What Every Tax Professional Needs to Know About E-Signatures

Mar 16th 2016
Product Manager, Tax Thomson Reuters
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The concept and use of electronic signatures is nothing new. The United Nations began providing guidance to countries worldwide on how to define and enforce e-signatures as early as 1996. In 1999, the United States began codifying e-signatures and ultimately arrived at the Electronic Signatures in Global and National Commerce (E-SIGN) Act of 2000, which establishes interstate recognition that all e-signatures are every bit as legally binding as pen-and-paper signatures – well, most e-signatures.

The IRS took a dim view of e-signatures for a long time – but not in all circumstances. Interestingly enough, eight years ago, the IRS issued Revenue Procedure 2008-12 (as part of Internal Revenue Bulletin 2008-5), which defined the requirements for collecting consent forms from taxpayers under Code Section 7216. This revenue procedure contains a section dedicated to defining clear guidelines on how tax professionals can allowably obtain client consent via specific e-signature methods.

Until just a few years ago, the IRS remained an opponent of e-signatures on one particular document, Form 8879, IRS e-file Signature Authorization, which most of you will recognize as the document the IRS requires tax professionals (specifically, electronic return originators) to collect from taxpayers before transmitting their e-filed tax return to the taxing agency – and which they must maintain on file for three years.

With the rampant fraud occurring today in tax filings, it’s no surprise that the fear of new fraud risks and the slow machinations of government conspired to squash the profession’s hopes of an e-signature solution for e-file authorizations.

Until 2014, that is. On March 11 of that year, the IRS released new guidance announcing that it would allow e-signatures on forms 8879 and 8878, IRS e-file Signature Authorization for Form 4868 or Form 2350, as long as very specific requirements were met.

What Makes an E-Signature IRS-Acceptable?
Thus, we arrive at the first of two vital considerations for any tax practitioner eyeing e-signatures: What makes for an IRS-acceptable e-signature on Form 8879?

In short, the answer is knowledge-based authentication (KBA).

Anyone who has signed up for online package tracking via UPS (MyUPS) or the US Postal Service (My USPS) has experienced KBA – a series of multiple-choice questions asking the person to identify facts that only he or she should know. The information used for these questions is culled from public records, such as phone listings, home and automotive titles, and credit reports.

For example: “From the following list of phone numbers, select the one you used while living at 123 MAPLE LN.” Or, “What is your relation to [your father’s name here]?” Or, “From the following list of creditors, please select the one with which you currently have an open line of credit.” Sometimes the answer is “None of the above.” There’s usually an option to skip questions that might be harder to answer – for instance, the closing sales price of a home purchased in 1963.

Tax professionals looking to implement e-signatures in their tax process should first confirm the existence of IRS-acceptable KBA methods in any solutions they evaluate. In general, only tax vendors that serve the tax and accounting profession offer fully IRS-compliant e-signature solutions. However, I’ve seen some vendors – even those specifically focused on the profession – claim that their solutions are acceptable for e-signing Form 8879. But if they don’t contain KBA, that can’t be the case.

Only a few organizations maintain databases of public information flexible enough to meet the IRS’s strict KBA requirements. Every e-signature vendor looking to provide an IRS-compliant solution is required to partner with one or more of these vendors to power its KBA, leading to slightly costlier e-signature solutions. Every practitioner should evaluate e-signature solutions with the knowledge that full compliance comes at a marginally higher price tag.

But given the immense hassle and wasted nonbillable time practitioners face when attempting to get their clients to complete and return Form 8879 (Who hasn’t had a client refuse to come into the office just to sign a form?), it becomes much easier to justify the marginal cost.

It’s worth noting that, at this time, the IRS only recognizes e-signatures for individual (Form 1040) taxpayers and hasn’t yet issued the necessary guidance for other return types, such as corporations and partnerships. That’s not to say, however, that e-signatures are completely irrelevant to the business clients of an accounting firm.

Thomson Reuters is poised to offer e-signatures for business return e-file authorizations as soon as the IRS provides its blessing – as is no doubt the case for other profession-specific e-signature vendors, as well.

Some States Have Yet to Comply
State taxing agencies add an additional layer of complexity to e-signatures in the context of e-file authorizations. Some of them have yet to conform to the IRS and don’t recognize e-signatures as valid for state e-file authorization purposes. Notable holdouts include Delaware, Maryland, New York, and West Virginia.

Unfortunately, these jurisdictions are placing their tax practitioners and taxpayers in a tough spot logistically, as implementing e-signatures would mean a split process: issue and obtain an e-signature for the federal and any conforming states, and separately collect a paper signature for the nonconforming states. For a multistate filer with filing requirements in states that do conform, everyone involved may still prefer to sign the one state’s e-file authorization on paper while electronically signing the returns in the other 20-plus jurisdictions.

But for those firms that reside in a nonconforming state with a majority of single-state filers for clients, it just won’t be worth requiring two separate signing methods of clients. As a result, most will continue collecting signatures on paper for all jurisdictions – at least until their home states get up to speed with the rest of the country.

Ultimately, save for the unfortunate few residing in nonconforming states, there’s no longer any reason for tax practitioners to continue collecting e-file authorization signatures on paper copies of Form 8879. E-signatures provide a quicker and easier client experience. As an example, my baby-boomer parents completed their e-signature for last year’s tax return in just minutes.

The days of clients putting off signing for two weeks or more because they’re required to print, fax, or come to their tax preparer’s office are basically gone because clients are more likely to take care of the e-signature request as soon as they receive it. And by automatically filing the signed copy in the firm’s document management system, e-signatures drastically simplify the e-file initiation and tracking process, proportionately reduce staff hours expended on e-file, and tighten up engagement timelines by shortening the average time between e-file readiness and transmission to the IRS.

Before firms move forward with implementation, however, they owe it to themselves to consider KBA support and state conformity. That could spell the difference between an exceptionally positive experience of increased efficiency and improved client experience, and trouble with one or more taxing agencies for implementing a less-than-compliant solution.

Related article:

How to Ensure a Seamless Tax Process with E-Signature Technology

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