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Practitioner Warns of Massive Confusion at Hearing on Mandatory E-Filing

By Diane Freda
Publication Date: 01/10/2011

A representative of the National Society of Accountants told an Internal Revenue Service panel Jan. 7 that its proposed rule on mandatory electronic filing is causing massive confusion among tax preparers and will be overwhelming when combined with all the other new requirements tax preparers are facing for 2011.

“There is so much that tax preparers have to look at and do and change and apply for—on top of the normal tax season,” said Paul Thompson, an enrolled agent and representative for Premier Accounting & Tax in Alexandria, Va.

He referred to new requirements that many tax preparers register with IRS for the first time if they want to prepare returns in 2011, as well as rules proposed by IRS (REG-100194-10) that they become electronic return originators with IRS if they reasonably expect to file 100 or more returns.

Under the law passed by Congress, any preparer who prepares more than 10 income tax returns will eventually be required to e-file. However, IRS gave tax preparers a break for 2011, raising the threshold to 100 or more returns.

IRS officials responded that they are struggling with the statute handed to them by Congress, which said that any individual income tax returns “prepared and filed” by a specified tax return preparer must be filed electronically.

Giant Loophole

Some practitioners said the statute and IRS rules may contain a giant loophole in that they could be interpreted to mean practitioners do not have to electronically file if they do not both prepare and file a return. Some are looking to escape the rule by saying they prepare the return but hand it over to the taxpayer to file. If the rule had said any preparer who prepares a return has to e-file, it would have been much clearer and more definitive in its inclusion of more tax preparers in the e-filing system, they said.

Much of the burden of determining who has to file electronically has now fallen on the definition of “filed.” IRS officials acknowledged this confusion by asking many questions addressing the concerns over the definition at the hearing. “Are you saying our definition of ‘filed' is wrong or what?” Lawrence Mack, a branch chief in procedures and administration, asked Kathy Petronchak, representing the American Institute of Certified Public Accountants.

Both AICPA and NSA, the only organizations that testified, said IRS should clarify situations that will constitute filing a tax return. This will especially pertain to the elderly, where tax preparers often take tax returns to the post office for customers and visit them in nursing homes to prepare and then mail their tax returns.

AICPA strongly urged IRS to allow preparers to mail tax returns on behalf of clients as a condition of a client opting out of the preparer e-file mandate.

Thompson said IRS needs to clarify if providing a stamped envelope to a client will constitute filing a return for them since the proposed rule says anything “beyond providing filing or delivery instructions” to the taxpayer will constitute filing a return.

Thomas Kane, IRS special counsel in procedures and administration, said the service understands the need for flexibility during the first season the rule goes into effect, if finalized as proposed.

Hardship Waivers

On the criteria for achieving a hardship waiver, Petronchak said there should be situations other than those outlined under Notice 2010-85 ( bankruptcy and qualified disaster areas being two outlined in the notice), that will qualify for a waiver.

Since there will be a wait of four to six weeks to find out whether a waiver has been granted, preparers will not have enough time to adjust, she said.

IRS has said it may provide administrative exemptions for certain classes of specified tax return preparers or types of income tax returns.

The complete text of this article can be found in the BNA Daily Tax Report, January 10, 2011. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »

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