You Want Me To E-File Your Tax Return? Then Show Me Your ID.

There are times I wonder why I do what I do.

It is difficult enough to keep up with the barrage of tax developments, pronouncements, law changes, court decisions and what not. I do not practice in all areas, so there is some fence around this field, but it is still a fairly large field.

Then you have the IRS bureaucracy, which is becoming more unwieldy every year. It used to be that I could contact a local IRS person to help with a tax problem. After a while, one got to know the local IRS employees, and they got to know me. The IRS restructuring took away our local contacts. Practitioners now contact regional offices using an 866-telephone number. Wait times have been noticeably increasing over the last two or three years.  I gave up on a call this past Thursday as it approached an hour and a half.

Folks, this is a “back door” line for CPAs and attorneys. I can only imagine what the wait time is for the general line.

This past week I was reading Publication 1345 titled “Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns.” I would not recommend it unless you are a serious insomniac.  I came across the following pearl:

In-Person Transaction

The ERO must inspect a valid government picture identification; compare picture to applicant; and record the name, social security number, address and date of birth. Verify that the name, social security number, address, date of birth and other personal information on record are consistent with the information provided through record checks with the applicable agency or institution or through credit bureaus or similar databases. For in-person transactions, the record checks with the applicable agency or institution or through credit bureaus or similar databases are optional.

Examples of government picture identification (ID) include a driver’s license, employer ID, school ID, state ID, military ID, national ID, voter ID, visa or passport. 

If there is a multi-year business relationship, you should identify and authenticate the taxpayer."

Huh?

Let’s translate. An ERO is an electronic return originator. That is fancy language for someone who is authorized to file returns electronically with the IRS. My firm for example is an ERO. That makes me an ERO.

The IRS is talking about me inspecting a “valid picture identification” and so on. And when am I supposed to do this?

The IRS starts off talking about electronic signatures on a tax return. Obviously if I file your return electronically, I cannot send your fresh-ink signature at the bottom of the form. I do require from you a release authorizing me to e-file your return. That release may have your fresh-ink signature, but that release stays with me. The IRS does not get a copy.

Is the IRS talking about the e-signature on the return I file for you? Or is the IRS talking about an electronic signature on the release I obtain from you before e-filing your return? There is a big difference, and I cannot tell what the IRS meant. I suspect the IRS is talking about electronic signatures on the release. For the most part most of my clients sign their release in ink, although many clients will either fax or PDF their release to me. I am presuming the fax or PDF does not constitute an electronic signature, but I do need the IRS to be more precise in its use of the language.

Then there are the few clients. You know the ones: the computer hyper-literate. These guys can write a ditty, put music and video to it and publish the whole thing on You Tube in the time you or I would draft an e-mail. These guys are going to cause me a problem, because they know enough to sign that release with an "electronic signature.”

Let’s say they do.

The IRS now wants me to:

(1)  Inspect a valid government picture identification.

I presume we are talking about a driver’s license. It is inconvenient, but it follows what the stockbrokers have done for years.

What am I supposed to do with the kids, though, if the kids are too young to drive? 

What if mom and/or dad live with the client? Where does this end?

(2)  Record the name, social security number, address and date of birth.

No problem. We already do that.

(3)  Verify that information through record checks with the applicable agency or institution or through credit bureaus or similar databases.

Are you kidding me?

That one angers me. There is a superstructure of self-serving – and obviously incompetent - government bureaucrats and they have to recruit a tax CPA in Cincinnati to do THEIR JOB? I tell you what I want in return: I want a government salary; government benefits; all the holidays, including the make-believe ones; 6 weeks of vacation; a retirement plan; union protection so that I cannot be fired, no matter how incompetent I am.

What if I have known you for years?

If there is a multi-year business relationship, you should identify and authenticate the taxpayer."

Seriously? And what does “authenticate” mean?

Good grief. It would be less work to let these people vote. Hire me to do your taxes, however, and I have to go all Kojak on you.

How have we gotten to this point?

It has to do with identity theft. It has become a top-tier issue for the IRS. They responded in turn with Publication 1345. I am trying to be fair, I truly am, but I see a few things the IRS could immediately do before making me their Barney Fife:

(1)  Review refunds to taxpayers with a different address from last year.

(2)  Review refunds to taxpayers with a different employer from last year.

(3)  Stop issuing multiple refund checks to the same address. For example, the IRS sent 655 refund checks to the same address in Lithuania.

And what tax crook in his/her right mind is going to hire a tax CPA to do their dirty work anyway? Somebody clue the IRS that is not how those people work.

Publication 1345 addresses only individual tax returns. Is the IRS going to extend this to business returns? Will I need to confirm corporate minutes to be certain that Tom N. Jerry is in fact the CEO of that corporation and authorized to sign the corporate return? Will I need in turn to background check Tom N. Jerry himself?

And where will the time come from to do all this? I am already swamped during busy season. Even if the above takes only 5 minutes per return, multiply the 5 minutes by hundreds of clients. The IRS could easily add at least another 40 or 50 hours to my individual tax practice, time that I do not have. How will I respond? I will extend more returns. I would have to. I will charge you more. I would have to.  I would not accept electronic signatures on tax forms.

That last one is obvious.

Donald Rumsfeld's Letter to the IRS

Did you hear about or see Donald Rumsfeld’s letter accompanying his tax  return to the IRS? Mr. Rumsfeld was Chief of Staff under President Ford and then Secretary of Defense in the George W. Bush Administration. 

It turns out that he writes a letter to the IRS to accompany his tax return every year. This year he published the letter on Twitter. Here it is:

He brings up a point that is on my mind this close to April 15: why do so many people use professional tax preparers? Mind you, over the years I have prepared or reviewed tax returns for very wealthy people. It is understandable why such people have preparers. I will when I become ridiculously rich.

What we are talking about are your neighbors or mine. Perhaps they have a small business, perhaps they own a duplex or perhaps inherited a little bit of money. They are far from broke but nowhere near wealthy. Why are they using a preparer?

Because the average person can hardly do his/her own return anymore.

If one is poor, then one is looking at the earned income tax credit. That thing makes even professional preparers cringe. Did you know there is a tax credit for low-income taxpayers contributing to their 401(k)?

Let’s say you start making a little bit of money. When does your deduction for student loan interest phase-out? Do you know how to handle the child care tax credit if you have dependent care taken out through your cafeteria plan? Is there a tax credit for those new windows on your house?

You and a family member own an LLC. You draw a paycheck. Do you owe self-employment tax on the profit left over?

That duplex shows a tax loss, caused mostly by depreciation. Can you claim the loss on your tax return?

You start making money. What is the “net investment income” tax, and does it apply to a family business you have little to do with, other than maybe annual meetings? What about that bank account you keep in Canada, as you have a cabin there? Is there any kind of tax break for all that alternative minimum tax you have paid in recent years?

I am a professional tax advisor, and I agree that the system is broken. There is no equivalent to our income tax preparation industry in the U.K. for example, which is even more remarkable when one remembers that perilously close to one-half of Americans do not pay income taxes.Thanks to Donald Rumsfeld for speaking out on this matter.