A recent Wall Street Journal opinion piece, Beware of E-Filing Your Tax Returns, has raised some concerns when it comes to security and IRS treatment. However, deciding to e-file your taxes remains a perfectly acceptable choice. Here, we look at some of the concerns raised in the Wall Street Journal and address them from the perspective of Wolf’s experts and the Massachusetts Society of CPAs.
E-Filing & Information Security
The Wall Street Journal piece heavily highlights the security vulnerabilities of e-filing, with a focus on malware attacks on e-filing tax software and preparation companies such as Wolters Kluwer.
The author focuses on the relationship the IRS has established with third-party vendor ID.me, which verifies taxpayer identities. The author suggests that clients should not offer anything to ID.me because it is a private database of personal information, the security of which is out of their control.
This is a very broad suggestion to make, and if taken seriously would apply to any number of third-party information gatherers and vendors. Unfortunately, the article does not go on to investigate the actual details behind the security of ID.me.
Wolf’s information security experts at DenSecure offered some insight into the safety of e-filing and ID.me’s security framework.
“Some folks have expressed concerns around the safety of e-filing their tax returns. With so much sensitive information being shared, it’s healthy to be concerned that this information is being kept securely. As you may know, the IRS works with a third party (ID.me) to facilitate the authentication process. As part of this process, ID.me will have access to sensitive information. They provide information around the different security audit and assessments they go through on their security page for anyone to view,” explained DenSecure Senior Manager Sean Goodwin.
“ID.me has been designed to comply with rigorous information security regulations including AICPA SOC 2, ISO 27001, FedRAMP, and multiple NIST 800 guidelines. Multiple ID.me clients have completed extensive technical due diligence regarding the processing environment. The customers that have completed this due diligence are: USAA, Veterans Affairs, IRS, SSA, and Allscripts,” Goodwin added. “All Personally Identifiable Information (PII) is encrypted using a FIPS 140-2 approved Advanced Encryption Standard (AES) algorithm with 256-bit key sizes and dynamic key rotation.”
We live in the world of risk management, not risk elimination. Is there some amount of risk posed by e-filing? Certainly. But the alternative of a paper tax return is not risk free, as we see in continuous USPS master key thefts. At the end of the day, ID.me is undergoing independent assessments to ensure they are taking appropriate steps to protect any sensitive information they receive and/or store. You should not avoid e-filing simply because the IRS is relying on a third-party to provide a piece of the larger puzzle.
E-Filing & the IRS
The article goes on to suggest that e-filing your taxes opens you up to a more challenging experience with the IRS. It offers a few specific examples, but each could have been dealt with utilizing proper communication and preparation. Look at how each example shook out:
- Christopher Haynes’s Certified Public Accountant (CPA) e-filed his 2020 tax return before the deadline, but the IRS rejected the return, and Mr. Haynes didn’t know this until he received a penalty notice from the IRS.
- This is the result of bad CPA work. Here at Wolf, we make sure every return is e-filed and submitted. We have a system in place to track and handle rejections, either from the IRS or individual states, and we make sure the rejections are taken care of and the returns are accepted after re-submitting.
- Efficiently managing the e-filing process, addressing rejection issues, and promptly resubmitting returns are key aspects of providing reliable tax services.
- Wayne Lee’s CPA failed to e-file his client’s returns for 2014, 2015, and 2016 due to software limitations, and didn’t inform Mr. Lee.
- Once again, this is bad CPA work at play. This incident showcases a lack of communication and proactive problem solving on the part of the CPA. In cases involving limitations or challenges in the e-filing process, a responsible CPA should promptly inform the client, discuss potential alternatives (such as paper filing), and work collaboratively to find a suitable solution.
- Antawn Sanders encountered technical problems while attempting to e-file a Tax Court petition before the midnight filing deadline. The document ultimately uploaded 11 seconds into the next day and the court rejected it as late. Similarly, Roy Nutt e-filed his Tax Court Petition on the day it was due at 11:05 pm Central Time. The tax court located in Washington rejected the filing because it was received at 12:05 am due to time zone differences.
- These examples highlight the risks associated with waiting until the last minute to submit important documents. Procrastination can result in unforeseen technical issues or other complications that may lead to missed deadlines and rejection by the court.
- It’s generally advisable for individuals and their representatives to plan ahead and submit required documents well in advance. This helps to account for any unexpected problems, ensures timely processing, and minimizes the risk of missing crucial deadlines.
E-Filing & Complex Tax Forms
While the article asserts that e-filing your taxes causes additional headaches with the IRS, the Massachusetts Society of CPAs disagrees. Mass CPAs points out that the speed of electronic submission and ease of access to communication makes resolving problems altogether more streamlined.
“E-filing remains the most effective and efficient way to file tax returns and is an important component of the Internal Revenue Service’s modernization plan. Filing electronically is better for accuracy, ensures privacy, allows for faster processing and quicker returns, and helps protect against fraud. It also allows taxpayers to resolve issues or uncertainty more quickly. It’s always important to discuss preparation and filing processes and concerns with a CPA or qualified tax preparer,” explained a MassCPA representative.
The article goes on to suggest that e-filing has created a more complex and costly tax form landscape for taxpayers. They specifically point to Form 1040, standing at two pages prior to 2018, now reaching up to eight pages.
The increase in the length and complexity of tax forms, such as Form 1040, is primarily attributed to tax law changes rather than the method of filing. Tax laws undergo frequent revisions, and legislative changes can significantly impact the content and structure of tax forms.
Additionally, the Tax Cuts and Jobs Act (TCJA) of 2017, which came into effect for the 2018 tax year, made substantial alterations to the U.S. tax code. These changes aimed to simplify the tax system, but they also introduced new provisions, deductions, and credits, contributing to the expansion of tax forms.
While e-filing itself doesn’t directly lead to the proliferation of tax forms, it does provide a more efficient way to handle the increased complexity. E-filing systems often have built-in checks and calculations to help taxpayers navigate the intricate details of the tax code, making it easier to complete and submit the required information accurately. The adoption of e-filing has been more of a response to changes in technology and a means to streamline the filing process in the face of evolving tax laws. If anything, e-filing has made these complex forms more accessible.
Is it Better to Paper File or E-File?
Should you take the author’s suggestions that paper filing is the “safest bet” to heart? We don’t think so.
While paper filing may be considered more secure in some respects, it comes with its own set of challenges, including longer processing times, the potential for delays, and the possibility of mail-related issues (lost mail, delayed delivery, damaged mail, misdelivery, theft or tampering, etc.).
Errors on paper returns might not be immediately apparent, and processing delays could occur if issues are not identified in a timely manner. Additionally, the article mentions that the IRS has been advocating for e-filing, and processing paper forms remains a challenge for the agency.
The author also mentions e-filed taxes getting rejected “for failure to check a box.” A well-organized system to handle e-filing rejections can indeed ensure the accuracy of tax returns. Rejections can serve as a valuable checkpoint, prompting a review of the return and allowing for corrections before resubmission. This can contribute to the overall accuracy and completeness of the tax filing process.
Ultimately, it is up to the taxpayer to decide how they wish to file their taxes. However, we would like to urge taxpayers to consider the benefits of e-filing before concerning themselves with fear over information security and possible rejections.
If you have any questions about your tax strategy for the year, reach out to our experts at Wolf & Company today.
