Modernized e-file: Are you in compliance?

Since 1990, the IRS has safely and securely transmitted more than 1 billion tax returns, and more than 90 percent of all individual federal returns are now e-filed. When you start your own tax practice, the first step after obtaining organizational documents is to become an authorized e-file provider. Here are the requirements to create an account:

Step 1: Create an IRS E-services Account by providing the following information to the IRS:

• Email address.
• Your Social Security number or Individual Tax Identification Number.
• Your filing status and address from your last-filed tax return.
• One financial account number linked to your name: 
  • Credit card last eight digits—no American Express, debit, or corporate cards.
  • Student loan—Enter the student loan account number provided on your statement. The account number may contain both numbers and letters. Do not include any symbols.
  • Home mortgage loan or home equity loan.
  • Home equity line of credit.
  • Car loan.
• A readily available mobile device—For instant access, your name must be associated with a U.S.-based mobile phone capable of receiving text messages. If the mobile number cannot be linked to your name, you may opt for a mailed activation code during registration.

Step 2: Submit your application to become an authorized IRS e-file provider by providing the following information:

• Identification information for your firm.
• Information about each principal and responsible official in your organization.
• You choose your e-file provider option. If you are a return preparer and want to e-file for clients, select Electronic Return Originator (ERO).
• If the principal or responsible official is certified or licensed-such as an attorney, CPA, or enrolled agent, they must enter current professional status information.
• All other individuals need to provide fingerprints to the IRS.

Step 3: Pass a suitability check in which the IRS will look into each principal or responsible official. This step may include a credit check, tax compliance check, criminal background check, and a check for prior noncompliance with the IRS e-file requirements. Once approved, you will obtain an acceptance letter from the IRS with your Electronic Filing Identification Number.

Once you become an authorized e-file provider, you can electronically file tax returns through the tax software of your choice. The tax firm is the ERO, which is the authorized e-file provider originating the electronic submission of a return to the IRS. But the requirements for keeping in compliance as an ERO are often overlooked. 

The main requirements of an ERO are: 1) timely originating the electronic submission or returns, 2) submitting any required supporting paper documents to the IRS; 3) providing copies of tax returns to the taxpayer; and 4) retaining records and making records available to the IRS if requested.

The ERO must keep Form 8878, IRS e-file Signature Authorization for Form 4868 or Form 2350,  and Form 8879, IRS e-file Signature Authorization, for three years from the return due date or the IRS received date, whichever is later. EROs should not send Form 8879 to the IRS unless the IRS requests it.

Guidance for obtaining electronic signatures for Form 8879

To sign Form 8879 electronically, the ERO must meet certain requirements for verifying the taxpayer’s identity. Electronic signatures appear in many forms. Some examples of approved electronic signature methods are as follows:

• A handwritten signature input onto an electronic signature pad.
• A handwritten signature, mark, or command input on a display screen by a stylus device.
• A digitized image of a handwritten signature that is attached to an electronic record.
• A typed name—typed at the end of an electronic record or typed into a signature block on a website form by a signer.
• A shared secret used by a person to sign the electronic record.
• A digital signature.
• A mark captured as a scalable graphic.

However, in order for the above approved methods to be considered approved by the IRS, the software must also record the following data:

• Digital image of the signed form.
• Date and time of the signature.
• Taxpayer’s computer IP address—remote transaction only.
• Taxpayer’s login identification/username—remote transaction only.
• Identity verification: Taxpayer’s knowledge-based authentication passed results, and for in-person transactions, confirmation that government photo identification has been verified.
• Method used to sign the record, system log, or other audit trail that reflects the completion of the electronic signature process by the signer.

Note: The ERO must provide this information upon request. 

In most cases, the main method of approval that exists within modern technology is the “Identity Verification” offered through Knowledge Based Authentication (KBA). To satisfy the KBA requirement, the verification requirements must be in accordance with National Institute of Standards and Technology, special Publication 800-63, Electronic Authentication Guideline, Level 2 assurance level and knowledge-based authentication or higher assurance level.

Best practices for electronically obtaining Form 8879s

Practitioners both small and large should have policies and procedures in place to ensure they are complying with the ongoing requirements of being an ERO. Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, is updated every year and is a great resource for knowing the rules of being an ERO.

For tax practitioners, there are many vendors that allow for 8879 e-signatures that comply with the IRS standards. However, the best-in-class software that is recommended is lntuit’s eSignature, which simplifies the complicated processes of compliance. Not only does it collect electronic signatures for 8879 purposes, but it also can streamline your engagement letter processes and other signature-related documents.