Best Practices for Tax Return Preparers When E-Filing

As a tax return preparer, nothing is more upsetting to your clients than receiving a notice from the IRS or state/local tax authority weeks, months, or even years after the fact indicating there was a problem with a tax return, that additional money is owed, or no return was filed. In addition, identity theft continues to be a major area of concern for both the IRS and those handling sensitive client information and data electronically. Lastly, the disruptions to IRS operations and return processing may mean that you need to account for returns, payments, and carryovers that may not yet be reflected on your client’s account.

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Some best practices for tax season are listed below to help you and your clients avoid future problems and filing delays. These best practices are in no way an exhaustive list but are helpful to ensure a successful 2021 filing season. Looking out for the best interests of your client is critical, while at the same time, ensuring that your standard of conduct does not put you at risk for preparer penalties. The tax laws are complex and ever changing, and it is your responsibility to stay knowledgeable and current as to each area that affects your clients.  As a tax preparer, you have an important job helping the taxpayer submit a true, accurate and complete tax return each year.

Review Firm Cybersecurity

Review IRS Pub. 4557, Safeguarding Taxpayer Data, a Guide for Your Business, to determine your firm’s data privacy and security needs and implement any safeguards needed to protect your systems and client information. Practitioners renewing Practitioner Tax Identification Numbers (PTINs) must certify that they maintain a written data security plan, a failure of which may be a violation of Circular 230. [620 TM] (subscriber only resource)

Review EFIN Usage

As an additional safeguard, during the filing season, you can check on your Electronic Filing Identification Number (EFIN) status to ensure that it is not used by others. Your e-Services account will give you the number of returns the IRS received, which you can match to your records. The statistics are updated weekly. You can contact the IRS e-help Desk at 866-255-0654 if you think your EFIN has been compromised. [620 TM] (subscriber only resource)

Systematize Data Collection

Use some type of electronic or physical tax organizer, client questionnaire, or checklist as well as prior year returns to gather taxpayer data (especially full birthdates, SSNs and EINs, direct deposit information) and to ensure that data from the prior year is accounted for when preparing the return. [620 TM Worksheet 7] (subscriber only resource)

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Preparer Due Diligence

As a paid tax preparer, you must exercise due diligence when preparing a client’s return or refund claim. As part of exercising due diligence, you must interview the client, ask adequate questions, and obtain appropriate and sufficient information to determine the correct reporting of income, claiming of tax benefits (such as deductions and credits), and compliance with the tax laws. You must also meet the specific due diligence requirements set forth in Treasury regulations when you prepare returns and claims for refund involving the Earned Income Credit, the Child Tax Credit, the Additional Child Tax Credit, the Credit for Other Dependents, the American Opportunity Tax Credit and/or Head of Household Filing Status. Form 8867, Paid Preparer’s Due Diligence Checklist for the Earned Income Credit, American Opportunity Tax Credit, Child Tax Credit (including the Additional Child Tax Credit and Credit for Other Dependents), and/or Head of Household Filing Status, must be prepared for each of the credits/status claimed on the return. The penalty for each failure to be diligent is $545 for returns or claims for refund filed in 2022. [634 TM] (subscriber only resource)

Review Client Transmissions

When e-filing, allow a few days before April 18 to review all of your client e-file statuses, transmissions, and IRS or state/local tax agency acceptance confirmations in the event corrective action is needed to validate an e-filing transmission for acceptance. If necessary, file an extension until the issue is resolved. Note that if there is a balance due, payment can be made using a variety of methods that are separate from providing direct debit information on the electronic return.

Leave Time for Extensions

For clients who need filing extensions, allow a few days before the April 18 deadline to-file extensions and ensure that electronic payments that may be required or desired are processed by your tax filing software or through other methods and received by the IRS or state/local tax authority. Some states require the balance due to be paid electronically to-file an extension. Form 8878, IRS e-file Signature Authorization for Form 4868 or Form 2350 is used only when e­-filing Form 4868 and (1) authorizing an electronic funds withdrawal, and (2) authorizing the Electronic Return Originator (ERO) to enter or generate the taxpayer’s PIN, and (3) you are not using the Practitioner PIN method. The taxpayer may return the completed Form 8878 to you in person, by mail or private delivery service, fax, e-mail, or an internet website.

Get Signature Authorizations

When an e-filed return or amended return is filed by an ERO, IRS Form 8879, IRS e-file Signature Authorization is the way that your client generally “signs” the return. (This form is used when the Practitioner PIN method is used or when the client authorizes the ERO to generate the taxpayer’s personal identification number (PIN)). The taxpayer may return the completed Form 8879 to you in person, by mail or private delivery service, fax, e-mail, or an internet website.

Review Client Payment/Refund Preferences

Ask your clients how they want to pay any balance due or receive a refund and ensure you have verified account information with the client.

Leave Time for Paper Filings

For returns that may need to be filed on paper (e.g., prior year amended returns), allow enough time for the client to sign and mail the return on or before the filing deadline. Remember to attach Form 8948, Preparer Explanation for Not Filing Electronically, to the return and have the taxpayer sign a taxpayer choice statement as outlined in Rev. Proc. 2011-25.  The choice statement should not be attached to the return or submitted to the IRS but should be retained by the tax return preparer.  [620 TM] (subscriber only resource)

Be Cautious With E-Mail

Regardless of whether your client files electronically or on paper, when using e-mail (as opposed to a secure File Transfer Protocol (FTP) built into many preparer software packages and accounting websites), password protect or otherwise encrypt all documents to ensure maximum protection of client identity and sensitive data.

Review Carryovers and Carryforwards

For existing clients, review the prior year return to ensure that any carryovers, carryforwards, and other important data such as depreciation have correctly transferred into the next year’s return. For new clients, obtain a copy of the prior year returns to ensure that you pick up and continue any carryovers, carryforwards, depreciation of assets, and tracking of suspended passive losses, etc.

Be Thorough When Entering Data

Enter all data from the various boxes on Forms W-2 and 1099s, etc. as the data often impacts calculations and other tax provisions, and often is required for the transmission to be validated and accepted by the IRS and state/local tax  For example, if amounts were set aside for dependent care benefits (Form W-2, Box 10), the failure to include this amount may cause such benefit to become taxable and/or cause an error when claiming the credit on Form 2441, Child and Dependent Care Expenses.

Beware of Joint Accounts

For joint accounts, the SSN on Forms 1098 and 1099 generally corresponds to the first name listed on the account.  If income or deductions are split across two or more tax returns (e.g., interest on a joint checking account or mortgage interest and property taxes on a personal residence or rental property), report the full amount reported on the form and then make a negative adjustment elsewhere on the return and attach a statement to the return explaining the nature of the adjustment to prevent your client from receiving a CP2000 notice long after the return has been filed.