Editor: Roby B. Sawyers, CPA, Ph.D.
The IRS has historically required hand-to-paper signatures ("wet signatures") for tax returns, election statements, and other IRS documents unless alternative methods are published. With technology advances and a need to modernize interactions with the IRS, there has been a long-standing call from tax professionals for IRS guidelines and procedures to allow e-signatures for all IRS documents.
The majority of all tax returns are e-filed, but the rules for many of these returns require a wet signature. The burden on the taxpayer to print, sign, and then return the form to the tax return preparer is significant compared to the minimal effort required for e-signing a form. The requirement of hand-to-paper signatures is unacceptable in an era in which technology continues to change the tax preparation process at a rapid pace, and physically signing returns limits the ability to file returns accurately and on time.
COVID-19 has brought many challenges to tax professionals, the IRS, and taxpayers — one is how to hand-sign a tax return when many tax practitioners' offices are closed. Due to COVID-19, the IRS released temporary exceptions to the rules prohibiting e-signatures, but tax professionals must be aware these are temporary exceptions, and, absent further action, the exceptions will expire.
The remainder of this column discusses the history of IRS e-signature requirements and guidelines, along with the forms and documents currently allowed to be e-signed, including those allowed through temporary exceptions.History of IRS's acceptance of e-signatures
Sec. 6061 originally provided that any tax return, statement, or other document "shall be signed in accordance with forms or regulations prescribed by the Secretary." Sec. 6061 was amended in 1998 as part of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA), P.L. 105-206, to instruct the secretary of the Treasury to "develop procedures for the acceptance of signatures in digital or other electronic form" (RRA, §2003(b)(1)). Sec. 6061 further explains that the Treasury secretary may waive the requirement for a signature or may provide an alternative method to sign tax returns or other documents.
In 2004, the IRS allowed income tax return preparers to use computer software programs, rubber stamps, or a mechanical device such as a signature pen to sign original returns, amended returns, or requests for filing extensions. This did not apply to signed elections, applications for changes in accounting methods, powers of attorney, or consent forms. Taxpayers themselves, however, were still not authorized to use e-signatures to sign these types of returns and requests (Notice 2004-54).
In Notice 2007-79, the IRS released similar guidelines allowing electronic return originators (EROs) to use computer software programs, rubber stamps, or a mechanical device such as a signature pen to sign the following individual forms:
- Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return;
- Form 8878, IRS e-file Signature Authorization for Form 4868 or Form 2350; and
- Form 8879, IRS e-file Signature Authorization.
EROs originate the electronic submission of a return to the IRS and are typically a taxpayer's income tax preparer whom the Service has authorized to submit the tax return electronically. Again, however, taxpayers were still not authorized to sign IRS documents electronically.
In 2008, the IRS for the first time allowed taxpayers to sign an IRS document using e-signatures: specifically, Sec. 7216 consent forms. These forms are used to gain consent to disclose a taxpayer's information to someone other than the taxpayer. In Rev. Proc. 2008-12, the Service allowed tax return preparers to obtain the e-signature of Form 1040 filers (individuals) on these consent forms using any of three alternatives:
- Assign a personal identification number (PIN) that is at least five characters long and is not automatically furnished by the software;
- Have the taxpayer type in his or her name and press "enter" to authorize consent — in this scenario, the software must not automatically provide the taxpayer's name; or
- Any other manner in which the taxpayer enters five or more characters that are unique to that taxpayer and are used by the tax return preparer to verify the taxpayer's identity.
In March 2014, the IRS first allowed taxpayers to use e-signatures on income tax returns. The IRS provided guidance for individual taxpayers on e-signing a tax return if the return is to be e-filed with the IRS in IRS Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns (available at irs.gov/pub/irs-pdf/p1345.pdf). Form 8879 was previously required to be hand-signed by the taxpayer before the return was e-filed.
To reduce the likelihood of identity theft and fraud, Publication 1345 requires that in a remote transaction, the software provider and the ERO must verify the taxpayer's identity through third-party knowledge-based authentication (KBA). The KBA process identifies each taxpayer who is e-signing the document by asking multiple-choice personal questions about the taxpayer. The information used to formulate the questions is from various sources such as public records, phone listings, home and automotive titles, and credit reporting agencies. Many e-signature vendors offering services to tax professionals provide a KBA process approved by the IRS.
Identity verification must be done each time a taxpayer remotely signs Form 8878 or Form 8879. The current FAQs for Form 8878 and Form 8879, Frequently Asked Questions for IRS e-file Signature Authorization, confirm this. When e-filing an individual tax return, tax professionals must send the individual taxpayer a copy of the tax return to review in advance of the taxpayer's signing Form 8879. Also, if the amounts on Form 8879 change by more than the amounts prescribed in IRS Publication 1345, a new Form 8879 must be signed. Note that an e-signature in a remote transaction does not include handwritten signatures on Forms 8878 or 8879 sent to the ERO by hand delivery, U.S. mail, private delivery service, fax, email, or an internet website.
Not counting the temporary procedures adopted due to COVID-19, the current individual forms eligible to be e-signed include only Forms 8453, 8878, and 8879.Taxpayer First Act of 2019
Under the Taxpayer First Act of 2019, P.L. 116-25, the IRS must establish standards for accepting a taxpayer's e-signature on requests to authorize the IRS to disclose the taxpayer's return or other information to a practitioner, or on powers of attorney granted by a taxpayer to a practitioner. In response, the IRS published guidance in Internal Revenue Manual (IRM) Section 10.10.1, effective Dec. 3, 2019, providing baseline requirements for e-signature programs. The IRM says that the instructions for IRS forms should specifically state whether e-signatures are allowed. However, many forms have not been updated to reflect the acceptance of e-signatures, and thus individual taxpayers and tax practitioners often must evaluate the guidelines themselves, which is inefficient. Discussed later, the IRS announced in November 2020 the acceptance of e-signatures on Form 2848, Power of Attorney and Declaration of Representative, and Form 8821, Tax Information Authorization, beginning in January 2021.Temporary acceptance of e-signatures: IRS correspondence
The IRS has grappled with navigating COVID-19 and how to safely reopen operations. In acknowledgment of the struggles many tax professionals and taxpayers are facing during the pandemic, it has temporarily allowed e-signatures in many circumstances that historically have required physical signatures.
In March 2020, the IRS released an internal memo (available at www.millerchevalier.com) temporarily allowing digital signatures and images of signatures (scanned or photographed) related to the determination or collection of tax liability. The Service also stated that, to help taxpayers and the agency complete tasks remotely during the pandemic, it would accept documentation via email. A digital signature must use encryption techniques to provide proof of original and unmodified documentation in one of the following file types: TIFF, JPG, JPEG, PDF, Microsoft Office suite, or ZIP. The expiration of these temporary procedures was set for July 15, 2020, but was extended through the end of 2020 and then further extended through June 30, 2021 (see IRS, "Memorandum for All Services and Enforcement Employees" (Dec. 1, 2020), available at www.irs.gov). Specifically, the guidance applies only to the following situations:
- Extensions of the statute of limitation on assessment or collection;
- Waivers of statutory notices of deficiency and consents to assessment;
- Agreements to specific tax matters or tax liabilities such as closing agreements; and
- Any other statement or form needing the signature of a taxpayer or representative traditionally collected by IRS personnel outside of standard filing procedures — for example, a case-specific power of attorney.
The March 2020 memo also allowed a new way for taxpayers to transmit data requested by the IRS. If the taxpayer was not able to use eFax or an established secure messaging system, the taxpayer could choose to transmit the documents to the IRS via email as an attachment. Specific steps were required to be followed to transmit documents via email, as detailed in the memo.Temporary acceptance of e-signatures: Most business e-filed tax returns
In August 2020, the IRS announced an expansion of the use of electronic and digital signatures on certain forms through Dec. 31, 2020 (see IRS memoranda of Aug. 28, 2020, available at www.irs.gov). In December, the authorization to use e-signatures on these forms was extended through June 30, 2021 (see IRS, "Memorandum for All Services and Enforcement Employees" (Dec. 28, 2020), available at www.irs.gov). The biggest change in these memos was that all the forms in the Form 8879 series can now be e-signed, rather than just the Form 8879 for individuals. Thus, e-file signature authorization forms for business returns can be e-signed through June 2021.
The IRS stated these changes were made to alleviate concerns about gathering handwritten signatures during the COVID-19 pandemic while promoting timely filing. Additional forms that could be e-signed were added on Sept. 10, 2020. In summary, through June 30, 2021, the following forms can be e-signed:
- Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file signature authorization forms;
- Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
- Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
- Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;
- Form 3115, Application for Change in Accounting Method;
- Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;
- Form 1120-C, U.S. Income Tax Return for Cooperative Associations;
- Form 1120-L, U.S. Life Insurance Company Income Tax Return;
- Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;
- Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;
- Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;
- Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies;
- Form 1128, Application to Adopt, Change or Retain a Tax Year;
- Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts;
- Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner;
- Form 8802, Application for U.S. Residency Certification;
- Form 8832, Entity Classification Election ; and
- Forms 8038, 8038-G, and 8038-GC, pertaining to tax-exempt bonds.
Interestingly, the temporary procedures did not include any identity protection measures such as confirmation of the authorized signer or KBA requirements. In a June 2020 letter to the IRS, the AICPA recommended elements of identity protection, including a suggestion that the ERO rely on previous business transactions as a way of proving the taxpayer's identity (see the AICPA's letter of June 4, 2020, "IRS Guidance for Electronic Signature Program," available at www.aicpa.org).
The IRS's original announcement states that the Service will evaluate the practical impact of this temporary change in signature rules as it formulates standards permitting the use of e-signatures going forward. Many tax professionals and taxpayers are requesting that these changes become permanent.Acceptance of e-signatures: Third-party authorization forms
The IRS announced in November 2020 that e-signatures would be allowed on Form 2848 and Form 8821 beginning in January 2021. This means tax professionals can submit third-party authorization forms through a new irs.gov secure online platform. Taxpayers and tax professionals can sign the forms electronically or in ink and then upload them. The tax professional is still required to verify the taxpayer's identity. Next summer, the IRS anticipates launching a platform called Tax Pro Account for e-signing these third-party authorization forms, and with this system, the signed forms will post immediately in the Centralized Authorization File (CAF), avoiding delays and backlogs (see IRS website, "Electronic Signature Options Will Simplify Third-Party Authorizations," available at www.irs.gov).State e-signatures
An added layer of complexity for tax professionals and taxpayers navigating the e-signature rules is understanding which states allow electronic or digital signatures, on which state forms they are allowed, and how the electronic or digital signatures must be executed. Many states, including California, do not allow e-signatures for business tax returns. Other states, including New York, recently adopted laws allowing e-signatures for e-filed documents as a result of the pandemic and have their own requirements for identity verification (see N.Y. Tax Law §171-aa and New York Dep't of Tax. and Fin., Technical Memorandum TSB-M-20(1)C, (2)I (10/6/20)).
Having multiple sets of requirements for the same taxpayer ultimately undermines the simplicity promised by the IRS's increasing acceptance of e-signatures. It is the hope that over time, states will also universally permit the use of e-signatures.Key takeaways
Despite Congress's decision more than 20 years ago to instruct the IRS to develop procedures for acceptance of e-signatures and despite calls from tax professionals to extend e-signature acceptance to a broader group of forms, progress has been slow. Concerns around taxpayer verification and identity protection prevented widespread allowance of e-signed returns and other documents until the recent pandemic-related authorizations.
Although the IRS has continued to modernize its e-filing system for income tax returns, the ability to e-sign is becoming a basic expectation in today's virtual economy. The pandemic has intensified the pressure on the IRS to temporarily allow e-signatures on many e-filed returns. There is a need for these adjustments to be made permanent. Currently, tax professionals and taxpayers bear the unfortunate burden of having to keep track of which IRS forms allow e-signatures, not to mention the specific requirements of the states that allow e-signatures. Over the next year, professionals are hopeful long-term solutions will be adopted so tax professionals can work more efficiently with taxpayers and the IRS.
|Rhonda S. Powell, CPA, is firm director of Tax Services at Moss Adams in Seattle. Lindsay A. Ferreira, CPA, is a tax manager at Moss Adams in Honolulu. Roby B. Sawyers, CPA, Ph.D., is a professor of taxation and accounting in the Department of Accounting, Poole College of Management, at N.C. State University. Ms. Powell and Prof. Sawyers are members of the AICPA Tax Practice Responsibilities Committee. For more information on this column, contact email@example.com.