Here comes e-filing: ready or not, mandatory e-filing will soon begin.

In his 2003-04 budget Gov. Gray Davis once again is proposing the implementation of a mandatory e-file requirement for tax practitioners who prepare more than 100 individual state tax returns and use tax preparation software. The proposal is predicted to reduce the state's tax filing costs by $50 million annually.

Tire Franchise Tax Board is anticipating that the legislation will pass and become effective Jan. 1, 2004.

At press time, the proposal was included in two budget trailer bills--SB 7X and AB 1756.

The mandate applies to individual income tax returns, but does not include prior year, fiduciary or amended returns. The requirement applies to all tax practitioners who file with California regardless of the state in which they themselves are located.

To e-file, tax practitioners must use an FTB-approved tax software program. A list of approved programs is located at www.ftb.ca.gov/individuals/eServices/ efile/allsoftware.html.

Currently, a tax practitioner must be an approved IRS e-filer to e-file with the state. There is an Oct. 1 deadline for applying to e-file with the IRS.

Practitioners who are denied participation in the IRS e-file program will be advised to file paper returns and encouraged to resolve their issues with the IRS.

The proposals allow clients to refuse to allow their tax forms to be e-filed. However, the initial proposals would require that client refusals be documented in writing and signed by the client.

Reasonable cause for not e-filing with the FTB also would be allowed for forms that are not supported by tax preparation software, or that are not able to be filed with the IRS since state filing is dependent upon films with the IRS.

However, the FTB is encouraging tax practitioners to lobby tax preparation software providers to change their programs to allow for e-filing of all documents or to change software vendors.

The FTB is planning informational seminars on e-filing to explain tire process to tax professionals, and they are encouraging professionals to become familiar with the process by visiting their website at www.ftb.ca.gov/professionals/eServices/efile.

The FTB has identified those tax professionals to whom the requirement applies and will communicate with them directly after the legislation is passed.

Transitioning to e-filing is reported to be a frustrating and time consuming event with a steep learning curve.

If this legislation is enacted, practitioners would be well advised to begin taking steps in advance of tax season to learn the process and complete the application.

In response to concerns about increased costs to tax practitioners--and ultimately to taxpayers if those costs were passed on--the FTB and other tax preparers have indicated that there could be a substantial savings in time, paper, postage and copying costs that would offset increased filing costs.

The FTB wants to hear from tax practitioners who have questions, comments, concerns and ideas about e-filing.

Tax practitioners are invited to send comments to [e-mail].

The FTB is supportive of the mandatory e-filing concept since it will save the state money, but the proposal is a statutory mandate and you might wish to contact legislators with concerns prior to its enactment.

The IRS and the FTB also are plan ring incentive efforts to encourage and inform taxpayers that the e-filing option is available, Information on the benefits of e-filing will probably be sent to all taxpayers with routine correspondence as well as included in the tax preparation booklet mailed to taxpayers.

Last year CalCPA was successful in persuading legislators that a similar mandate was unworkable. Concerns raised in that process have been addressed in this year's e-filing proposal by providing for the client to opt out and allowing tax practitioners to state a reasonable cause for not filing a specific individual return electronically.

A fine of $50 per eligible return not filed electronically will be assessed for those who chose to ignore the requirement.

The FTB has not yet finalized its penalty collection system.

Abusive Tax Shelters

CalCPA is working with tire Legislature to make sure that that legislation designed to end the use of abusive tax shelters is workable and does not inadvertently impact normal tax planning activities engaged in routinely by CPAs and taxpayers.

Language was included in two bills--SB 614 (Cedillo) and AB 1601 (Frommer)--that would have applied to all taxpayers, including individuals.

Prior to allowing any investment deduction, tax practitioners would have had to evaluate the investment to assure that it met all the following four requirements:

* The transaction changed in a meaningful way apart from the tax benefits the taxpayer's economic position:

* The taxpayer had a substantial non-tax purpose for entering into that transaction:

* The transaction was a reasonable means of accomplishing that purpose; and

* The present value of the reasonably expected pretax profit from the transaction was substantial in relation to the present value of the expected net tax benefits and the reasonably expected pretax profit from the transaction exceeds a risk-free rate of return.

Bruce C. Allen is CalCPA's director of government relations.