How to have a successful e-filing experience. (Tax Practice Management).

Rosenfeld, Holland, Raymon & Pielech is a small regional CPA firm located in New Bedford, Massachusetts. It has a very diversified individual tax practice and prepares more than 1,500 returns annually. Although registered as an electronic return originator (ERO) in 1998, the firm did not actively participate until the later part of 1999, when it adopted e-filing as a formal strategic initiative. The approach was first to define goals and designate a professional within the firm to champion the e-filing program. The goal was to create and implement a program that would integrate the e-filing process with the firm's traditional process of return preparation, review, signing and quality control procedures.

The program has been in existence for three full years. The first two years (1999 and 2000) were pilot seasons. Subsequent to each pilot season, the firm would reassess and establish the adjustments necessary to achieve its objectives. The third year's approach was more proactive. Enclosed in the client annual tax packet was a letter informing them that the firm provides e-filing, asking clients whether they would like to file their return electronically, if eligible. The result was that more than 20% of the clients' 2001 returns were electronically filed.

Clients are classified using an alphabetic system. The clients with the highest tax complexity are classified as A, moderate complexity as B and low complexity as C.

As the e-filing process continues to evolve, the process has been made easier. For example, the number of forms and schedules to be filed electronically is expanding, thus encouraging a greater number of clients to e-file.

Other barriers that have been eliminated are Forms W-2, 1099 and W-2G, which are no longer required as attachments to Form 8453, U.S. Individual Income Tax Declaration for an IRS E-file Return. Faxes are now an acceptable method to authorize EROs to transmit returns; however, an original taxpayer signature must still be forwarded to the IRS.

Certain administrative barriers remain, such as the hidden costs for software, costs associated with transmitting and tracking returns and initial data keypunch requirements. Offsetting these costs are the benefits realized. An electronically filed return eliminates the need for the IRs to manually key tax return information into its system, reducing the number of errors that would occur. There is also an error check that is inherent in the e-filing process, resulting in a reduction of notices received by clients. Because the professional time needed to respond to most notices is a half-hour or more and an administrator's time to transmit and track the return through the e-filing process is 15 minutes, this is a significant benefit.

Clients who have participated in the e-filing process have reacted positively. They have received quicker refunds, reduced their postage and experienced greater convenience. During the processing of e-filed returns, the administrator is generating two copies (as opposed to three copies with paper returns), rendering a savings of paper, toner and time.

The Service will probably provide additional incentives (such as "e-services") in the near future. These e-services will be available online to EROs that file a certain number of e-file returns (currently proposed at 100). These e-services may include the ability to look at a client's payment history to check estimated tax payments, request a full transcript and many other online services.

Six Steps to E-Filing

A firm can set up a successful e-filing system consisting of the following steps:

1. Designate a professional within the firm to champion the e-filing program.

2. Gather complete information about the Federal and state e-filing programs in which the firm will be participating.

3. Develop an understanding of the procedures necessary to e-file returns through a software provider.

4. Develop the proper documentation and checklist to ensure proper quality controls are in place.

5. Document and organize procedures through the development of an e-filing manual.

6. Provide personnel with education and training and encourage clients to participate in e-filing.

Starting Point 

The key to a successful e-filing program is first to designate a professional within the firm to champion the e-filing program. That professional will establish, integrate and coordinate all facets of the e-filing process within the firm's traditional process of return preparation and quality control procedures.

A firm's tax preparation software package must support e-filing and the states that are participating. Information about the Federal/state e-filing program a firm will be participating in must be amassed. The Federal e-file program is a cooperative tax-filing program that allows the practitioner to process both Federal and state returns electronically for clients. Each state has its own set of rules and limits; for example, Massachusetts requires an application be filed subsequent to being accepted by the Federal e-filing program, while Rhode Island only requires a copy of the letter from the IRS confirming acceptance to participate. The only prerequisite and invariable component of the states that offer e-filing is that the practitioner must be accepted into the Federal e-file program; see www.irs.gov for more information.

Overview of Software and Tracking Returns

The practitioner must become familiar with the procedures necessary to process and track returns electronically. Most software companies have a section in their manual specifically designed for e-filing, which typically addresses how to set up and configure the software to designate a return for e-filing. Generally, once a return is prepared and designated for e-filing, most software will provide diagnostics to determine its eligibility. However, a firm should not rely solely on the computer to determine the eligibility of a return. A tax adviser should know while preparing the return whether it qualifies for e-filing for both Federal and state purposes.

Although the process of obtaining client information has not changed, preparing a return for e-filing often requires additional data input. For example, the W-2, 1099-R and W-2G must include the employer's name, complete address and employer's tax identification number. If the client information remains unchanged from year to year, then no additional input will be required. This information should transfer over to subsequent years.

On completing the return and on review and approval of the return by the client (subject to qualifying for e-filing), the file must be exported to create an IRS file. The IRS file will be reflected as a qualified return, defined as a return that has passed diagnostics and is ready to be released for transmission. At the creation of this file, a declaration control number (DCN) will be assigned to each electronically filed return. The DCN identifies the electronic file identification number assigned by the IRS, as well as a serial number assigned by the software. This number is used to track the return through the e-filing process.

In the processing department, the returns are segregated into two drop-boxes, as indicated on the route sheet for either traditional paper returns or e-file returns. The e-file returns are posted to an e-file tracking log. There are many alternatives to the design and development of this worksheet. Each firm must develop one that works best for its purposes. Using the worksheet pre-numbered by the DCN is one option. This will allow the firm to track returns that have been prepared and for which an IRS file has been created, which remain either with the preparer or reviewer and have not yet been forwarded to the processing department. It provides information as to who participated in the e-filing process and the dates the return was transmitted and accepted and Form 8453 was mailed.

Before a return can be transmitted electronically, a signature from the taxpayer must be obtained. This can be through the use of an electronic or paper signature. Electronic signatures are not currently an acceptable form for Massachusetts or Rhode Island; practitioners should check the requirements in those states where they intend to e-file. On receiving the signature on Form 8453, the returns can be selected for transmission. Once transmitted and posted to the tracking log, the file is put aside until an acknowledgment is received from the IRS or the state that the return is accepted. A return history report should be printed and attached to the file copy of the return. The tracking log will be completed with the acknowledgment date and the mailing date of Form 8453. At this point, the file can be returned to its appropriate place.

Due Diligence and Quality Control

E-filing has not changed CPAs' needs to ensure that their work meets certain quality standards and that they document procedures. However, with e-filing, CPAs have a greater awareness of the questions clients should be asking during the interview process.

These questions should be integrated within the individual tax preparation checklist whether or not a return is e-filed, as many of the income, deduction and credit items rely on the following:

* Confirmation of names of taxpayer, spouse and all dependents.

* Confirmation of current address.

* Verification of date of birth of taxpayer, spouse and all dependents.

A separate supplemental checklist should be created and attached to the individual tax preparation checklist when a return is electronically filed.

E-file due diligence checklist when using Form 8453:

Part I. To be completed by preparer:

* Indicate on route sheet that the return is to be electronically filed.

* Check diagnostics to ensure the return qualifies for e-filing.

* Export the return to create IRS file (guidance of software commands).

* Print copy of the return.

* Print additional copy of Form 8453.

* Review process as normal.

* Review return with client.

Part II. To be prepared by the ERO:

* E-filed returns will be listed on tracking log.

* Check Social Security Number(s) and taxpayer(s) name.

* Verify that Form 8453 has been signed. Both signatures are required for a joint return.

* Verify that Form 8453 has been signed by preparer/ERO.

* Transmit returns.

* Print transmit report and list date on tracking log.

* Ensure that the return was accepted by checking acknowledgment file.

* Attach copy of signed Form 8453 and print return history report along with Forms W-2, 1099-R and W-2G to file copy of the return.

* Staple attachments to the back of Form 8453.

* Mail Form 8453 to IRS.

* Retain state signature form (if required) in binder.

As part of quality controls, an electronic-filing manual should become part of a tax-procedures manual already established. This manual should provide standards and consistency to the personnel participating in the process of return preparation, review, processing and signing.

Education and Training

Firm education and training is essential to all personnel connected with the preparation, review and processing of returns. Education decreases the learning curve that results when new procedures and systems are implemented, thereby increasing efficiency and productivity. The individual designated to champion the e-filing program would be the most effective individual to coordinate the in-house training.

The IRS provides a wealth of information in the "Electronic Services" section of its web page, located at www.irs.gov.

Practitioners' Comments on E-Filing

While the e-filing experience described in the column was generally a positive one, practitioners have encountered some problems and suggested how to improve the process further. Some of the problems listed here may have already been addressed by the IRS (or soon will be).

Problems

* Addresses too sensitive for 1099-Rs--if used Zipcode +4, they were rejected.

* Different address for employer on IRS or Social Security records than on W-2 results in a rejected return.

* Cannot file all forms under all circumstances.

* Cannot e-file with large number of partnerships on Schedule E.

* Must manually enter capital-gain transactions--cannot attach client's spreadsheet or any other white paper attachments.

* Cannot e-file state returns when multiple states are involved.

* Some states do not allow e-filing of nonresident returns.

* IRS will not accept W-2 form that uses a Social Security number for the employer ID.

* IRS will not accept an employer ID issued during the tax year being filed.

* Additional credit card fees for e-payments is a deterrent.

* Takes too long to get a refund--longer than advertised.

* Large refunds seem to be delayed.

* Seven more steps existed to either process or track forms for each client who e-filed.

* In disputes between spouses over dependency exemption, the second person to file cannot e-file.

* Some restrictions with e-filing entries (e.g. "various" cannot be entered on some forms when e-filing).

* Acknowledgment forms too lengthy and do not give enough information about processing dates.

Suggestions

* When the return is ready to be e-filed, it takes time to get Form 8453 signed and returned--the IRS should allow tax preparers to submit this form via fax to expedite process.

* Copying and sending in Form 8453 with Form W-2 is time consuming--the IRS should do as California does, just requiring Form 8453 to be in practitioner files. (Note: Form 8879 allows e-filing without sending W-2s to the IRS.)

* Should give more time to straighten out Form 8453s when they are rejected.

* There should be "no exceptions" to e-filing (e.g., 50% withholding on Form W-2 or 1099-R, installment sales, passthrough research and development credits, deceased spouses).

* E-filing is getting better, but the IRS should work more closely with practitioners, rather than treating them as adversaries.

* The IRS should provide account and other information about taxpayers via the Internet.

* "Newcomers" to e-filing should contact the IRS for Pub. 3112, The IRS e-file Application Package, which explains e-filing issues and options.

* E-filing saves the government money and shifts costs to practitioners. Those who e-file should he given a nominal tax credit.

* Registered tax professionals should be able to get notices electronically from the IRS and state--the current process has too much paper and is too slow.

From the AICPA Tax Division's E-Filing Task Force

Editor's note: Mr. Holub is a member of the AICPA Tax Division's Tax Practice Responsibilities Committee. He is formerly a member of the Member Tax Practice Improvement Committee and chair of the Tax Practice Management Committee. Mr. Scutellaro is a member of the Tax Practice Responsibilities Committee and chair of the E-File Task Force.

If you would like additional information about this article, contact Steve Holub at [phone] or [e-mail], Lisa Szargowicz at [phone] or [e-mail], or Joe Scutellaro at [phone] or [e-mail].

FROM LISA SZARGOWICZ, CPA, ROSENFELD, HOLLAND, RAYMON & PIELECH, PC, NEW BEDFORD, MA, AND JOSEPH SCUTELLARO, CPA, HJ JUMP SCUTELLARO AND COMPANY, LLP, TOMS RIVER, NJ