Preparer Mandatory E-File Guidance Proposed

The IRS late on December 1 issued proposed guidance on how return preparers may meet their new electronic filing requirement for individual and fiduciary income tax returns starting January 1, 2011. The proposed regulations (REG-100194-10) and a proposed revenue procedure (Notice 2010-85) provide for a hardship exception to the requirement and specify how preparers may document via a statement signed by the taxpayer that the taxpayer chose to self-file the return on paper rather than have the preparer e-file it. They also clarify how to determine whether a preparer meets the minimum number of returns to be filed in a year for the requirement to apply.

The mandate is imposed by Sec. 6011(e), as amended by the Worker, Homeownership, and Business Assistance Act of 2009, P.L. 111-92. It provides that a tax preparer who reasonably expects to file more than 10 individual income tax returns in a calendar year must do so by “magnetic media” (generally, through the IRS’ e-file computer system). For purposes of the requirement, individual income tax returns include those filed on behalf of estates and trusts. The IRS has provided a transitional rule for calendar 2011 only that increases to 100 the number of returns a preparer must anticipate filing for the requirement to apply.

The proposed regulations specify that for purposes of the requirement, a return is considered filed by a return preparer if it is filed, either directly or indirectly, on paper or electronically, by a member, employee or agent of the preparer or the preparer’s firm. In other words, the requirement applies to the aggregate number of returns filed by a firm, whether or not a return is filed by an employee or agent other than the preparer.

Taxpayer Statement

A taxpayer may choose to paper-file his or her own return prepared by the preparer, but must sign a written statement saying that he or she was not influenced by the preparer or a member of the preparer’s firm to do so. The statement must be dated before the return filing date and returned to the preparer, who should keep it on file. A statement for a joint return must be signed by both husband and wife.

Hardship Waiver

The IRS will “in rare cases” grant a waiver from the requirement for a preparer’s undue financial or personal hardship. The IRS plans later to publish an application form, Form 8944, Preparer e-file Hardship Waiver Request. Until it is available, applicants may request a waiver by submitting a statement containing information specified in the proposed revenue procedure. Such information includes the nature and financial impact of the hardship, for which the IRS gives as examples personal or business casualty, bankruptcy or “technical or systems-based” difficulties. However, the IRS advises that “the fact that a specified tax return preparer does not have a computer or appropriate software or does not desire to obtain or use a computer or software does not, standing alone, constitute an undue hardship.” A waiver will ordinarily be good only for one year.

The proposed regulation also acknowledges that administrative exceptions may be necessary for returns that may be filed only on paper, such as those containing a claim for the first-time homebuyer credit, which requires paper-based substantiation. Such returns are not counted toward the e-file requirement threshold, although those excluded by an undue hardship waiver are.

E-File Providers

In an accompanying news release (IR-2010-116), the IRS reminded preparers that if they are subject to the requirement, they must be authorized IRS e-file providers. It normally takes up to 45 days to set up initially as an authorized e-file provider by obtaining an electronic filing identification number.

Comments on the proposed regulations and proposed revenue procedure are requested by January 3, 2011, with a public hearing scheduled for January 7, 2011.