Embrace E-Filing Your Tax Return

A rebuttal of the Jay Starkman article in the Wall Street Journal

On February 5, Jay Starkman, CPA published a Wall Street Journal opinion piece titled Beware of E-Filing Your Tax Return in which he advocated that tax professionals should return to paper filing tax returns. Many tax professionals took to social media to express their profound disagreement with the article, and I agree.

In Five Reasons Why You Should E-File Your Tax Return, my friend Amber Gray-Fenner, EA, USTCP accurately and persuasively made five assertions regarding the electronic filing of tax returns:

1. E-filing is secure

2. E-filed returns are accurate

3. E-filing protects the taxpayer

4. Identity verification through ID.me is secure

5. E-filing is fast

I wholeheartedly agree with all the points in the Gray-Fenner article, so I will not repeat them in my comments on the Starkman article. I will go section by section through the Starkman article and give you my thoughts. Mr. Starkman’s article quotes are in italics, and my comments on that section immediately follow.

Smart business owners aim to make transactions simple and smooth for customers. At the Internal Revenue Service, the roles are reversed: customers must adapt to the government’s requirements. The IRS makes some taxpayers file an electronic tax return instead of mailing in a paper one. The trouble is that e-filing is both vulnerable to cyberattack and less forgiving for taxpayers. When a taxpayer e-files—voluntarily or by mandate—and makes an error, the penalty can be harsh and might have been avoidable with a paper return.

The problems with e-filing aren’t widely known, even by tax professionals. Paper is more secure, as demonstrated by recent malware attacks on e-filing tax software and preparation companies such as Wolters Kluwer, and by data breaches involving taxpayers’ personal information such as with the company TaxSlayer. E-filing income-tax returns can also lead to unfair treatment by the IRS.

Both electronic filing and mail filing have security risks; it is not true that paper is more secure. Mail can be stolen — mail theft is rising, and USPS boxes and facilities are not always physically secure. In February 2023, The Financial Crimes Enforcement Network (FinCEN) issued FinCEN Alert on Nationwide Surge in Mail Theft-Related Check Fraud Schemes Targeting the U.S. Mail stating that

Criminals have been increasingly targeting the U.S. Mail and United States Postal Service mail carriers since the COVID-19 pandemic to commit check fraud. Criminals typically steal personal checks, business checks, tax refund checks, and checks related to government assistance programs, such as Social Security payments and unemployment benefits. Following the initial theft and fraudulent negotiation of the stolen checks, criminals may continue to exploit their victims by using the personal identifiable information found in the stolen mail for future fraud schemes, such as credit card fraud or credit account fraud.

If millions more tax returns are filed on paper due to Mr. Starkman’s advice, there is no doubt criminals would also target those documents for theft. The tax return contains an individual’s name, address, Social Security number, sources of income, assets, and bank account information if they choose direct deposit of a tax refund.

Electronic data breaches are real, so the IRS and the Security Summit partners have pushed tax professionals to adopt and follow sound technology security policies. As far as I know, any data breaches have been on the private sector side, not the IRS side.

The IRS accepts returns that are e-filed or paper returns deposited in the mail by the filing deadline. If a return has enough information for the IRS to calculate the proper tax, it is considered valid. But such protections don’t fully apply to electronic returns. Authorizing your preparer to e-file on your behalf doesn’t protect you as a taxpayer, because the IRS doesn’t consider an electronic return until it acknowledges receipt.

This is not correct. In Fowler v. Comm., 155 T.C. No. 7 (2020), a taxpayer’s tax return was electronically rejected for failure to include the taxpayer’s Identity Protection Personal Identification Number (IP PIN). The Tax Court held that the return met the four requirements for a valid tax return under Beard v. Comm., 82 T.C. 766, 777 (1984), aff'd, 793 F.2d 139 (6th Cir. 1986) at the time of rejection and the §6501(a) assessment statute of limitations began regardless of the rejection.

The Beard test requires that:

1. The information on the return must be sufficient for the IRS to calculate tax liability,

2. The filed document must purport to be a return,

3. The return must be an honest and reasonable attempt to comply with the tax laws, and

4. The taxpayer must execute the return under penalties of perjury.

Under the Fowler precedent, a valid tax return under the Beard test received by the IRS yet rejected electronically still starts the assessment statute of limitations for that tax period under §6501(a). The taxpayer is equally protected whether they file electronically or on a paper return.

In recent years, courts have upheld harsh financial penalties for taxpayers who thought they had properly e-filed. Christopher Haynes’s certified public accountant e-filed his 2010 return before the deadline in 2011. The IRS rejected the return on a triviality: A Social Security number was entered on a line designated for an employer identification number. Mr. Haynes didn’t know this until he received a penalty notice from the IRS in August 2012. A district court upheld the penalty, ruling in a summary judgment in the government’s favor that Mr. Haynes’s reliance on his CPA to e-file didn’t constitute reasonable cause to abate the penalty. An appellate court later vacated the decision, and the final outcome isn’t yet clear. (Mr. Haynes didn’t respond to requests for comment.)

Wayne Lee’s CPA failed to e-file his client’s returns for 2014, 2015 and 2016. The accountant told the IRS that the software he used couldn’t handle Mr. Lee’s complex returns. But Mr. Lee said the accountant never told him about this problem. In 2019 the IRS assessed Mr. Lee more than $70,000 in penalties and barred him from applying his six-figure 2014 overpayment to taxes owed in 2015 and 2016. An appellate court ruled that reliance on his CPA wasn’t an excuse for making errors. The court noted that taxpayers can confirm timely filing with the IRS by phone or on the IRS website. Alternatively, instead of e-filing, the preparer can attach Form 8948 (Explanation for Not E-filing) to Form 1040 and file a paper return instead.

The Supreme Court case U.S. v. Boyle, 469 U.S. 241 (1985) established that a taxpayer has a nondelegable duty to ensure their extension or return is filed and cannot use their reliance on a tax professional to file the documents to avoid penalties for failure to file. In Boyle, the attorney neglected to file the estate tax return because the deadline was accidentally omitted from the attorney’s calendar; the attorney mailed the return three months late, and the IRS assessed a late filing penalty.

The taxpayer’s nondelegable duty to ensure the tax return is filed applies equally to paper-filed and electronically-filed documents; the taxpayer must always ensure proper filing with the IRS before the statutory deadline. Therefore, Mr. Starkman’s advice that a preparer can mail a paper return instead of electronically filing would not absolve them of responsibility if that preparer fails to file that paper return promptly.

When a dispute can’t be resolved within the IRS, a taxpayer can petition the Tax Court—either by mail or by e-filing—seeking a favorable outcome. E-filing a petition with the Tax Court, however, also is risky. Antawn Sanders said he encountered technical problems while trying to e-file a Tax Court petition and spent almost an hour trying to submit it before the midnight filing deadline. The document ultimately uploaded 11 seconds into the next day. The court rejected it as late.

Roy Nutt e-filed his Tax Court petition on the day it was due at 11:05 p.m. Central Time. That meant it arrived at 12:05 a.m., the next day, in Washington, where the Tax Court is located. The court rejected the filing because it was five minutes late. An appeal is pending. Had Mr. Nutt mailed a hard copy to the Tax Court postmarked before midnight, it would have been accepted.

These cases involve the electronic filing of a United States Tax Court petition, which is irrelevant to whether or not taxpayers should electronically file their income tax returns. The IRS and the Tax Court have completely different electronic filing systems, and the issues brought up in these cases do not apply to tax return filing.

Does Mr. Starkman believe that Mr. Nutt or Mr. Sanders could get a valid, timely postmark the night of the Tax Court petition deadline? The downfall of their cases was not the electronic filing of the petitions; instead, it was their procrastination as they waited until the evening of the last day to file their petitions. As someone admitted to practice before the United States Tax Court, I see taxpayers wait until the last minute to deal with their Tax Court matters. If anything, the ability to electronically file petitions makes it easier for pro se litigants to timely file a petition because procrastinators do not have to go through the hassle of printing documents and physically putting them in the mail during business hours.

The cases cited above are a harsh result of the Tax Court’s petition deadline in a deficiency case being jurisdictional. However, in light of the Supreme Court’s decision in Boechler v. Comm., 142 S. Ct. 1493 (2022) and the Third Circuit’s decision in Culp v. Comm., 75 F.4th 196 (3d Cir. 2023), it is possible that equitable tolling may eventually apply to the 90-day deadline in a deficiency case, allowing Tax Court judges discretion to permit late-filed petitions to proceed if the facts support it.

The security risks posed by e-filing are equally serious. The IRS works with a third party vendor, ID.me, to verify taxpayers’ identities. Registering with ID.me is a prerequisite to obtaining an IRS online account or using the new IRS Direct File tax program. Taxpayers must submit copies of their Social Security cards or employer identification numbers and other documents to ID.me as proof of identity. I advise my clients not to use ID.me because it is a private database of personal information. My clients have no control over it and must trust that it won’t be hacked.

The IRS uses ID.me for identity verification for specific web-based applications, but ID.me is not used in the return e-filing process, so this point is irrelevant to whether a taxpayer should file a tax return on paper or electronically.

A taxpayer can contact the IRS to receive any documents secured with ID.me by mail if requested; the IRS does not require the use of ID.me. As an aside, when I used ID.me to get access to IRS applications, I did not have to provide my Social Security card. I provided my state driver’s license.

E-filing is widely used and isn’t always voluntary. The IRS mandates e-filing of certain forms for every tax-exempt organization, preparers who file 11 or more returns, and for any business filing 10 or more returns; each W-2, 1099, and payroll return counts toward the 10.

E-filing has also spurred tax forms to proliferate, making it more complex and costly for taxpayers to file returns. For example, Form 1040, which before 2018 was two pages long, now runs as long as eight pages.

Form 1040 is two pages, not eight pages. Some items squeezed on the base Form 1040 have been moved to supplemental schedules. The additional space has allowed the IRS to create specific data entry points for adjustments, deductions, credits, and payments, which benefits the IRS and the taxpayer. For example, it is much easier to review prior year returns to see exactly what items were included and excluded.

There is no proof that the general e-file mandate caused the moving of items to supplementary schedules; however, it is indeed easier to get more data points when a return is filed electronically versus a return filed on paper.

Considering that e-filing isn’t as forgiving as paper filing and raises other risks, paper returns seem the safest bet. Unlike e-filed returns, paper ones won’t get rejected for failure to click on a box. You might even get away with missing a deadline by mailing a day late—though I wouldn’t recommend cutting it close.

A tax return mailed a day late is late, period, end of story. A Form 1040 return rejected on or near the deadline has a five-day perfection period where the return can be resubmitted electronically and, if accepted, treated as timely filed. Electronic filing actually provides more opportunities for timely filing when compared to paper filing.

Regrettably, the IRS appears to be pushing e-files over paper. IRS National Taxpayer Advocate Erin Collins recently said processing paper forms remains an agency weak spot. In 2021 Ms. Collins wrote that “paper is the IRS’s kryptonite”—a point she reiterated last month.

Businesses have long understood that customer service is crucial. It’s past time for the IRS to learn this lesson—and put it into practice.

Mr. Starkman must wake up to the fact that this is the 21st century. Efficient customer service is delivered via digital tools that minimize physical effort, not reverting to a 19th and 20th-century physical mail system. People under 50 years old (and some older folks as well) generally do not want to mail documents or payments. I am 45 years old and barely use physical checks. If I have a choice, the vendor with digital solutions will always win out as using the phone or the mail is an inconvenience to me.

The IRS e-file system is not perfect, but no system is perfect, and it is most certainly better in almost all respects than physical mail. Tax professionals should focus on implementing sound security policies in their required written information security plan (WISP) to enhance taxpayer security instead of mailing documents en masse to the IRS. The IRS cannot handle it, taxpayers do not want it, and tax professionals do not need the additional burden.

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