Magazine article The CPA Journal

E-Filing Benefits and Requirements

Magazine article The CPA Journal

E-Filing Benefits and Requirements

Article excerpt

Although there is no mandate by the IRS to participate in the federal e-filing program, the number of returns filed electronically has grown dramatically over the past few years. According to the IRS, an estimated 67 million returns were e-filed during the 2005 calendar year. In addition to personal income tax returns, most frequently used forms can be e-filed, including Forms 940 and 941 for employers, Form 1065 for partnerships, Form 1041 for estates and trusts, Forms 1120, 1120S, and 1120-POL for corporations, and Forms 990, 990-EZ, and 990-PF for exempt organizations.

Federal and state e-file programs, which include 37 states and Washington D.C., allow e-filing of both federal and state individual income tax returns at the same time. Various states, such as California, Michigan, Minnesota, Wisconsin, and Oklahoma, have already mandated Form 1040 for e-filing; other states, such as Alabama, Massachusetts, New Jersey, and Virginia, mandate e-filing beginning with tax year 2005. Nine states have no state income tax, and the remaining states have some form of e-filing program in place. New York, New Jersey, and Connecticut are moving to require tax preparers to e-file and to register with the IRS.

The IRS e-file pilot program began in 1986, and the program itself has been operational since 1990. Of the estimated 67 million returns electronically filed as of April 26, 2005, 46.6 million have been submitted by authorized e-file providers. Authorized e-file providers that actively participate in the IRS e-file program and file at least five individual or business tax returns in a calendar year can use the IRS's e-services.

Benefits for an Electronic Return Originator

There are several benefits, in terms of time, money, convenience, and recordkeeping, for tax preparers that become efilers.

First, a registered e-filer can log on to the IRS website at any time. Benefits of the website include: resolving taxpayer problems expeditiously through electronic exchange of data; viewing, completing, and filing either Form 2848 (Power of Attorney and Declaration of Representation) or Form 8821 (Tax Information Authorization) online; and inquiring (with an appropriate power of attorney) about an individual's or business client's account, problems, refunds, installment agreement, missing payments, or account notices, including transcripts of accounts as well as a new product called "record of account," which combines the return transcript and the account transcript into one product.

Additionally, the IRS allows electronic return originators (ERO) to save on printing, paper, and storage costs by providing taxpayers with a copy of their return via any media that is acceptable to the ERO and the client. Thus, EROs no longer need to provide clients with a paper copy of the prepared return if they agree to file electronically. EROs may electronically image all paper returns and related papers that they are required to retain.

EROs have an electronic signature option (via the practitioner PLN method) permitting their tax clients to sign their return by entering a five-digit PIN. Individual clients can self-select a five-digit PIN which they can use to sign their e-filed return. This eliminates the requirement for Form 8453 (U.S. Individual Income Tax Declaration for an IRS E-file Return) and makes the filing process completely paperless.

When an ERO files a client's tax return electronically, the ERO receives an acknowledgement that the IRS received it within 48 hours of filing; thus, individuals can e-file and electronically pay their taxes in a single step. E-filed returns are also automatically checked for accuracy, and if an error is detected, the preparer will receive an electronic message explaining the error, which can then be corrected without paying a penalty.

Refunds are received by e-filers in about half the time as by paper filers, and even faster if direct deposit is used. …

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