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. A few best practices for tax season are listed below to help you and your clients avoid future problems.

  • 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 PTINs must certify that they maintain a written data security plan, a failure of which may be a violation of Circular 230. [620 TM]
  • Systematize Data Collection – Use some type of tax organizer, client questionnaire, or check list as well as prior year returns to gather taxpayer data (especially full birthdates, SSNs and EINs) and to ensure that data from the prior year is accounted for when preparing the return. [620 TM. Worksheet 7.]
  • Review Client Transmissions – When e-filing, allow a few days before April l5 to review all of your client e-file statuses, transmissions, and IRS or state/local tax agency acceptance confirmations in case 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 l5 deadline toe-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 ERO to enter or generate the taxpayer’s PIN, and (3) you are not using the Practitioner PIN method.
  • Get Signature Authorizations Secure Form 8879, IRS e-fil e Signature Authorization (and any state counterpart authorization) before transmitting Clients must sign a new declaration if the electronic return data is changed after the original declaration was signed and the amounts differ by more than either $50 to “Total income” or “AGI,” or $14 to “Total tax,” “Federal income tax withheld,” “Refund,” or “Amount you owe.” The taxpayer may return the completed Form 8878 or Form 8879 to you in person, by mail or private delivery service, fax, e-mail, or an internet website.
  • Leave Time for Paper Filings For returns that may need to be filed on paper (e.g., prior year amended returns), allow sufficient time for the client to sign and mail the return on or before the filing 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.
  • 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.
  • Beware of Refund Statute Expiration Deadlines For clients who have late, unfiled returns or refund claims, identify, prepare, and file the return(s) for which the general three-year or two-year statute of limitations on refunds may expire before filing other late returns.
  • 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. For many clients with rental properties, for example, the $25,000 rental real estate loss allowance phases out completely once income reaches $150,000, i.e., the losses become suspended passive losses and are carried forward indefinitely until the client has rental income or other passive income against which to deduct the losses or the property is sold to an unrelated party, which reduces the gain from the sale.
  • 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 correspond to the first name listed on the account. If income or deductions are being 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 (see, e.g., Line 8 of Form 1040 Schedule 1) 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.
  • Save Time on Schedule D – When dealing with numerous stock and mutual fund sales, especially from multiple accounts, some tax preparation software packages allow for direct import of the information electronically. Otherwise, the Instructions for Schedule D and Form 8949 provide that Form 8949 isn’t required for certain transactions. You may be able to aggregate those transactions and report them directly on either line 1a (for short-term transactions) or line 8a (for long-term transactions) of Schedule D. This option applies only to transactions (other than sales of collectibles) for which (1) the client received a Form 1099-B (or substitute statement) that shows basis was reported to the IRS and doesn’t show any adjustments in box lf or 1g; (2) the Ordinary box in box 2 isn’t checked; (3) the client does not need to make any adjustments to the basis or type of gain or (loss) reported on Form 1099-B (or substitute statement), or to the gain or (loss); and (4) the client is not electing to defer income due to an investment in a Qualified Opportunity Fund (QOF) and is not terminating deferral from an investment in a QOF.
  • Don’t Forget about Depreciation and Section 179 Elections – For new clients with Schedule E rental properties, review prior year returns to ensure the client was properly depreciating assets. If not, determine the correct amount of depreciation for the current year’s return and consider filing amended returns to potentially obtain additional refunds, where applicable.