Mandatory E-Filing
I've written often about the reasons why electronically filing tax returns is an unwise move and I have resisted all attempts by IRS to start using that program for my clients. So far, IRS efforts to make e-filing mandatory have been shelved. However, that hasn't stopped some State tax agencies from taking a more aggressive approach to what they perceive as a cost saving technique.

Living up to its name as the People's Republic of California, that state's rulers have just passed a law requiring any professional tax preparation office that prepares more than 100 individual income tax returns with computer software to file their clients' tax returns electronically as of January 1, 2004. This requirement has been in the works for several months, with debate over the break point. There is going to be a $50 penalty for every paper return submitted by preparers who should have used e-filing.

What I will find personally interesting is the definition of 100 tax returns. Since leaving the PRC ten years ago, and transferring my 700+ California tax clients to new CPAs, I don't prepare that many PRC returns any more. My current clientele is spread all over the country, with only about a dozen in the PRC. However, overall, I am preparing tax returns for about 150 individuals each year. The FTB has more info on this new law, but it isn't clear as to whether or not someone in my circumstances would be covered by this new requirement. I wrote to the FTB asking for clarification.

I did notice a sort of Catch-22 in the FTB rules. In order to sign up for e-filing of PRC tax returns, a preparer has to already be enrolled in the IRS's e-file program. It's working out that the rulers of the PRC are doing some of IRS's dirty work by forcing the use of electronic filing.

I have seen indications that other states are also considering requiring that their taxpayers submit tax returns electronically. I'm sure if it goes smoothly with the PRC, other states will be quick to enact such requirements.

In the meantime, I can't help but ponder ways for people to avoid undue audit potential by continuing to file paper returns with plenty of explanatory material. Some options that come to mind at this early stage include the following.

This new rule only applies to professional tax preparers; so people could prepare their own tax returns, or have a pro do their 1040 and do the 540 themselves. Another option would be to use a tax preparer who falls under the 100 returns per year limit. Another choice would be to continue filing paper returns and pay your preparer an additional $50 to cover his/her FTB penalty. This last one will probably be my approach, if the FTB considers me to be subject to the new rule.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/31/2003 04:16:00 PM Send this post: