Every tax return has to be signed, so why is signing them so confusing?
Putting pen to a paper tax return for a "wet signature" is simple enough, but 130 million individual income tax filers don't file their returns on paper — they file them electronically. And if the return is electronically filed (e-filed), it must be electronically signed (e-signed). If taxpayers pay a third party to prepare the return, that paid preparer also must e-sign the return to e-file it.
Navigating the various e-signature requirements to successfully e-file a tax return can seem byzantine, even for tax professionals. Here's why:
- A taxpayer who prepares his or her own return is subject to one set of signature requirements.
- A tax preparer e-signing a return for an individual is subject to another set of requirements.
- Plus, there's crossover between how self-prepared returns and returns prepared by third parties are signed.
If solving the e-signature puzzle wasn't challenging enough, the IRS has been under pressure in recent years to tighten safeguards around electronic signatures on tax returns, meaning the puzzle is even more difficult to solve. Without a high bar of entry, criminals are more likely to e-file tax returns using stolen identities, which victimizes taxpayers and revenue agencies alike. Because of the stepped-up security to deter and prevent fraud, legitimate taxpayers and their tax professionals must learn to overcome extra hurdles to comply with their tax obligations.
So, for anyone who has to sign a tax return (which is probably everyone reading this), here's a guide to navigating the e-signature maze.
A brief primer on e-signatures
Before delving into tax returns specifically, it's important to know some basic rules that apply to all e-signatures. Every e-signature has five distinct components:
- Creation of an electronic form of the signature;
- Proof of the signer's intent to sign the electronic record;
- Association of the signature to the record;
- Verification of the signer's identity; and
- The integrity of the signed record.
However, taxpayers and tax professionals need to know only two of the components to understand signing a tax return: Verification of the signer's identity and the creation of the signature. Tax preparation software typically handles the rest.
Verification of the signer's identity is required because, by definition, a signature must be the act of a specific person. The party relying on the signature's validity (in this case, the IRS) can require a level of authentication appropriate for the level of risk associated with a false verification.
The signature created can be any discrete set of digital data, such as a symbol, process, or even a sound. Commonly, it's a digitized signature from an electronic signature pad, clicking a box, or in the case of a tax return, a personal identification number (PIN).
A tale of two PINs
Taxpayers can e-sign their tax returns with either of two PINs: the practitioner PIN or the self-select PIN.
A third — the e-file PIN — is now gone because, during the 2016 tax season, fraudsters armed with stolen identities used malware to generate e-file PINs en masse through the IRS's e-file PIN application. By the next tax season, the IRS shut down the application and no longer accepted e-file PINs as a valid tax return signature.
But this isn't a story of forgotten PINs. It's about the last two bastions of tax return e-signatures that sow confusion and consternation through no fault of their own. The PINs themselves are merely five-digit numbers. It's everything else about them that is so complicated.
The practitioner PIN
The practitioner PIN is straightforward compared to the self-select PIN.
Almost all people filing an income tax return, regardless of how old they are, where they live, and whether they're alive, can sign a return using the practitioner PIN method. Taxpayers don't need to know anything about their prior-year return or have ever filed a return before.
The taxpayer signs a Form 8879, IRS e-file Signature Authorization, which authorizes the return preparer to create a five-digit PIN for the taxpayer. Then, either the taxpayer or the preparer can sign the return with the PIN.
With the practitioner PIN, it's up to the preparer to verify the signer's identity
If the taxpayer signs the Form 8879 with a pen, general authentication rules apply. The return preparer can verify the signer's identity with photo identification such as a school ID, an employer ID, or a driver's license. But if the taxpayer e-signs the Form 8879, additional identity verification requirements apply.
E-signing the Form 8879 in person requires the preparer to inspect the taxpayer's government-issued photo identification, meaning the ID has to be a driver's license, military ID, passport, visa, etc. E-signing it remotely requires the preparer to validate the taxpayer's identifying information through record checks with various organizations, agencies, institutions, credit bureaus, or other similar databases.
To affirm that the preparer verified the taxpayer's identity, the preparer signs the Form 8879, and then signs the tax return with an 11-digit PIN. That PIN is made up of the preparer's six-digit electronic filing identification number (EFIN), followed by a five-digit self-selected PIN. The preparer uses the same PIN for the entire tax year, and it can be manually input or automatically generated by the software.
In summary, to e-sign a tax return using the practitioner PIN method:
- The taxpayer signs an authorization form to allow the preparer to create the taxpayer's tax return signature.
- The preparer verifies the taxpayer's identity and attests to the identity verification by signing the same authorization form.
- Either the taxpayer or the preparer signs the return for the taxpayer with the newly created five-digit PIN.
- The preparer signs the tax return by inputting his or her 11-digit PIN (six-digit EFIN plus five-digit self-select PIN).
Yes, this is the more straightforward e-signature method for tax returns.
For filers, the self-select PIN may seem easier since creating the PIN requires choosing only five numbers, but there is a lot of room to get tripped up during verification.
Most filers can use the self-select PIN. The IRS requires self-prepared filers to use it, but any taxpayer can use it to sign a return prepared by a third party.
Some taxpayers, however, are disqualified. Primary taxpayers under age 16 who have never filed and secondary taxpayers under age 16 who didn't file in the prior tax year can't use the self-select PIN to sign their tax returns.
Creating the self-select PIN is simple
Essentially, after reviewing the completed return, the primary taxpayer (and secondary, if married filing jointly) chooses any five-digit number other than all zeros, and enters it into the software.
But, to be able to use the self-select PIN, the signing taxpayer will need to verify his or her identity by providing his or her date of birth, as well as one of the following:
- Prior-year adjusted gross income (AGI). This is the total from line 37 on Form 1040, U.S. Individual Income Tax Return. Taxpayers can also find their prior-year AGI in their taxpayer account at irs.gov/account.
- Prior-year self-select PIN. The signature PIN that taxpayers put on last year's return will verify their identity for the current year.
- Identity protection PIN (IP PIN). IP PINs are six-digit numbers that the IRS assigns to some taxpayers to protect their tax identities from stolen identity refund fraud. If a taxpayer has an IP PIN, he or she must put it on the return. If not, the IRS will reject the e-filed return. See below for what to do if the IP PIN is lost.
For joint filers, who both must e-sign the return, validating their identity depends on each spouse's situation. A spouse without an IP PIN still needs to use the correct prior-year self-select PIN or AGI.
On the other hand, if a taxpayer has an IP PIN, it supersedes prior-year AGI and prior-year self-select PIN. That taxpayer will have to use the IP PIN to verify his or her identity. The IRS issues new IP PINs every December by mail via CP01A notices, so software and tax preparers will never be able to prepopulate it for returning taxpayers.
Conversely, tax preparation software is good at prepopulating prior-year tax information, such as AGI. So, for taxpayers who use the same software or preparer every year, it will likely be easy to validate their e-signature to file.
On top of that, software packages are getting better at importing data from previous years' returns, so even if a taxpayer changes software, simply uploading a copy of the prior-year return may end up validating the taxpayer's identity, as well. At any rate, having a copy of the prior-year tax return on hand at the time of filing will never hurt.
Taxpayers who don't have the information to use an e-signature
Individual taxpayers who don't have their prior-year AGI or prior-year self-select PIN (or their current-year IP PIN, if applicable) will need to do some legwork. They may even ask for help from a tax professional if they're surprised by this requirement at tax time and don't want to navigate the IRS.
The solution for individual taxpayers who want to e-file without professional help: Retrieve the information from the IRS by successfully navigating the two-factor authentication process or by asking the IRS to mail a copy of last year's tax return transcript.
IRS online accounts and passing Secure Access
In 2016, IRS quietly rolled out a multifunctional individual taxpayer account that allows users to see their balance owed by year, recent payments made, and key tax record information.
Taxpayers can use the account to see how much they owe, pay off a tax liability, or track their payments. Most importantly, for e-signing a tax return, the account shows the taxpayer's prior-year AGI. Similarly, taxpayers with an account can retrieve their IP PIN online through IRS's Get an IP PIN tool. For people who can access this account, it's an easy, immediate way to retrieve prior-year AGI or IP PIN for verifying a tax return e-signature.
However, it's not always so easy to access the account. The IRS implemented a strict authentication process for online services, aptly called Secure Access, to help prevent criminals from stealing sensitive tax information. It needed to be strict, because behind that authentication mechanism is a host of personal information, including the keys to e-filing a tax return.
More taxpayers fail the application's rigorous authentication process than pass it. Early indications from the IRS suggested that only three out of 10 taxpayers could pass.
To get into the system, taxpayers must provide a financial account number from a credit card or loan, as well as a U.S.-based mobile phone number registered in the taxpayer's name that can receive a confirmation code via text.
It's easy to get hung up during authentication. For example, if taxpayers have a credit freeze, they must ask the company to temporarily lift the freeze for the IRS authentication to work. If taxpayers don't have a credit card, a specified loan type, or a text-enabled, U.S.-based mobile phone, they can't authenticate and use the tool, period.
Cellphones present a specific set of problems. If a mobile phone isn't registered to the taxpayer, the IRS won't send a confirmation text to the cellphone. Instead, the IRS mails the confirmation code to the taxpayer's address on file. The code takes five to 10 calendar days to arrive by mail. Then, the taxpayer can revisit the login process and enter the code and his or her phone number to receive confirmation codes by text. So, for people who have pay-as-you-go phones, family plans, or company-provided phones, the tool won't be immediate at all.
Another option to get the information: Request IRS transcripts
People who can't access their IRS online account but need their information to e-file a return should request their tax transcripts. Taxpayers can use tax transcripts for many purposes, such as addressing tax compliance issues or substantiating income for a home mortgage loan or federal student aid.
Tax transcripts are available online, but immediate access requires successfully completing Secure Access, just like a taxpayer account. So, for individuals who need AGI from these transcripts to e-file a tax return, here are some tips:
- Request a tax return transcript, not an account transcript or record of account transcript. The tax return transcript is the most familiar looking IRS transcript — it looks a lot like a tax return. It has, among many items, the taxpayer's AGI from the original return filed. Other transcripts, such as the account transcript, contain an AGI amount but also contain many other confusing codes. Stick with the tax return transcript, because it guarantees the correct, original AGI every time.
- Timing is critical if taxpayers need to request prior-year AGI or their IP PIN from the IRS. Taxpayers who start planning early will have a much easier time obtaining a copy of their tax return transcripts or CP01A notice than those who wait until the filing deadline (which was April 17 for the 2018 tax season). They'll need to request the information be sent by mail, and it will take five to 10 calendar days to arrive.
- Ensure the IRS has the right address on file before requesting the information. Taxpayers who have moved since they filed a return should update their address by mailing a completed Form 8822, Change of Address (For Individual, Gift, Estate, or Generation-Skipping Transfer Tax Returns) to the IRS before requesting a transcript or IP PIN by mail. It can take four to six weeks for the IRS to process the address change.
There's more than one way to get the transcript:
- Visit the IRS Get Transcript tool at irs.gov/individuals/get-transcript. Taxpayers can request a copy by mail.
- Call 800-908-9946, authenticate by phone, and request a transcript by mail. The IRS won't give out prior-year AGI on the phone.
- Mail or fax Form 4506-T, Request for Transcript of Tax Return, or Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript, to the IRS. The IRS will mail the transcript to the taxpayer's address on file, which is usually the address on the last filed tax return.
There's only one way to immediately retrieve a lost IP PIN:
- Taxpayers can immediately retrieve IP PINs through the IRS's Get an IP PIN tool. This tool, like the taxpayer account, is behind Secure Access.
- If taxpayers can't access the tool, they'll need to call the IRS at 800-908-4490, Monday through Friday, 7 a.m. to 7 p.m. local time. After verifying the caller's identity, the IRS will mail the IP PIN to the address on record within 21 days.
If all else fails … there are three more options
If it's close to the filing deadline, and taxpayers can't provide a prior-year self-select PIN or prior-year AGI (or don't have their IP PIN), all is not lost.
Here's a summary of their options to guarantee filing:
- Visit a tax professional. If the taxpayer can't use the self-select PIN, a tax professional can sign the return with his or her practitioner PIN.
- File an extension of time to file to have enough time to request a tax transcript or a copy of the IP PIN. Just make sure to pay any tax due by the filing deadline to avoid penalties and interest.
- File on paper. Sign the return with a pen. It takes the IRS longer to process the return, and taxpayers may need to mail the state return separately, but this is always an option if e-filing isn't working.
So there it is, the guide to signing tax returns. For better or worse, the information above is all that is needed for taxpayers to successfully sign and file their tax returns and for tax preparers to help them do the same.
Ben Deneka, J.D., is The Tax Institute at H.R. Block's industry operations liaison and serves as a member of the Digital Services Subgroup of the IRS Advisory Council. To comment on this article or to suggest an idea for another article, contact senior editor Sally Schreiber at Sally.Schreiber@aicpa-cima.com.