Electronic filing - it's in everyone's future.
The Service has stated that in the future there will be only three acceptable methods of filing: (1) electronic, (2) 1040 PC-condensed print format and (3) manual input on IRS scannable forms. The 1040PC format return consists of a computer-generated condensed three-column return. This paper return contains only the IRS form lines for which there are amounts. 1040 preparation software may have this print method available. The Service plans to scan the 1040PC and the manually prepared returns in the future. It is not clear if and when these three filing methods will become mandatory; however, the IRS has indicated its desire to make electronic filing the standard filing format by the end of the century. Now is the time to prepare for a future in which electronic filing will be vital to a tax practice.
What's in it for practitioners
and their clients;
Offering electronic filing services for clients' individual tax returns may be the right choice in the very near future. As the popularity of electronic filing continues to grow and taxpayers demand this service, those practitioners who respond accordingly will place themselves in a leading competitive position. Electronic filing is the next step toward increasing filing season revenues through expanded services and increasing a client base. The fees charged,by practitioners vary greatly depending on their marketing philosophy. Some do not charge an additional fee if they have prepared the return. They view electronic filing as a giveaway to retaining existing customers or attracting new ones. Alternatively, they may offer free electronic filing to clients who submit their data before a certain date to help ease the practitioner's peak work load. For others,the added service of providing refund anticipation loans (RALs) may generate additional revenues.
The big plus for clients is faster refunds. Refunds can be expected in two to three weeks (as compared to the six to eight weeks for paper returns). And the two to three weeks can be accelerated by requesting direct deposit into the taxpayer's bank account. Of course, taxpayers can accelerate their refunds even more by using an RAL.
Because of the checks in the electronic filing software and the error checking done by the Service prior to accepting a return, electronically filed returns have substantially fewer errors than paper returns. Error rates on electronically filed returns range from 1% to 3%, compared to 15% to 17% for all individual returns. On acceptance of the return, the IRS sends an acknowledgment file to the preparer. This is an added benefit to taxpayers, in that they know that the return has been properly received by the Service.
The first step to getting started in electronic filing is to obtain a Form 8633, Application to Participate in the Electronic Filing Program, from the IRS District Office. This form should be completed and mailed to the applicant's primary IRS Service Center (as indicated on the application) by December 1 for consideration in the subsequent filing season. On receipt of the Form 8633, the IRS will assign an electronic filer identification number (EFIN) and send a letter to the applicant acknowledging receipt of the application. New applicants will have to pass a suitability check "to ensure that participants are conscientious, reputable filers who will protect the integrity of the program." An acceptance letter will be sent on completion of the necessary suitability checks.
Based on the information contained on Form 8633, the applicant will be sent the pertinent publications. IRS Publication 1345, "Handbook for Electronic Filers of Individual Income Tax Returns," provides all of the information needed to participate in the electronic filing program and to operate successfully as an electronic filer. Rev. Proc. 93-8 informs participants in the 1040 electronic filing program of their obligations to the Service, taxpayers and other participants.
Software for formatting tax return information into the IRS-specified file format and for transmitting files to the Service is available from most tax software vendors, usually as an add-on module to the 1040 individual tax program. In addition to formatting and transmitting the files, most of the transmission software provides extensive validation of the returns prior to transmission to avoid rejected returns. Most vendors provide software that transmits the files using a standard 1200 or 2400 baud modem. These files are transmitted, usually for a per-return fee, to a third party (either the tax software provider or an associated third-party transmitter), who in turn transmits batches to the IRS. Transmitting the files through a tax software provider provides the advantage of already being familiar with the software's user interface.
An alternative is for the CPA to directly transmit the information to the Service. Some vendors sell direct filing packages for those preparers whose high volume of electronic returns makes the additional expense for hardware and emulation software cost effective. This requires the added expense of a 4800 BPS bi-synchronous Bell 208B compatible modem. Filers who wish to transmit directly to the IRS must also complete further testing to be accepted into the program. Publication 1346 contains technical information needed by direct transmitters.
Which taxpayers qualify?
The electronic filing program has been expanded over the years to encompass more and more forms and schedules and to include balance due returns. Most commonly used forms and schedules can be filed electronically. Eligible forms for tax year 1992 were Forms 1040,1040A, 104OEZ, W-2, W-2G, 1099-R, 2106, 2119, 2210, 2210F, 2441, 3903, 4136, 4137, 4255, 4562, 4684, 4797, 4835, 4952, 5329, 6198, 6251, 6252, 8283, 8582, 8606 and 8829, and Schedules A, B, C, D, E, EIC, F, R and SE. Additional forms that will be eligible for 1993 are Forms 1116, 4970, 4972, 8396, 8615, 8814, 8815 and 8828, and Schedule C-EZ.
What still must be filed
Form 8453, U.S. Individual Income Tax Declaration for Electronic Filing, is the paper document that is required to be sent to the service center where the electronic return was transmitted. This form should be mailed on the next business day after the preparer has received the IRS acknowledgment that the return was accepted. There are five numeric amounts that are required input on Form 8453 from the 1040 return. This form and these amounts, such as total income and total tax, should automatically be generated by the 1040 and electronic filing software. This form is signed by the taxpayer and the paid preparer. Copies of the taxpayer's W-2s and 1099-Rs should also be sent with Form 8453. Balance due returns require the check to be sent with Form 9282, Form 1040 Electronic Payment Voucher, to the service center and address shown on that form.
What about state returns?
The Federal/State Electronic Filing Program simplifies processing of state returns by offering a one-step solution for transmitters. As many as 25 state governments may be participating with the Federal government to allow the state returns to be transmitted along with the Federal returns for 1993 return processing. This allows the returns to be accepted by the Service before being transmitted to the state government. The IRS transmits the state files to the appropriate state service center after Federal acceptance. The states have requirements similar to the Service; most will accept the Federal electronic filing application, so a separate state application is not required. Acceptance of balance-due returns varies by state.
All states provide filers with acknowledgments and have signature requirements similar to the IRS. This program is becoming very popular in North and South Carolina, where well over 200,000 Federal and state returns were filed electronically last year; Indiana, Kansas, Kentucky, Louisiana, Maine, Michigan, Mississippi, New Mexico, New York, Oklahoma, Utah, West Virginia and Wisconsin also participated for 1992 returns. In addition, 10 states (Arkansas, Colorado, Connecticut, Delaware, Idaho, Iowa, Missouri, Nebraska, New Jersey and Oregon) will be new to the program for 1993 returns and will limit participation in the first year.
In addition to the 25 states participating in this program, three states (Minnesota, Maryland and Illinois) have independent state programs; California is also planning to have its own program for 1993 returns. These independent programs vary by state, and do not use the standard file format used in the Federal/state program.
Refund anticipation loans
An RAL is a loan taken out by a taxpayer based on the taxpayer's anticipated income tax refund. With an RAL, a taxpayer may receive the refund immediately on the IRS's acceptance of the return, rather than having to wait for payment from the Service. A preparer/transmitter (usually in conjunction with a financial institution) can offer RALs to clients. The normal process is for the lender to loan the borrower the amount of the refund, less the electronic filing and RAL fees. The refunded amount is sent from the IRS directly to the lender, rather than to the taxpayer. The RAL fee charged by each institution must be identical for all taxpayers and must not be related to the amount of the refund. The effective annual interest rate on an RAL can be quite high, given that the RAL fee is in effect an interest charge for the two- or three-week period that it would otherwise take to receive the refund. However, some taxpayers with immediate cash flow needs may be willing to pay this high interest cost.
The incidence of fraudulent return filings associated with RALs greatly increased for the 1992 filed returns. Many of the fraudulent returns included an erroneous earned income credit. Part of the Service's electronic filing procedures has been to notify electronic filing transmitters that the taxpayer's refund has been approved for direct deposit to the taxpayer's financial institution. Last year, the IRS issued Ann. 92-153, which would have eliminated the direct deposit indicator (DDI) notification. This notification is significant to the electronic filing industry because refund anticipation loans are based on the DDI. The Service indicated that this decision was made to ensure that all possible steps were taken to protect the security of the tax system, and to safeguard the growing electronic filing program from use for fraudulent purposes, against either the tax system or the banking community. Increased awareness on the part of electronic filing preparers and changes to the Service's systems and processing resulted in more successful detection of fraudulent returns this year. The IRS has issued a news release (IR-93-53) stating that it will continue for 1993 returns to notify electronic filing transmitters that the taxpayer's refund has been approved for direct deposit. It should be noted that the Service does not approve refunds for direct deposit if the taxpayer has an outstanding debt to the Federal government or other agencies for items such as child support or educational loans.
media filing programs
Forms 1041, 1065, 5500, 5500-C/R and 5500EZ returns are permitted to be filed electronically, on magnetic tape or floppy diskette. The benefits of filing these business returns electronically are similar to the 1040 advantages. Due to the bulk processing of these returns there are additional benefits: reduced paperwork and storage, especially for partnership returns with hundreds of K-1s; a multiple return signature can be used if the practitioner has the authority to sign more than one 1041 or 5500 series return; and payment for multiple balance due returns can be made with one check.
Electronic filing in the future
The IRS is committed to expanding the number of returns filed electronically. The Service estimates that the number of electronically filed returns will double by the year 2000. Currently, around 75% of the approximately 115 million returns filed show refunds. This represents a large number of potential clients who have the incentive to file electronically. Thus, it behooves practitioners to include electronic filing in their firms' future plans.
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|Author:||Sarasota, Thomas W.|
|Publication:||The Tax Adviser|
|Date:||Oct 1, 1993|
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