What compliance is necessary to e-file tax returns?

Compliance for e-filing tax returns involves two distinct categories: the requirements for tax professionals to become and remain Authorized IRS e-file Providers, and the mandates that compel certain taxpayers and entities to file electronically.

1. Introduction

Electronic filing compliance is primarily governed by IRS Revenue Procedures and Publications, specifically Publication 3112 (Application and Participation) and Publication 1345 (Handbook for Authorized IRS e-file Providers). For tax professionals, compliance is no longer just about having an EFIN; it now includes strict data security standards under federal law. For taxpayers, the threshold for mandatory e-filing has been significantly lowered, making paper filing non-compliant for most businesses.

2. Core Explanation

A. For Tax Professionals (Authorized IRS e-file Providers)

To professionally e-file tax returns for clients, you must be an Authorized IRS e-file Provider.

• Application Process (Become an ERO):

  • EFIN Application: You must apply for an Electronic Filing Identification Number (EFIN) via the IRS e-Services platform. This replaces the paper Form 8633, though the underlying questions remain similar.
  • Suitability Check: The IRS conducts a credit check, a tax compliance check (you must be current on your own taxes), and a criminal background check on all principals and responsible officials.
  • Fingerprinting: Principals who are not licensed professionals (CPA, Attorney, Enrolled Agent) must undergo fingerprinting.
  • Status: You will typically enroll as an Electronic Return Originator (ERO).

• Data Security Compliance (Mandatory):

  • FTC Safeguards Rule: Tax professionals are defined as "financial institutions" under the Gramm-Leach-Bliley Act. You generally must adhere to the FTC Safeguards Rule.
  • Written Information Security Plan (WISP): You must have a written plan detailing how you protect client data. This is a primary document requested during IRS data security audits.
  • The "Security Six": IRS Publication 4557 outlines six critical protections: Antivirus, Firewalls, Two-Factor Authentication (2FA), Backup Software, Drive Encryption, and VPNs.

• Operational Requirements:

  • Identity Verification: You must verify the taxpayer's identity. For remote transactions, this often requires Knowledge-Based Authentication (KBA).
  • Signature Authorization: You must obtain a signed Form 8879 (E-file Signature Authorization) before transmitting the return. This form must be retained for 3 years.
  • Source Documents: You cannot transmit a return with a pay stub; you must have the Forms W-2, W-2G, or 1099-R.

B. For Businesses and Entities (E-Filing Mandates)

The IRS has aggressively expanded mandatory e-filing rules under IRC § 6011(e).

• The "10-Return" Threshold:

  • Generally, if a filer (corporation, partnership, or individual) files 10 or more information returns (e.g., W-2, 1099) and income tax returns in aggregate during a calendar year, they must e-file.
  • Example: A partnership with 2 partners (two K-1s) and 8 employees (eight W-2s) hits the threshold of 10 and must e-file its Form 1065.

• Specific Mandates:

  • Partnerships: Partnerships with more than 100 partners must e-file (though the 10-return aggregate rule often captures them first).
  • Tax-Exempt Organizations: Must e-file Form 990 series regardless of total returns.
  • Qualified Opportunity Funds: Under the One Big Beautiful Bill Act, newly added Section 6011(e)(8) mandates that Qualified Opportunity Funds and Qualified Rural Opportunity Funds must file their returns on magnetic media (electronically), regardless of other thresholds.

3. Audit and Practitioner Consideration

The IRS and Treasury Inspector General for Tax Administration (TIGTA) have increased scrutiny on EROs.

1. The "WISP" Audit:

   • Challenge: The IRS is increasingly asking practitioners, "Do you have a Written Information Security Plan?" during standard check-ups.
   • Risk: Answering "No" is a confession of non-compliance with federal law (FTC Safeguards Rule). Answering "Yes" when you don't have one is a false statement.
   • Requirement: Ensure you have a drafted, signed, and annually updated WISP.

2. EFIN Theft and Monitoring:

   • Trap: Cybercriminals steal EFINs to file fraudulent refund claims.
   • Duty: You are required to log into your e-Services account periodically (weekly during tax season) to monitor the volume of returns filed under your EFIN. If the IRS shows 500 returns and you only filed 50, your EFIN has been compromised.

3. "Leasing" EFINs:

   • Disqualification: You cannot "rent" or "lease" your EFIN to another preparer who cannot get their own. This is a common cause for immediate expulsion from the e-file program.

4. Due Diligence:

   • Form 8867: Compliance with e-filing often triggers the paid preparer due diligence requirements for credits (EITC, CTC, AOTC). E-filing software will block transmission without this form, but "ticking the boxes" without actual documentation is a high-risk audit trigger.

4. Summary

• Practitioners: Must have an active EFIN, pass suitability checks, and maintain a Written Information Security Plan (WISP).
• Signatures: Form 8879 must be signed before transmission.
• Mandates: The threshold is 10 returns (aggregate of income + information returns) for most businesses.
• New Rule: Qualified Opportunity Funds must e-file regardless of return count.
• Security: Multi-factor authentication (MFA) and encryption are not optional; they are federal requirements for anyone holding an EFIN.

5. Suggested Next Steps

• Draft your WISP: If you do not have one, download a template immediately (often available from liability insurance carriers or tax software providers) and customize it.
• Check E-Services: Log in to IRS e-Services to verify your EFIN status is "Active" and the address is current.
• Review Client List: Identify business clients who issue 10+ forms (W-2s + 1099s + Tax Return) to ensure they are set up for e-filing to avoid penalties.