Jul 3, 2008

The Truth on E-filing and the IRS: A mandate to come??

In 2007, there were over 235 million tax returns filed. Obviously, for cost measures and efficiency, the IRS wants as many of them to be e-filed as possible. The target set by the IRS is to have 80% of all Forms 1040 e-filed before 2007. At 59.7%, the IRS has clearly not met the expectations of Congress.

Hence, what are the proposals that are on the table: mandates for e-filing

The IRS' Electronic Tax Administration Advisory Committee ("ETAAC") has recently come out with its 2008 Annual Report to Congress that suggests and re-suggests some mandates that may be forthcoming:

1. A requirement that all tax preparers file taxpayer returns electronically if they have more than 50 returns prepared each year (e-filing is not currently a requirement for a tax preparer)
2. Increasing the number of employers that need to file Forms W-2 in an electronic manner to the IRS (currently the requirement to file electronically is for businesses with more than 250 employees)
3. Testing and licensing all Tax Preparers who are not essentially CPAs, attorneys, or enrolled agents to insure that electronic filings are done by competent professionals (presently anyone can be a paid preparer without qualification or training)

The emphasis on mandates on the practitioner is consistent with the IRS "deputizing" the tax professional for compliance risks. Congress has mandated that the tax preparer disclose "questionable positions" on a tax return or face stiff penalties.

All of these items are pushing to a modernized IRS. The "Modern IRS" has the taxpayer doing its adminstrative work Because more than half of all returns are filed by tax professionals, the work will be done by these preparers. To take this a step further, the errors will be owned by the preparer also.

The IRS wants to bury its archaic computer systems for a more modern system that can consolidate all information into a centralized source: The Customer Account Data Engine ("CADE"). This new system will allow the IRS to look across its traditional lines of communciation with one contact. It will consolidate individual and business accounts, notices, examination and collection efforts. In fact, 30 million accounts have been processed into CADE this year.

In short, the legacy system that the IRS uses is proposed to be off-line by 2012 according to the ETAAC. The IRS cannot do this without mandates- 60% compliance is about all they can get voluntarily. The IRS realizes that this will be done by tax professional.

This tax professional must meet their standards. This standard is simple: an honest, trained preparer who will stand by their returns. Choose this person wisely for years to come for the IRS sees this person as the key to scaling their e-file and compliance risks for the future.

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