferring it onto a digital document.

Handwritten Signature by a Stylus Device

A stylus is a pen-shaped device that is used to input information on a computer screen, mobile device, or tablet. The distinction between this method and an electronic signature pad is highly technical. The key difference is the type of device used to capture and record the signature. With this method, practitioners could potentially use any electronic device with a touchscreen display that can capture marks, input, or commands from a stylus instead of having to buy a specially designed signature pad. This is significant because the technology required for this method, in most cases, might be as easy as installing a special app, program, or software that can run on a tablet, touchscreen computer, or even a smartphone.

Typed Name

Although it is less common, the option of providing a typed signature is still familiar. As described in guidance on the IRS website, this is when a name is "typed at the end of an electronic record or typed into a signature block on a website form" to sign a document. While it might seem that this could be accomplished by creating a fill-in PDF form, that would not meet the requirements of a "digital signature" if the data required to be retained are not captured and stored for each electronic signature.

In addition to the types of digital signatures described above, the IRS permits four other options. As firms become more paperless and consumers increasingly use electronic signature technology or interact with businesses online, the use of paper in the tax return preparation process will continue to decline. While integration of electronic signature software with tax return preparation software would streamline the process, it is not required. The key is that the chosen method is able to affix an electronic capture of a written signature onto an electronic copy of Form 8879 and retain the following information, which must be provided to the IRS upon request:

• Digital image of the signed form;
• Date and time of the signature;
• Taxpayer's computer IP address ­(remote transactions only);
• Taxpayer's login identification-user name (remote transactions only);
• Identity verification: Authenticate the taxpayer's identity and, for in-person transactions, confirm that the government identification has been verified; and
• Method used to sign the record (e.g., typed name) or a system log or other audit trail that reflects the completion of the electronic signature process by the signer.

The initial cost to transition to a digital e-file authorization signature process may delay decisions to adopt more mobile- and consumer-friendly technology. Now is a great time to contact tax software providers to see if they offer digital signature options. Also, many third-party software providers offer solutions that can be implemented immediately without affecting existing software or work flow procedures. By exploring their options now, practitioners have time to test a few methodologies over the remainder of the filing cycle. This can put them in a great position to have everything set up, tested, and ready to go next busy season.