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Nov 1989

Electronic filing of tax returns. (The Practitioner & the Computer)

by Maury, Mary D.

    Abstract- The Internal Revenue Service (IRS) has now made electronic filing available in all states. Firms interested in electronic filing should contact the IRS for publications. The firm must then decide on which services it will provide from six categories: preparer; transmitter; prepare/transmitter; service bureau; software firm; and electronic return collector. Firms must meet IRS requirements and pass a suitability check, which is usually completed within 45 days of filing an application. Firms must also maintain compliance with IRS requirements, maintain quality standards, and follow electronic filing procedures. Violations of these requirements will result in suspension. The equipment required for electronic filing is simply a computer and modem costing between $2,500-3000.

IRS Motives

It is essential to understand that electronic filing is no longer an option in the eyes of IRS planners. It is a must if the IRS is going to control costs and maitain its effectiveness. Thee IRS's direct labor costs of processing an electronic return are four cents, compared to 40 cents for paper returns. The IRS error rate is 3% for electronic returns, compared to 16% for paper returns. The sooner electronic filing becomes the preferred (or only) form of tax filing, the soonere the IRS will cash in on these efficiencies.

Not surprisingly, theree is an additional development at the state level. Various representatives from state taxing authorities are learning from the IRS how to implement electronic filing of state tax returns.

The IRS is educating state authorities about electronic filing to achieve greater national acceptance. States will soon begin accepting federal forms in an electronic mode, which should lead to acceptance of electronic filing of their own tax returns.

The Opportunity

Electronic filing with the IRS began as an experimental program in 1986, with 25,000 personal income tax returns filed in that way. In 1989, over 1 million personal tax returns were filed in the limited areas where electronic filing was permitted. In 1990, electronic filing will be available in all states, and another dramatic increase in the number of electronic returns is expected.

One of the primary benefits to individual taxpayers is the short time after which refunds are received for electronic retuns. In 1989, this was 18 days compared to six to eight weeks for paper returns. This period is further reduced if the taxpayer selects Direct Deposit. The IRS expects to reduce the electronic return refund period to 3 days in 1990, with further reductions in the future. As a final enticement, Refund Anticipation Loans can bring the taxpayer's refund money in only three days.

Over 9,000 tax preparation firms already file returns in electronic form. This is a significant number, but the imminent additional growth of electronic filing is underscored by the large number of tax preparers expected to file electronic returns for the first time. The IRS expects to receive applications from well over 20,000 preparers in 1989, which could raise the number of firms eligible to file electronic returns to over 30,000. Electronic filing will become the preferred filing method for all returns, and the required method for some (if not all) returns.

Some financial institutions, including Dollar Dry Dock Bank, offer electronic filing and interest free Refund Anticipation Loans even though they do not prepare the tax return. Some financial service institutions are considering hiring accountants and accounting firms to prepare tax returns simply to attract the refund loan business. Considering how eager financial institutions are for this business, there may be opportunities for CPAs to join forces with the right institution.

IRS Expands Electronic Filing

As mentioned, beginning with the 1990 filing season, the IRS is removing virtually all geographic limits on the electronic filing of tax returns. Every tax preparer in the 63 IRS districts in all states and the District of Columbia can participate in 1990, if they register for the program.

The IRS is working on three programs designed to expand electronic filing even further. The Individual Master File Program is dedicated to individual tax returns. Business returns are split between the Business Master File Program (e.g., Forms 1065 and 1041) and the Employer Plans Master File Program (e.g., 5500C and 5500R).

Electronic filing of individual returns has been limited, since its inception, to refund returns. Tax due and no refund returns were excluded to keep electronic filing of individual returns relatively small and simple while the "bugs" were worked out. This also gave the IRS more time to develop an acceptable system of receivng payment for tax due returns submitted in electronic form. For example, payment by check cannot accompany the electronic return and would involve adding a series of paper handling steps and payment reconciliations which would be relatively inefficient, raise error potential, and delay the processing of the return.

The IRS has worked on these problems and intends to begin accepting tax due and no refund individual electronic returns in the 1991 filing season. Details will be accounced in 1990.

Business returns generally will be limited in 1990 to Forms 1065 and 1041 (with K-1s), Forms 8308, 8453 (including E, F and P variations), 5500C and 5500R, and Schedules C, E, and F filed with individual returns.

How to Start Participating in

Electronic Filing

Learn About Electronic Filing. Call the IRS, at 1-800-424-3676, and order Publications 1345 and 1435, and Forms 8633 and 9041. These documents will familiarize you with the more technical requirements of electronic filing.

Publication 1345, Revenue Procedure for Electronic Filing of Individual Income Tax Returns (Tax Year 1989), contains the official IRS instructions and specifications relating to individual returns. It also provides examples of the required forms. Publication 1435 is the business return counterpart to Publication 1345.

Form 8633 is entitled "Electronic Filer Application To File Individual Income Tax Returns Electronically" and must be filed by all "filers" who want to begin participating in 1990. Its business return equivalent is Form 9041.

Forms 8633 and 9041 provide the IRS with all of the information it needs to determine which filing services you intend to provide and whether you are an appropriate filer to provide such services. They also provide the IRS with your firm's taxpayer identification number, its name, address and phone number, the contact person you designate, etc. The IRS presents a marketing opportunity by asking whether you want to authorize the IRS to provide your firm's name and address to taxpayers and vendors of services related to electronic filing.

Decide How You Will Participate. The most important decisions you must make before filing application Forms 8633 and 9041 involve choosing which electronic filing services you will provide. For example, Form 8633 allows for six categories of filers, which are not mutually exclusive. As a filer, you should check the maximum number of boxes which describe your eventual intended services, even it you do not actually provide all of these services initially. This would give you the greatest flexibility and information. You should approach Form 9041 in the same manner.

Your choices include the following six categories:

1. Preparer: A firm which fills in a tax return and computes the tax based upon information provided by the taxpayer.

2. Transmitter: A firm which transmits to the IRS returns prepared by it or another person.

3. Preparer/Transmitter: A firm which performs the services of each prior category.

4. Service Bureau: A firm which provides final tax figures based on a Preparer's information, and may format and transmit the return directly to the IRS.

5. Software Firm: A firm which develops software to be used by Preparers to prepare returns for direct transmission to the IRS.

6. Electronic Return Collector: A firm which accepts completed returns from taxpayers solely to produce and transmit such returns electronically to the IRS.

File the IRS Applications. Your completed Form 8633 application must be sent to the particular IRS Service Center which will process the electronic returns you will submit. In 1990, the IRS will process electronic returns only at three IRS Service Centers. Each Center is responsible for returns which originate from a designated geographic area. The Andover Service Center is responsible for New England, New York, New Jersey, Pennsylvania and other Mid-Atlantic Coast states. The Cincinnati Service Center handles Florida, most of the South and some Great Lakes States. The West and the remainder of the United States is handled by the Ogden Service Center.

The IRS prefers to receive your completedForm 8633 as early as possible to provide a good lead time to handle the testing and processing work it must do. However, the IRS recognizes that electronic filing is becoming a phenomenon that it must deal with flexibly to continue its spectacular growth. Consequently, it has emphasized that it will accept and process Form 8633 applications with out any time limit for 1990.

The rules applicable to filing Form 9041 for electronic business returns are similar to those relating to Form 8633. Separate Forms 8633 and 9041 must be filed with each appropriate center if you plan to file both individual and business tax returns.

Meet IRS Requirements. The IRS will acknowledge receipt of your application and will assign your firm an Electronic Filing Identification Number (EFIN) and/or an Electronic Transmitter Identification Number (ETIN). The IRS will then send various publications to you, depending upon your designated services. If you will be a Prepare (or a Software Firm), you will receive Publications 1345 and 1453 (the "Help Guide--Hints for Electronic Filing Preparers 1990"). A Transmitter would receive the Test Package (Publication 1436), File Specifications (Publication 1346) and Record Layouts (Publication 1347) in addition to Publication 1345. Note that you can order any of these publications from the IRS right now. The IRS, upon receipt of your application, will run a suitability check. The suitability check is meant to determine whether an electronic filing applicant possesses the high degree of integrity desired by the IRS for all participants in the program. Applicants may be rejected on the basis of a prior criminal conviction involving dishonesty or a violation of the IRC; failure to file timely tax returns or to pay tax liabilities; assessment of IRC preparer penalties; misrepresentations on an application; and other acts considered significant by the IRS.

Suitability checks usually are completed within 45 days from receipt of the application. The applicant will be notified promptly of the result. Those who are rejected will receive a letter explaining the reasons and the applicant's appeal rights.

If you have chosen to be a Transmitter or a Software Firm, you must now pass IRS tests using the applicable IRS Test Package. The IRS will test software you have developed to determine whether it meets the IRS specifications and whether it is appropriate for transmission to IRS computer equipment. Transmitters undergo a communications test to determine whether they can transmit returns properly.

If you will only prepare returns, the IRS will verify the acceptability of the Transmitter you have chosen and the software you plan to use. The IRS supplies lists of acceptable Transmitters and Software Firms

Begin Making Electronic Filings. The IRS has tentatively set January 12, 1990, as the date on which you may begin electronic filings for 1989. However, you cannot collect returns for electronic transmission prior to your official acceptance into the program. Electronic filings may be made 24 hours a day, but all electronic filings must be for tax years ending in 1989. Amended returns, even if electronically filed, cannot be submitted electronically.

You must also obtain each taxpayer's signature on an official IRS paper document. The need for this arises from the legal requirements for the taxpayer's signature to authenticate the return, to authorize the Preparer to file the return electronically, and to authorize Direct Deposit of the taxpayer's refund into his or her bank account.

For example, Form 8453, "U.S. Individual Income Tax Declaration for Electronic Filing," must be signed by the taxpayer before transmission of the return. All other paper documents needed with the return must be attached to Form 8453. Such attachments include copy B of Forms W-2, W- 2P and W-2G, other documents requiring signatures (e.g., Form 8283, the "Appraisal Summary"), and other informational documents such as voluntary schedules. The Preparer also signs Form 8453.

These forms must be matched to a Declaration Control Report which is to be sent to the IRS.

Maintain Compliance With IRS Requirements. IRS Publications 1345 and 1435 contain a comprehensive set of requirements for electronic filing participants. These include advertising, trade name and logo use restrictions, and other mass media requirements. Detailed requirements are set forth for special programs authorized by the IRS, such as Direct Deposit of refund checks and repayment of Refund Anticipation Loans. Other restrictions include the IRS prohibition of separate fees for Direct Deposit, and its prohibition of transmission fees based on a percentage of the taxpayer's refund. Also, electronic filing participants must promptly update all IRS Service Centers regarding all significant information contained in their applications. Participants who fail to maintain the integrity standards required for approval of the application, who fail to maintain the quality standards for electronic filing, or who do not follow electronic filing procedures can be suspended from electronic filing by the IRS.

What Will Electronic Filing Cost? The IRS introduced electronic filing because of the tremendous increase in computer use by tax preparation firms. It is anticipated that most tax preparation firms already have a computer, a printer, and a monitor.

To transmit electronic returns, you will need the computer equipment previously mentioned, a 4800 BAUD modem, and an emulator board. A proper modem and board should cost about $2,500-$3,000.

A Last Offer. If the relatively low $3,000 entry cost still exceeds the amount you want to pay for electronic filing, there is an alternative which is virtually cost-free. The alternative is called the Paper Input Processing of Electronic Returns (PIPER) program. For $200, you can buy software from an accepted software vendor which will produce optical character readable (OCR) documents which can be mailed to the IRS. Such tax returns will then be processed through a scanner and entered into the electronic filing system.

Call the electronic filing coordinator at your local IRS district office for assistance in purchasing such software. The coordinator will be eager to help you with any other matter that will ease your entry into electronic filing.

John S. Manna Patrick Colabella Mary D. Maury

What's New

RightWriter 3.1 Helps Improve

Business Writing

RightSoft, Inc., has released RightWriter 3.1, a document proofreader for the IBM PC, PS/2 and compatibles. RightWriter analyzes documents for errors in grammar, writing style, word usage, and punctuation. The product works with WordPerfect, Microsoft Word, pfs: Professional Write, and other leading business word processors.

RightWriter helps improve writing by pointing out wordy and redundant phrases, weak sentences, and overused words. For example, RightWriter tells you "consensus of opinion" is redundant. It also suggests replacing "between you and I" with "between you and me." RightWriter also finds non-verb disagreement, cliches, slang, passive voice, and jargon.

RightWriter 3.1 uses more than 4,500 rules. Features include automatic file selection, a direct interface inside WordPerfect 5.0, and compatibility with many word processors. All packages include both a 3- 1/2" disk and two 5-1/4" diskettes plus a self-running demonstration tutorial. The product also includes a choice of five writing styles, and the ability to customize the program to your writing style.

RightWriter recommends ways to improve your writing; it never forces you to make changes. The final decision is always yours.

RightSoft, Inc. 4545 Samuel Street Sarasota, FL 34233 813/923-0233

* Requirements: IBM PC, PS/2, or compatible, 384K, using only .5Mb of disk space floppy or hard disk.

* Price: $95.

Systems Integration

Selecterm, Inc.'s MicroScript can interface applications which run on microcomputers, minicomputers and mainframes creating a single integrated applications. Integration is achieved through the use of a proprietary, high-level programming language to develop an application system interface between each system. MicroScript reads the data from the display buffer of the source system and writes that data to the target system through its keyboard buffer. It never touches the source file structure or the application code.

Selecterm, Inc. 153 Andover Street Danvers, MA 09123 617/246-1300

* Requirements: IBM PC or compatibles, can transfer data to/from: Burroughs; Control Data; Data General; DEC; Honeywell; IBM 3x/AS400 series; IBM 4300 series; Texas Instruments; Wang; Hewlett Packard.

* Price: Not available.

Marketing Information on Six

Million Companies

Dun's Marketing Services has introduced Dun's Direct Access, a PC software product that provides instant access to specific marketing information on more than six million businesses contained in the Dun & Bradstreet marketing database.

Dun's Direct Access provides researchers the ability to search, access and download comprehensive, up-to-date marketing information. Users can choose from a wide variety of search criteria, such as business size, location, industry and sales volume.

Dun's Marketing Services Three Sylvan Way Parsipanny, NJ 07054-3896 212/879-8278

* Requirements: IBM PC or compatibles, 640K, DOS 3.0 or higher, Hayes Smartmodem or a Hayes 100% compatible (operating at 1200 or 2400 baud), and a hard drive.

* Price: $125 for a one-year subscription. There is a nominal charge each time summary information is requested.

CPA Review Materials

MicroMash, publisher of accounting education software, announced that it is including hardcopy CPA Review Reference Volumes with its CPA Review software package, at no extra cost. The CPA Review Reference Volumes are integrated with the CPA Review Software, so that candidates can conveniently study the information to which the software directs them.

MicroMash 14 Inverness Drive East, F-104 Englewood, CO 80112 800/241- 9700

* Requirements: IBM PC, XT, AT, PS/2 and compatibles, DOS 2.1 or higher, 640K.

* Price: Not available.

Open Systems Software Update

Open Systems has released its updated Accounting Software (OSAS) Version 4.0. This version features on-line, context sensitive help, improved screen and system navigation features, user-defined function keys and colors, field editing, expanded use of inquiry screens, a "pop- up" calculator, and allows users to send most reports directly to the screen, file or printer. In addition, new master records can be added "on the fly." Application specific enhancement include: Source Manager:

* User-defined function keys, menu maintenance & screen colors;

* Improved overall system speed; and

* Expanded password protection. General Ledger:

* Trial balance worksheet;

* Automatic reversing entries; and

* Copy chart of accounts. Accounts Receivable:

* Expanded description capabilities;

* Automatic recurring billings;

* Immediate invoice printing; and

* Discounting based on price breaks, inventory item, customer class. Accounts Payable:

* Duplicate invoice checking; and

* Automatic recurring payments. Sales Orders:

* On-line printing of picking slips; and

* Ability to print invoices immediately. Purchase Orders:

* Duplicate invoice checking; and

* Automatic recurring purchase orders.

Open Systems 6477 City West Parkway Eden Prairie, MN 55344 800/328-2276

* Requirements: IBM PC, AT, PS/2 and compatibles, including 80386 machines with 640K and a 20MB hard disk. It will operate under MS DOS, on networks, Unix/Xenix, and C-TIX.

* Price: Not available. A free demo disk is available.

Lotus 1-2-3 Upgrades Shipped

The Lotus Development Corp. has shipped Releases 2.2 and 3.0 of Lotus 1-2-3. Release 2.2 is designed for PC users working within the 640K DOS environment. Release 2.2 delivers more analytical power, improved customization, new ease of use functions, and advanced spreadsheet publishing functions. Some of the new capabilities include:

* File linking-- the ability to access and reference data from worksheet files, located on disk, in the current worksheet;

* Recalculation of only those formulas or cells affected by a change;

* Extensive undo capabilities;

* Extensive graphics enhancement; and

* New customization features.

Release 3.0 is designed for 80286 and 80386 PCs and will support both DOS and OS/2. It is compatible with all prior releases including 2.2. It has been written in the C language so that it is portable to minicomputers and mainframes. It features three-dimensional worksheets. Enhancements include those listed for Release 2.2, plus:

* Extensive spreadsheet annotation and security;

* Automatic data formatting options (e.g., date, time, percent);

* Automatic updating of onscreen graphs when related data is changed.

* New graph types (e.g., mixed bar and line, stacked);

* Relational database management including joins;

* External database links (e.g., dBASE III);

* Support for PostScript printers; and

* New macro commands, formulas and @ functions.

Lotus Development Corp. 55 Cambridge Parkway Cambridge, MA 02142 617/577-8500

* Requirements: IBM PC, AT, PS/2 or compatibles. Release 2.2 requires DOS 2.0 or higher, 320K. Release 3.0 requires DOS 3.0 or higher, and 1MB. 3MB of RAM are required under OS/2. Release 3.0 requires a hard disk; Release 2.2 can run on two-floppy drives.

* Price: Release 2.2, $495; Release 3.0, $495 until the end of 1989, then $595. Current users are entitled to a free upgrade if they bought Release 2.01 on or after September 6, 1988. Other users are entitled to an upgrade at a reduced price.

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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