Many taxpayers are aware that it is possible to exclude gains earned on selling a home from their income tax return. However, a common question is how often and how many times a taxpayer can exclude such gains from their taxes? This article addresses these questions. The tax law that grants taxpayers the right to exclude gains on selling their...Read more...
Understanding IRS e-File Requirements for Tax Professionals
In 2011, the IRS began enforcement of a new e-filing requirement that applies to nearly all tax professionals who prepare Individual (Form 1040 series) and/or Estates and Trust (Form 1041 Series) tax returns. The general e-filing requirement is as follows: any tax professional who expects to prepare 11 or more tax returns during the year must e-file all tax returns they professionally prepare. Initially, this new e-file requirement was implemented in two phases - in 2011 you were only required to e-file your returns if you anticipated that you would prepare 100 or more returns. The more stringent requirement now in effect was implemented for tax year 2012 and thereafter.
The 10 tax return threshold depends on the amount of tax returns you reasonably expect to file each tax year. When determining the number of tax returns you expect to file, you should not include tax returns that are exempt from the requirement due to the client-taxpayer preferring to file paper returns (see Section: "Exceptions to the e-File Requirement", below). You need to separately determine whether you're subject to this requirement every calendar year during which you will be preparing tax returns. It is entirely possible for you to be exempt from the e-filing requirement in one year and be subject to the requirement in another year.
For purposes of determining whether you're subject to the e-file requirement, the collective amount of returns that your firm, company, or office files should be used. If the collective expected number of returns for your firm or company is ten (10) or more, all members of your firm or company must e-file all returns prepared and filed. So, for example, let's say you work in a small, independent tax office with only yourself and one other tax professional. You anticipate preparing six individual tax returns (Form 1040s), and your partner anticipates preparing seven trust returns (Form 1041s). Even though neither you nor your partner exceeds the threshold of 10 or more returns, you collectively do exceed the threshold, and as a company you will be required to e-file all of the tax returns you file during the year.
Exceptions to the e-File Requirement
There are many exceptions that apply to the general e-filing requirement described above. These exceptions generally fall into one of three categories, each of which is explained below. The first relates to specific tax returns that are exempt based on the taxpayer-client's preference to file a paper return. The second category is administrative exemptions, which involve circumstances where the IRS specifically exempts the tax preparer from e-filing a tax return. The final category of exception is an undue hardship waiver, which the tax preparer may apply for to be exempt from the e-filing requirement in certain circumstances. If any of these exceptions apply, the tax preparer must file Form 8948 with the exempt tax return that is not being filed electronically.
Exempt Tax Returns -- One important exception to the e-filing requirement involves circumstances where a tax preparer's client prefers to paper file their tax return(s). What's important here is that the taxpayer must choose to have their tax return filed as a paper return and the tax return must be submitted to the IRS by the taxpayer. The tax professional should not influence the taxpayer's decision, and the tax preparer may not paper file the return on behalf of the taxpayer. The tax preparer should also obtain a written and signed statement from the taxpayer on or before the day the paper return is filed. This written statement should meet the following specifications:
- Hand Signed and Dated by Taxpayer - The statement should be hand-signed and dated by the taxpayer on or before the day tax return will be filed with the IRS. The statement may be signed by either spouse if the statement is for a joint tax return.
- Affirm Choice of Taxpayer to Paper File Return - The statement must affirm that the taxpayer is choosing to file the return in paper format and that the taxpayer will be filing the return.
This written statement should not be filed with the taxpayer's return, but should be retained by the tax preparer as evidence of the taxpayer's choice to file a paper return. An e-mail sent from the taxpayer to the tax preparer is not sufficient evidence of a taxpayer's choice to file an income return in paper format. However, a written and signed statement may be sent to the tax preparer by the taxpayer as a scanned document attachment to an e-mail.
Administrative Exemptions -- The IRS has indicated that certain circumstances will justify a tax preparer from being exempt from the e-filing requirements, which they detailed in a notice published on March 30, 2011. Tax preparers who meet the requirements of these "administrative exemptions" are automatically exempt from the e-file requirement and therefore do not need to apply for an undue hardship waiver (as described below). The following are approved administrative exemptions that, if applicable, exempt the tax preparer from the e-filing requirements for all tax returns the tax preparer files:
- Preparer Members of Certain Religious Groups - Tax return preparers who are members of a "recognized religious group that is conscientiously opposed" to members using electronic technology are exempt from the e-filing requirement so long as their religious group has "existed continuously" since 1951.
- Foreign Preparers Without Social Security Numbers - A tax preparer who is a foreign person without a social security number is exempt from the e-filing requirement because applications to the IRS e-file program are not currently accepted from such persons without a social security number who "live and work abroad."
- Certain Preparers Ineligible for the IRS e-file Program - Some tax preparers are ineligible to be an IRS e-file provider because of a sanction against them, and are therefore exempt from the e-filing requirement until the sanction is no longer effective against the tax preparer.
Some additional administrative exemptions apply for individual returns a tax preparer files, depending on the circumstances of the tax return itself. They are as follows:
- Rejected Returns - A tax preparer is not required to e-file a return if the tax preparer already attempted to e-file the return, had the return rejected, and cannot resolve the condition related to the reject code returned from the e-file system.
- Forms/Schedules Not Supported by Tax Prep Software - A tax preparer who is using a tax preparer software that is does not support e-filing a form or schedule on a taxpayer's return may paper file the tax return.
- Technological Difficulties - A tax preparer who is has a "short-term inability" to electronically file a return may paper file returns for a reasonable time while the technological difficulty is being resolved.
- Tax Returns and Forms Not Accepted Electronically - Any tax return containing forms that are not yet accepted by the IRS e-file system for electronic filing, such as a Form 1040X or Form 1040-NR, may still be filed by paper return.
- Requirement Documentation/Attachments Not Accepted Electronically - If a tax preparer prepares a tax return where submission of documentation, attachments, appraisals, etc. is required and the IRS does not yet provide the capability of filing such forms electronically, the tax preparer may paper file the return.
Undue Hardship Waivers -- Obtaining a waiver from the IRS e-file requirement resulting from undue hardship requires the tax professional to file a Form 8944 with the IRS, and include with the form any documentation required as given in the instructions to Form 8944 (included as part of the Form 8944). Tax preparers who file a Form 8944 to apply for a waiver should ordinarily do so between October 1st of the year preceding the tax filing season for which the tax preparer seeks the waiver and February 15th of the applicable year. Untimely applications for waivers won't be considered by the IRS except in cases of "unusual or unforeseen and unavoidable circumstances." A tax preparer who successfully obtains an undue hardship waiver will receive a notice from the IRS. The tax preparer should not include a copy of the notice of waiver when paper filing the tax returns they prepare.
Background and History of the e-File Requirement
The e-file requirement was initiated by Congress with the enactment of the Worker, Homeownership, and Business Assistance Act of 2009 ("WHBAA"), which added a new special rule to Internal Revenue Code Section 6011 that requires that specified tax return preparers who file tax returns must electronically file the tax returns they prepare. The term specified tax return preparers is defined in the statute as "any tax return preparer unless such preparer reasonably expects to file 10 or fewer individual income tax returns during such calendar year." This provided an exception to the previous rule in Section 6011(a) that restricted the IRS from requiring tax returns for individuals, estates, and trusts to be filed "in any format other than paper forms."
In response to the enactment of WHBAA, the IRS announced in Internal Revenue Bulletin 2011-17 the implementation of final regulations in T.D. 9518, which set forth the fundamental rules regarding the applicability of the e-file requirement to certain tax professionals, i.e. those who meet the criteria of a "specified tax return preparer". Simultaneously, the IRS released Notice 2010-85, containing the proposal form of Rev. Proc. 2011-25, with guidance regarding undue hardship waivers (see above). The e-filing requirement was phased in over the course of two years, beginning in the 2011 tax filing season, during which only tax preparers who reasonably anticipated preparing 100+ tax returns would be required to comply with the e-filing requirement. Beginning with the 2012 tax filing season, the e-filing requirement took full effect, and currently any tax preparer who reasonably anticipates proessionally preparing 10 or more tax returns during the filing season is subject to the requirement.
Frequently Asked Questions: e-File Requirements
Is a tax professional who is required to e-file the returns he/she prepares also required to e-file their personal return(s)? - No. The e-file requirement only applies to tax returns that the tax preparer professionally prepares for another individual.
 - IRS.gov Article, "Most Tax Return Preparers Must Use IRS e-file", Link
 - Treas. Reg. §301.6011-7(a)(3), Link .
 - Treas. Reg. §301.6011-7(d)(1), Link .
 - Treas. Reg. §301.6011-7(d)(2), Link .
 - See Examples, Treas. Reg. §301.6011-7(e), Link .
 - Rev. Proc. 2011-25 Section 9, p. 10, Link .
 - Rev. Proc. 2011-25 Section 9, p. 11, Link .
 - Rev. Proc. 2011-25 Section 9, p. 12, Link .
 - IRS Notice 2011-26, Link .
 - Rev. Proc. 2011-25, p. 8, Link .
 - IRS Notice 2011-26, p. 5, Link .
 - Rev. Proc. 2011-25 Section 6, pp. 8-9, Link .
 - Worker, Homeownership, and Business Assistance Act of 2009, Section 17, PL 111-92 (Nov. 6, 2009), Link .
 - See 26 U.S.C. §6011(e)(3), Link .
 - IRS T.D. 9518 (IRB 2011-17), p. 3, Link . Before this change, corporations and partnership with more than 100 partners already had requirements in place for e-filing their tax returns.
 - supra note 15.
 - Link
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