Sunday, March 1, 2020

2020 Tax Season is Here: E-signature’s Best Practices

We are coming up quickly to the tax deadline of April 15th, so you need signatures from your online clients to complete their tax returns. You can do this easily by getting them to sigh through e-signature technology. Before 2015, only handwritten signatures or signatures captured on signature pads were accepted for Forms 8878 and 8879, which authorize an Electronic Return Originator to file e-file tax returns to the IRS. In March 2014, new IRS rules allowed the forms to be signed by taxpayers electronically, making it easier for you, the accountants and tax preparers for clients.

The concept of the use of electronic signatures financial management is not 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(ESIGN) Act of 2000, which establishes interstate recognition that all e-signatures are every bit as legally binding as the traditional paper and pen signatures.

The IRS took a dim view of e-signatures for a long period, though not in all circumstances.

About 8 years ago, the IRS issued the IRS Internal Revenue Bulletin 2008, which defined the requirements for collecting consent forms from taxpayers under the Code Section7216. This revenue procedure contains a section dedicated to defining clear guidelines on the best way tax professionals can allowably obtain client consent via specific e-signature methods.

Until recently, the IRS remained an opponent of e-signatures on one particular document, Form 8879, which the majority of people recognize as the document the IRS requires tax professionals to collect from taxpayers before transmitting their e-field tax return to the taxing agency- and which they must maintain for a period of three years.

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

Until 11th March 2014, the IRS released new guidance announcing that it would allow e-signatures on forms 8879 and 8878, as long as very specific requirements were met.

What Makes an E-signature IRS-Acceptable?

At this point, we arrive at the first of two important considerations for any tax practitioner eyeing e-signatures: What makes an IRS-acceptable e-signature on form 8879?
The answer to this question is knowledge-based authentication (KBA).

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

For instance, “from the following list of phone numbers, select the one you used while living at 456 Venus Inn.” Or “What is your relationship to (your mother’s name here)?

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 would like to use. Generally, only tax vendors that serve the tax and accounting profession offer fully IRS-compliant e-signature solutions. But there are some vendors-even those specifically focused on the profession- who claim their solutions are acceptable for e-signing Form8879. In case they don’t contain KBA, then that cannot 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 needed to partner with one or more of these vendors to power its KBA. This leads to slightly costlier e-signature solutions. Each practitioner should evaluate e-signature solutions with the knowledge that full compliance comes at a marginally higher asking price.

But given the wasted non-billable and huge hassle that practitioners face when attempting to complete and return Form 8879, it becomes much easier to justify the marginal cost.

You should note that at this time, the IRS only recognizes e-signatures for individual taxpayers and has not yet issued the required guidance for other return types, such as corporations and partnerships. That doesn’t mean, however, that e-signatures are completely irrelevant to the business clients of an account firm.

Some States are Yet to Comply

E-signatures legal department adds an additional layer of complexity to e-signatures in the context of e-file authorizations. Some of those states have yet to confirm to the IRS and don’t recognize-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 tough spot logistically, since implementing e-signatures would mean a split process: issue and obtain an e-signature for the federal and any conforming state, and then separately obtain a paper signature for the non-conforming states. For a multi-state filer with filing requirements in states that do not conform, each party 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.

Ultimately, save for the unfortunate few residing in non-conforming states, there is no longer any reason for tax practitioners to continue collecting e-file authorization signatures on paper copies of Form 8879. E-signature provides a quicker and easier client experience. For instance, my neighbor completed their e-signature for last year’s tax return in just minutes.

E-signatures make the process so seamless and convenient that the number of returns filed electronically skyrocketed from just 25,000 in 2014 to nearly 100 million in 2017.

Before you hit the web and sign-up for an e-signature service, there is one critical consideration to bear in mind. You should be looking for a solution that will keep your confidential data secure, especially given the fact that one in every 15 people fell victim to tax-related identity theft in 2017.

Benefits of E-signatures for Tax Professionals

  • Reduced refund turnaround time for your clients. Because of the overwhelming number of returns IRS is getting, they started to accept eSignatures on returns and official tax documents as of 2008, thus expediting the refund process. 
  • Losing documents is a thing of the past. An electronic signature software is your convenient location for confidently storing your large quantity of signed documents. Gone are the days of keeping track of many hard copies with the hope that the file won’t get misplaced. 
  • Cut costs and reduced turnaround times. You can set up and send your tax form in a matter of minutes. There is no need to travel long distances to get in touch with your clients, or wait for printing, signing, scanning and sending back all the documents. 
The best way to ensure your security is to choose e-signature solutions that meet the IRS standards for e-signature.

Here are 3 rules that the IRS has laid out as a guideline for e-signature security

1. Identify the Taxpayer Who Signed the Document

The e-signature solution must record each signer’s personal information, including their date of birth, social security number, and address. It also verifies the taxpayer’s identity by checking if the information they provide is consistent with the data received from the record checks with credit bureaus or similar databases.

With the remote signing, the e-signature solution must use knowledge-based authentication (KBA) to verify the taxpayer’s identity. This process usually cannot be known by anyone other than the signer. In accordance with the requirements put forth by the National Institute of Standards and Technology, the e-signature solution must keep a record of a signer successfully passing this authentication test. However, if a signer doesn’t clear the questions within 3 tries, they must authorize the document with a handwritten signature.

2. Ensure E-signature Validity while Keeping the Document Tamper-proof

So as to maintain the integrity of these electronic records, the e-signature solution chosen must ensure that the e-signature provided by the taxpayer is valid. This verification is completed by linking the e-signature to its associated electronic record.

It should also be impossible to remove, copy or transfer the e-signature to falsify a digital record. This means that the electronic signature solution for legal services you choose should employ techniques that prevent the document from being modified in any manner.

3. Provide a Digital Paper Trail

In order to comply with IRS requirements, the e-signature solution must record a digital image of the signed form. It must also include other details such as the date and time at which the document was signed, the taxpayer’s IP address, their user name, and the KBA results following the completed identity verification process.

It is also important to make sure that your chosen e-signature solution offers a digital audit trail confirming that the signer completed the entire process. This way, the Electronic Return Originator will be able to provide proof for the IRS if needed.
While the adoption of legal esign solutions for tax documents is still in its early stages, the technology has the capacity to make the filing process more convenient than ever before.

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