What Every CPA & Tax Pro Should Know About E-Filing

What Is E-Filing?

Electronic filing, or e-filing, is the online transmission of required tax information (such as W-2s and 1099s) directly to the Internal Revenue Service (IRS) or Social Security Administration (SSA), rather than filing traditional paper tax forms through the mail.

Since its introduction three decades ago, e-file has evolved and expanded. Here’s a quick history:

1986: E-file began as a small pilot program with five tax preparers
in three metropolitan areas —Cincinnati, Raleigh-Durham and Phoenix

1987: The previous year’s program is expanded to include 66 preparers from seven cities, and electronic direct deposit is added

1988: The program is expanded to 16 IRS districts, with the addition of two new forms – Form 1065 (partnerships) and Form 1041 (trusts)

1989: E-file expands to 36 states, with the IRS making a major marketing push to tax preparers

1990: It’s official! IRS e-file is now operational nationwide

2005: The IRS terminates its automated voice-response program Telefile, in favor of the more efficient and safer e-filing

2011: E-file hits the billion mark of tax returns filed

2015: 75% of W-2s are e-filed this tax season, fulfilling a goal set by the IRS

In the past five years the demand for paper tax forms has declined while electronic filing has continued to grow. Businesses are looking for the best method for filing; e-fling is it.

It’s important to note, e-file does not eliminate the need for paper completely. Recipients (employees or independent contractors) still must receive a copy of the W-2 or 1099 – or opt-in to receive an electronic version.

This means e-filing with government agencies is only part of the process. The other is printing and mailing copies to recipients. Many businesses struggle with the tasks of printing copies, stuffing envelopes and affixing postage. It’s a labor-intensive undertaking that occurs at the beginning of the year – a traditionally hectic time for employers. Fortunately, the right provider will recognize these demands and offer an all-inclusive print, mail and e-file service.

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Additional helpful information:

5 Things Every CPA Should Do Before January http://www.eagleviewfiling.com/5-things-every-cpa-should-do-before-january

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Why Many People Prefer Electronic e-Filing

E-filing is a popular method for filing W-2s, 1099s and other business tax forms because everything is done online – eliminating the need for paper forms or software. E-filing is gaining traction for good reason, specifically:

Convenience – Instead of navigating software or handling mountains of paperwork, online filers follow a few easy prompts from their desktops. No more trips to the office supply store and post office – or struggling with paper jams and misaligned forms in printers. E-filing is more environmentally friendly, too, thanks to less paper and toner cartridge use.

Low cost –The online filer pays only for the number of forms filed, even if it’s only one. In most cases, online tax reporting is much more affordable than purchasing software and bundles of forms and envelopes.

Accurate –In addition to the numerous prompts that ensure compliance with the latest tax rules, e-file sites do the complicated calculations. Data entry errors are caught, and mistakes are prevented. In fact, the IRS considers e-file returns to be virtually error-proof.

Helpful–Online filers appreciate the regular communication during the e-file process, including email notifications when the IRS and/or SSA receive filings. Plus, the business can check the status of a specific filing any time, from any computer, laptop or tablet.

Print and Mail: Outsourcing Advantages

Many businesses choosing to e-file will seek a provider that can also print and mail recipient copies. Using a one-stop partner is appealing because:

Cost savings. In addition to the dollars-and-cents impact of paper filing, there are labor costs to consider. Online filers who select an all-in-one tax-reporting partner save on payroll associated with having an employee manually print and mail forms.

Time savings. The data is entered or uploaded online and then the provider handles the rest. No time is wasted standing by the printer, fixing paper jams, stuffing envelopes and affixing postage. And again, no more trips to the office supply store and post office.

Minimize security risks: Handling printed forms such as W-2s in an office environment increases security risks when handling confidential data. Mismatching forms and envelopes is a concern too. Imagine the potential issue if one employee was mistakenly given an envelope containing a coworker’s W-2. Outsourcing to a specialized and reputable provider increases security and decreases risk.

Secure E-Filing: Not All Providers Are Alike

Security is of critical importance when filing taxes electronically – in the cloud – particularly for new users making the switch. There are several factors businesses should consider when choosing an e-file provider for cloud processing. First and foremost, they should verify they are working with an IRS-authorized e-file provider. To become an IRS-authorized e-file service provider, the business must go through a multi-step process and pass the IRS’s suitability inspection. Verify they are an IRS-authorized e-file service provider by locating the IRS eFile logo, as shown in this article, on their website.

Security with Transmission of Sensitive Data

A first-time user needs to know how the site handles sensitive data. Due to the ever-present threat of data breaches and other security threats, an e-file provider needs to offer the strongest data encryption possible.

Only with end-to-end data encryption recommended by the federal government can a provider effectively block the interception or interruption of information by a third party. Data should be encrypted as soon as it’s entered on the site – and stay encrypted through the entire process.

It’s important to note that the IRS doesn’t regulate how recipient data is handled. Instead, it’s entirely up to the service provider.

Security with Print and Mail

For cloud processing, data transmission is just half the necessary protection. The user has electronically filed with government agencies, but now they need to send the appropriate copies to employees and other recipients. And unless these individuals opted to receive an electronic version, the user will need to print and mail paper copies.

Facilities that have achieved Service Organization Control (SOC) certification follow all the necessary precautions to protect data. This special certification by the American Institute of Certified Public Accountants (AICPA) means that every step of the e-filer’s process has been thoroughly examined and approved to guarantee security. The AICPA examines these areas:

Security: The entire system is protected against unauthorized access

Availability: The system is functional and operates correctly

Processing integrity: Data processing is complete and accurate

Confidentiality: All sensitive information is protected

Privacy: Personal information is collected, used, retained and disclosed in conformity with the AICPA’s privacy principles

Security of Protected Health Information

Finally, if a business is seeking an e-file provider for the new, mandatory Affordable Care Act (ACA) reporting, it needs to check for one additional certification.

ACA forms include employee personal information, like Social Security numbers and birthdates, along with specific health insurance details. These details are considered protected health information (PHI) under the Health Insurance Portability and Accountability Act (HIPAA) — and must be handled according to strict privacy and security rules.

ACA reporting requires greater security than other IRS forms. Third-party vendors, such as payroll and e-file providers, should be HIPAA-compliant and, therefore, contractually bound to encrypt and safeguard electronically transmitted PHI.

 

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Bob Tenner is General Partner of Tenenz, Inc. (www.tenenz.com) and has more than 20 years experience successfully serving the marketing, communications and product needs of accounting and tax professionals. Tenenz, Inc., located in Minneapolis, MN, has provided high quality products and services to accounting professionals across the U.S. for over 40 years. Learn more about automated, digital client communication messaging here.