New Law Requires Many Preparers to e-File

In 1986, when the IRS launched a pilot program to test the waters for its Electronic Filing System (EFS), the five participating preparers collectively transmitted 25,000 tax returns. The prevalence of e-filing has increased considerably over the years, and the IRS recently reached a major milestone when it safely and securely processed its one billionth tax return. For tax year 2010, approximately three out of four tax returns filed by the April 18 deadline were e-filed. That’s more than 100 million individual tax returns.

The popularity of e-filing has grown for a reason. With an error rate of one percent, e-filed returns are far more accurate than their paper-filed counterparts. (Paper-filing has 20-percent error rate.) With e-file, taxpayers with a balance due can file now and pay later; those with a refund have convenient options as well, including direct deposit. A faster and easier process for both tax preparer and taxpayer, e-filing is safe and secure, and it requires a fraction of the paperwork.

If you’ve never e-filed before, get ready. A new law requires many tax professionals to e-file.

Who is required to e-file?

Individuals and firms who expect to file 100 or more 1040, 1040A, 1040EZ, and 1041 returns collectively in calendar year 2011 must e-file. If a firm will prepare 100 or more of these returns, each of the firm’s preparers must e-file. Note that the requirement is based on the firm's numbers, not individual preparers’ numbers. In calendar year 2012, firms and individuals who prepare 11 or more returns will be required to e-file. Taxpayers who refuse e-file services will be allowed to submit a paper return on their own.

How does a firm or individual preparer become an authorized e-filer?

It takes at least 45 days to become an authorized e-filer with the IRS, but the application process is fairly simple. The first step is to create an IRS e-Services account for communicating with the IRS electronically. Once you’ve answered a few basic questions and created a username, password, and PIN, that IRS will mail you a confirmation code. The next step is to activate your e-Services account online, which you must do within 28 days of receiving the code. Next, complete the application and submit the necessary documentation, which may include both proof of professional status and a fingerprint card. The last step is to pass a suitability check. Once you are approved, you’ll receive an acceptance letter and be issued an Electronic Filing Identification Number (EFIN). For more information or to begin your application process, visit the article “Become an Authorized e-file Provider” on the IRS website.

Certain conditions, such as bankruptcy; the inability to purchase hardware, software, and services required to e-file; and operating in a Presidential Disaster Area might exempt some tax preparers from the new e-file requirement. A preparer may request a Preparer e-file Hardship Waiver Request (Form 8944) to apply for this exemption.

More benefits to come?

If you’re already familiar with e-filing, you know that tax returns are processed multiple times throughout the day as specified by the IRS drain times. You also know that acknowledgments are not immediate, and that rejections can be hard to understand—sometimes requiring much research before they can be corrected. But this will soon change.

The IRS is phasing in a Modernized e-File (MeF) system, which will provide tax preparers with acknowledgements within minutes, rather than the 48 hours the current system requires. Returns will also be processed as they are submitted, rather than held for batch processing, and more detailed explanations will be provided for rejected returns so errors can be corrected quickly and retransmitted. Eventually, the new MeF system will provide access to tax refunds within a few days rather than a few weeks. So the benefits to e-filing will continue to grow.

What can Drake do for you?

Drake Software was a pioneer in e-filing; in fact, we have been part of the e-file realm since the first successful transmission in 1986.  For more information, visit us online at www.drakesoftware.com.