A Step Toward Mandatory E-filing

Mandatory e-filing of your 1040 in on the horizon.  The recently enacted “Worker, Homeownership, and Business Assistance Act of 2009” requires that any individual return filed by most preparers must be submitted via e-file.   This is to be effective for 2010 returns, which will be filed beginning in 2011.  If you prepare your own return, there is no current requirement that it be submitted by e-file.

Specifically the legislation states that “any individual income tax return prepared by a tax return preparer be filed on magnetic media” if two requirements are met.  Magnetic media includes e-filing and is the type of submission contemplated by this legislation.    The first requirement is that the preparer reasonably expects to file more than ten returns in a given calendar year.  With such a low threshold, this obviously includes most legitimate paid preparers.

However, it is the second requirement that is somewhat ambiguous.  It states that the return in question must be e-filed if prepared and filed by the preparer.  Taking this language at face value, a preparer can prepare a paper return for a client, give the return to the client, and the client mails the return to the IRS. The preparer has prepared the return, but it has been filed by the taxpayer.  Based on the language, one would think this really doesn’t change anything, as clients who want to file a paper return simply must file it themselves.  This does not seem to be the intent of the legislation, so I anticipate that the Treasury Department will issues regulations defining the filing of a return for purposes of this legislation.

There is no doubt that e-filing of returns going to be a larger part of your future.  According to the IRS, they can process an e-filed return for about three dollars less than it costs to process a paper return.   Taxpayers who are due refunds are more likely to e-file, as it allows them go get their refund within a couple of weeks when utilizing direct deposit (another Treasury money-saver).  But in requiring return to be e-filed, the Treasury Department is shifting its costs to the taxpayer, requiring them to bear the cost of e-filing the return.    Should e-filing of all returns be mandatory, the taxpayer would likely incur additional costs for preparation of the return if they are currently filing a self-prepared return.  If they still opt to prepare their return, they would likely incur a fee for e-filing.  Spreading the e-file requirement to all types of returns could also adversely affect small preparers who prepare only a limited number of returns for entities other than individuals.

Another adverse impact of the current legislation would likely be to drive small preparers underground.  Those preparers who do not have e-file capability could simply not sign the return as a paid preparer and allow taxpayers to file the return as if they had prepared it themselves.  This would add to the existing estimated 700,000 preparers who illegally prepare returns, but do not sign as paid preparers.  This illegal preparation industry harms taxpayers, as the taxpayer cannot argue that their preparer prepared an incorrect return if it is not signed by the preparer.  Should the taxpayer wish to sue the preparer, there are no grounds for suit, as there is no evidence linking the preparer to the return.

Despite any semantic problems with the current legislation, there is little doubt that e-filing for the future will be on the rise.  The IRS can process a return at less cost, the incidence of errors is decreased, and processing time for the returns is less.  On the other side of the coin, however, e-filing can create a logistical burden for taxpayers with no internet access if they prepare their own return.   Secondly, additional cost is likely to be incurred by some taxpayers who do not already utilize the e-file process.  Third, when taxpayers owe, there is likely to be some confusion in coordinating the filing of the return and the payment of the amount due.  Finally, rather than bother with e-filing a return, some taxpayers may simply opt to drop out of the system and not file returns at all.