Electronic return filing discouraged

[Famspear]

According to informal feedback I have received from Intuit, the company that provides the Proseries tax return preparation software we use, the Internal Revenue Service has made some sort of informal agreement with software providers for this filing season.

Under this agreement, at the moment a year 2016 Form 1065 partnership return is filed electronically, the tax practitioner must transmit, to Proseries, the Social Security number of someone at the client's business who is "filing" the return. To the best of my knowledge, this is not a requirement found in the Internal Revenue Code or the Treasury regulations.

For example, let's say that the partnership has fifteen owners, and each owner is a Limited Liability Company (LLC). Let's assume that each Limited Liability Company has its own Federal employer identification number (EIN). Let's also assume that one of the LLCs is designated as the Tax Matters Partner (TMP). The name, address, and EIN of the TMP would be shown on the Form 1065 return (whether filed by paper or electronically).

However, Intuit is now requiring that a real, living, human being with a Social Security number -- someone who presumably is an owner or officer of the LLC, perhaps -- provide his or her Social Security number at the time the partnership Form 1065 return is filed.

This is not a requirement where the Form 1065 return is filed the old-fashioned way: in paper form.

We are getting blow-back from people who do not want to provide their Social Security numbers in this situation. I can see the concern: At a time of rampant identity theft, when people arguably should be providing LESS sensitive personal information over the internet, etc., people are now being asked to provide such information which, although perhaps helpful to the IRS, is not only not required for a "paper return" filing but which apparently is not legally required at all. The effect of the agreement between the IRS and Proseries, 'though it may be unintended, is to discourage electronic filing.

The bottom line is that some of our clients are refusing to authorize the electronic filing of year 2016 returns, and are opting to go back to paper filings.

[Burnaby49]

The Canada Revenue Agency has a lot of what I consider stupid policies too but we don't have that one yet. The CRA is very big on electronic filing so I doubt that they'd do anything that tended to discourage it. I can't see how providing the social security number of some esentially random individual in the firm who files the returns is of any use to the IRS.

[notorial dissent]

Burnaby, you're assuming there was a sane rationale reason for the new requirement, this is the IRS doing this, that is never a good or even a reasonable assumption.

[Burnaby49]

Burnaby, you're assuming there was a sane rationale reason for the new requirement, this is the IRS doing this, that is never a good or even a reasonable assumption.

Not at all, sane rational reasons are not an assumption. Just look at your Department of Homeland Security policies. As an ex CRA auditor I've had a lot of experience with policies that made little rational sense but I understood them within the context of government decision making. So I assume there is some reason for this IRS policy, no matter how idiotic, but I just can't see it.

[notorial dissent]

True, I didn't mean to imply there wasn't a reason, just that it wasn't sane or rationale, or probably legal.

[operabuff]

But there does have to be a real live person who signs a paper Form 1065, not just the return preparer. That person is the one who swears under penalties of perjury that the return is correct. I suspect the Form 1065 electronic requirement is related to some sort of perceived abuse. It allows the IRS to know with more certainty the identity of the person signing the return. Contrary to some speculations in this thread, the IRS does not make up requirements on a whim and would prefer to reduce barriers to electronic filing. The IRS may not perceive supplying the SSN as much of a burden. If you feel that it is, why not let them know?

The IRS actually has quite a few of these kinds of requirements around electronic filing. For example, you cannot file a Married Filing Separate return electronically unless you have the other spouse's SSN. In many MFS situations, the spouses are separated and not eager to share information. So the MFS taxpayer may have to file a paper return. In this situations, it seems likely that the IRS wants to be able to link the two MFS returns.

Another example is that electronic filing requires supplying the correct birthdate of the taxpayer and any dependents. There is no comparable requirement for a paper return. I can see how that requirement helps to prevent abuse. If you can't provide the correct birthdate of a dependent, then you probably don't live with them. (You don't necessarily have to live with a relative to claim the dependency exemption, but there is a residency requirement for the EITC. The Schedule EIC asks for birth year, but not the birthdate.)

[Burnaby49]

As far as I'm aware information requirements are the same in Canada whether you file paper or electronically so there are no privacy reasons to prefer one over the other. Spouse's Social Insurance Numbers are not as important here because we don't file joint returns. My wife and I file entirely separately, I don't even know what is in her return. The SIN is only necessary if there are joint issues.

[Famspear]

But there does have to be a real live person who signs a paper Form 1065, not just the return preparer. That person is the one who swears under penalties of perjury that the return is correct. I suspect the Form 1065 electronic requirement is related to some sort of perceived abuse. It allows the IRS to know with more certainty the identity of the person signing the return....

In the case of an electronically filed Form 1065 return, the tax return preparer is required to obtain a signed Form 8879-PE from the taxpayer, which reads in part as follows:

Declaration and Signature Authorization of General Partner or Limited Liability Company Member Manager [ . . . ]

Under penalties of perjury, I declare that I am a general partner or limited liability company member manager of the above partnership and that I have examined a copy of the partnership’s 2016 electronic return of partnership income and accompanying schedules and statements and to the best of my knowledge and belief, it is true, correct, and complete. I further declare that the amounts in Part I above are the amounts shown on the copy of the partnership’s electronic return of partnership income. I consent to allow my electronic return originator (ERO), transmitter, or intermediate service provider to send the partnership’s return to the IRS and to receive from the IRS (a) an acknowledgement of receipt or reason for rejection of the transmission and (b) the reason for any delay in processing the return. I have selected a personal identification number (PIN) as my signature for the partnership’s electronic return of partnership income.

This appears to be intended by the IRS to satisfy the statutory requirement that a 1065 return -– in this case, an electronic return -- be signed under penalty of perjury. However, the signed Form 8879-PE is not actually filed with the Internal Revenue Service; it is retained by the tax return preparer. Neither the paper 1065 nor the 8879-PE require a Social Security number where the signing partner is an LLC or other non-individual.

The IRS actually has quite a few of these kinds of requirements around electronic filing. For example, you cannot file a Married Filing Separate return electronically unless you have the other spouse's SSN. In many MFS situations, the spouses are separated and not eager to share information. So the MFS taxpayer may have to file a paper return. In this situations, it seems likely that the IRS wants to be able to link the two MFS returns....

The requirement of the SSN for the spouse has been on the paper returns since tax year 1964.

Another example is that electronic filing requires supplying the correct birthdate of the taxpayer and any dependents. There is no comparable requirement for a paper return....

Interesting points.

Come to think of it, I guess we could argue that all these requirements are legally based on the general requirement in Internal Revenue Code section 6011(a):

When required by regulations prescribed by the Secretary any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary. Every person required to make a return or statement shall include therein the information required by such forms or regulations.

(emphasis added).

It's just that the SSN requirements are more specifically laid out in section 6109.

[Famspear]

Getting back to the requirement that the taxpayer supply the spouse's SSN where the taxpayer is filing "married filing separately" (a requirement that has been on the paper forms since 1964), I note that the IRS began requiring SSNs for dependents with the 1987 tax year. It just never occurred to me back then to question the legal basis for that requirement.

But now, in the internet age, when fraud (such as identity theft) is such a problem, it appears that some people are much more reluctant to provide a social security number or other personal information -- especially where the information was not previously required on electronic returns and is still not required on paper returns.

[operabuff]

Getting back to the requirement that the taxpayer supply the spouse's SSN where the taxpayer is filing "married filing separately" (a requirement that has been on the paper forms since 1964), I note that the IRS began requiring SSNs for dependents with the 1987 tax year. It just never occurred to me back then to question the legal basis for that requirement.

But now, in the internet age, when fraud (such as identity theft) is such a problem, it appears that some people are much more reluctant to provide a social security number or other personal information -- especially where the information was not previously required on electronic returns and is still not required on paper returns.

The IRS has pretty broad statutory authority to require taxpayer identification numbers (or TINs). Check out section 6109. With respect to dependents for whom the EITC is claimed, section 32(c)(3)(D) requires the TIN and 32(m) clarifies that the TIN must be an SSN.

What I was talking about is the birthdate (TINs are required on both kinds of return) requirement for dependents on electronic returns - but not on paper ones. The IRS matches up the name, the birthdate and the SSN with information provided by Social Security and will reject an electronic return that has a mismatch. If no birthdate is provided, the return will also be rejected. This process normally takes less than an hour.

And while the spouse's SSN is "required" on paper returns, the IRS will process the paper return without the spouse's SSN (i.e., not reject it). But you simply cannot file such a return electronically.

There's a big difference between electronic returns and paper. The IRS can reject electronic returns very easily if they don't meet their standards. The rejection means that the return has not yet been filed. But if the IRS receives a paper return that is deficient in some relatively minor way such as a missing SSN for a spouse on a MFS, the IRS "rejects" the paper return at its peril, because it would almost certainly be regarded by a court as filed. I suppose the IRS could hold the refund until it receives the information it wants, but that will very likely mean that the IRS ultimately pays interest on the refund, because the requirements in section 6611(g) for being in processible form are pretty minimal

[Famspear]

But there does have to be a real live person who signs a paper Form 1065, not just the return preparer. That person is the one who swears under penalties of perjury that the return is correct. I suspect the Form 1065 electronic requirement is related to some sort of perceived abuse. It allows the IRS to know with more certainty the identity of the person signing the return.....

This is an interesting point, and reminds me of a case I worked. For electronic filing of a Form 1065 federal partnership return where a tax practitioner "files" the return electronically for the client, the practitioner is required to obtain a signed Form 8879-PE. This form is signed by the person who is stating under penalty of perjury that the return is correct. However, the Form 8879-PE is not generally filed with the return itself. Instead, the tax practitioner keeps the signed Form 8879-PE as evidence that someone in authority at the client's office did authorize the act of filing the return electronically.

Now, I was involved in a case recently where a Form 1065 return had been filed electronically, and the return was selected by the Internal Revenue Service for examination. It turns out that there was a material, intentional understatement of income on the return. (By the way, neither I nor anyone at my firm had prepared the return; it was for a tax year before we became involved.)

The tax practitioner who had prepared the return handled the IRS examination. The Revenue Agent's Report that resulted, of course, asserted that there had been a huge understatement of income (over a million dollars). Funny thing, though: According to what I was told informally, neither the tax practitioner nor the client personnel ever provided the IRS with a signed copy of the Form 8879-PE that would indicate which individual at the client's office authorized the filing of the return -- despite repeated attempts by the IRS to obtain this information over several months.

I can see why the practitioner and the client refused to turn over the document (assuming a signed copy even existed): the document could be used as evidence that the person who signed the document (as well as the tax practitioner) had essentially intentionally filed a materially false return.

Maybe in the future, the IRS should consider requiring that the Form 8879-PE be filed with the IRS (either by paper or electronically) at the time the Form 1065 return is filed.

[Famspear]

Another point: For the IRS, the signed Form 8879-PE would generally be even stronger evidence than the Social Security number inputted by the practitioner.

[operabuff]

Another point: For the IRS, the signed Form 8879-PE would generally be even stronger evidence than the Social Security number inputted by the practitioner.

I don't think it's so much evidence as it is a way of establishing identity. There could be many "John Smith's" but only one John Smith with SSN xxx-xx-xxxx, for example. It does look like the form also requires the person's title, which should narrow the field, but the IRS likes to use the SSN. If they suspect abuse, they might want to identify all the returns signed by that person and set them up for investigation - easy to do with an SSN, harder to do with just the name.

Of course the 8879-PE doesn't bear the social security number of the signing person either. I don't know about submitting the 8879-PE electronically, but I'm certain that the IRS doesn't want to have any more paper on its hands. So they put the burden on the preparer to retain it. It's the same with individuals, as you probably know. They sign an 8879 which is retained by the preparer. Now it's possible that an electronic 8879 is transmitted to the IRS - it's certainly part of the package prepared by the software. So it could be going or not - the programmers could tell you.

[operabuff]

As far as your clients reluctance to provide SSNs, that seems a little forced to me. They provide their SSNs in all sorts of commercial contexts right? And they give it up for innumerable other information returns. It's just one more. "The lady doth protest too much, methinks." Every time I call my bank, or credit card company or phone company, they want the last four of my SSN, to be assured it's me on the phone.

That being said, privacy advocates have advocated that the IRS create some other unique identifier for taxpayers. I wasn't convinced that would do much good - maybe initially, but eventually that identifier would become just as overused as the SSN is.

[Famspear]

As far as your clients reluctance to provide SSNs, that seems a little forced to me. They provide their SSNs in all sorts of commercial contexts right? And they give it up for innumerable other information returns. It's just one more. "The lady doth protest too much, methinks." Every time I call my bank, or credit card company or phone company, they want the last four of my SSN, to be assured it's me on the phone...

For electronic filing of a 1065, all we do is send the client an email with an encrypted PDF copy of the Form 1065 return (and the Form 8879-PE) for the client's review. All the client does is review the PDF of the return, print and sign the one page Form 8879-PE, scan it, and Email it back to us.

There is no need to print the entire Form 1065 return, no need to sign it, no need to put it in an envelope, no need to affix postage, and no need to mail it. By contrast, a paper filing requires that the client do all these things.

So, with due respect, my view is that "the lady doth protest too much" is not very persuasive. My clients are incurring additional hassle to avoid providing SSNs.

I would also point out for the benefit of other readers (not operabuff, who I believe is an experienced tax lawyer) that we are not talking about situations where the SSN is already shown somewhere else on the return (such as on a K-1 for a partner). We are talking about individuals who are not themselves partners in the partnership. So, this is something new for them.

And, the argument (if I understand the essence of the argument) that an individual's reluctance is "a little forced" because he or she has already been providing his or her SSN in innumerable other situations is not persuasive, at least for me. Indeed, that could be a reasonable argument for more reluctance, not less. To combat internet fraud, identity theft, and so on, I would argue that we should consider using Social Security numbers, dates of birth, mother's maiden names, etc., LESS, not more -- precisely because these identifiers have already been used and over-used so much on the internet and in other places where commerce is conducted.

[operabuff]

But shouldn't your clients be putting up a fight when the phone company, cable company, credit card company, etc. ask for the SSN? That's where the overuse is. The IRS is statutorily mandated to use it. Section 6109(d). And has been since about 1961. All these other folks are Johnny Come Latelies. And it's practical for the IRS to use because they share information with the SSA. I'll stick to my guns on "My Lady Doth Protest Too Much."

[Famspear]

But shouldn't your clients be putting up a fight when the phone company, cable company, credit card company, etc. ask for the SSN? That's where the overuse is. The IRS is statutorily mandated to use it. Section 6109(d). And has been since about 1961. All these other folks are Johnny Come Latelies. And it's practical for the IRS to use because they share information with the SSA. I'll stick to my guns on "My Lady Doth Protest Too Much."

I agree that the real overuse and abuse of the Social Security number has previously been at places like the phone company, etc. I also agree that a reasonable argument could be made that the statutory authority for this particular kind of use of the Social Security number by the IRS -- i.e., where the individual technically is not even the "taxpayer" filing the return -- might be supportable under section 6109(d) -- and (even if section 6109(d) did not exist) maybe also supportable by the more general language of section 6011(a). I'm backing away from (or, as they sometimes say, "walking back") my original conjecture (at the top of this thread) that the use of the Social Security number is this way "apparently is not legally required at all".

[operabuff]

Another aspect of this issue is the extent to which other persons than the IRS might have access to a copy of the return and therefore the signer's SSN. (The IRS, of course, only shares taxpayer information under very narrowly drawn circumstances.) One of the factors in the development of the PTIN system for preparers was so that taxpayers would not have access to their return preparer's SSN. The IRS wanted a unique identifier for preparers but recognized the legitimate privacy concern about having the preparer's SSN appear on each return. Preparers provide their SSNs to the IRS when they apply for PTINs, but it's the PTIN rather than the SSN that appears on returns.

I have no idea who other than the return preparer and the IRS might have reason to see the 1065 and thus have access to the signer's SSN. I didn't work in the partnership area - I know partners get the K-1's, but would there be any reason for them to see the 1065?

[Famspear]

.....I didn't work in the partnership area - I know partners get the K-1's, but would there be any reason for them to see the 1065?

A partner might want to see the entire Form 1065 return -- especially the kind of 1065s I prepare -- to gain insight into complex factual and legal issues explained in the disclosure statements. When a partner requests a copy of the entire Form 1065 return from me, I generally delete the K-1s of the other partners from the copy I send.

I understand that Congress has also recognized that a partner may have a valid reason for seeing a copy of the Form 1065 return. The Code provides that, under the Material Interest Rule, any person who was a partner during any part of the tax year has the right to receive some parts of the 1065 return from the IRS, upon written request. Basically, the partner generally is not entitled to receive any part of the return containing the "taxpayer identity" information (name, address, and taxpayer ID number) of another partner. See sections 6103(e)(1)(C), 6103(e)(10) and 6103(b)(6).

I prepare lots of returns with complex explanations in disclosure statements.

[Famspear]

One area where a partner in a partnership might want to see a copy of the Form 1065 return as a whole would be where the partner suspects that the partnership took a frivolous position on an income or deduction item. (Suppose a partner receives a K-1 that shows a suspiciously large net ordinary loss amount, for example.) In such a situation, even in the case of a so-called "TEFRA partnership," the partner might want to include a Form 8082 in his or her Form 1040 return and NOT deduct what appears to be an overstated net loss. See IRC section 6222(b)(1). This avoids the potential problem of section 6222(a) -- the general rule that on his or her own tax return, the partner must treat a "partnership item" shown on his K-1 in a manner consistent with the way the item was treated on the Form 1065 return. On the Form 8082, the partner would explain why he or she believes the treatment of the item on the Form 1065 return was incorrect, and why the treatment on his or her Form 1040 is considered correct.

Speaking of the old TEFRA partnership audit rules, regular tax practitioners here will be aware that those rules have been repealed, effective (in general) for the tax year 2018 Form 1065 returns (due March 15, 2019, before extensions).