CPAs, state open dialogue on e-filing

Comptroller's Office hopes to allay concerns, increase rate at which returns are filed electronically

By Bill Sheridan
MACPA Editor

ANNAPOLIS, June 6, 2005 — E-filing is growing in popularity among Maryland's tax practitioners, but it's not growing fast enough for state Comptroller William Donald Schaefer.

Schaefer challenged tax professionals last fall to increase the rate at which they filed their clients' returns electronically by 50 percent this year. Instead, that rate grew by only 13.45 percent, and in an open letter to preparers, Schaefer wanted to know why.

As a result, the MACPA has joined the Comptroller's Office in launching a major outreach effort to find out what impediments are keeping some members from taking advantage of e-filing.

A pair meetings will be held this summer to allow MACPA members to ask questions related to e-filing directly to representatives of the Comptroller's Office. Equally important, the meetings will allow state officials to allay CPAs' concerns and dispel some e-filing misconceptions.

The meetings will be held at the following times:

July 11, from 2 to 4 p.m. at the MACPA's Towson office
July 28, from 8 to 10 a.m. at the Columbia Center

MACPA members voice concerns

The idea to hold the meetings came out of talks held in early May between Schaefer, Deputy Comptroller Stephen M. Cordi and representatives of the MACPA's State Tax Committee.

At the heart of that discussion were the results of a recent survey that asked MACPA members to name the factors that are keeping them from e-filing more returns. Some common concerns emerged:

Software limitations (including the inability to e-file certain forms) prevent preparers from e-filing more often.

Some members say the e-filing process is overly cumbersome and costly.

Many clients don't want to e-file, citing privacy and security concerns and personal preferences.

State officials hope to allay these concerns during the meetings with MACPA members.

In the meantime, they offered the following guidance to address issues raised in the survey.

E-filing is reassuring

Many clients, particularly those who aren't comfortable with new technologies, have told their CPAs they don't want to e-file their returns. Some clients have expressed fears that they would never know if their e-filed returns had actually been filed or if they had been successfully transmitted.

The question arises: How does a tax preparer convince his or her clients to e-file when they feel more comfortable with traditional, paper-based returns?

Jeane Olson, electronic processing manager for the state Comptroller's Office, recommended that CPAs communicate a couple of points to their clients:

E-filers receive a time-and-date acknowledgement stating when the return was received by either the state or the IRS. This document is proof that the return was successfully transmitted.
There is no such guarantee with paper-based returns. Mail can be tampered with or lost, and even certified mail doesn't guarantee successful delivery of the envelope's contents.

Because clients who e-file received acknowledgement that the return was received, "they never have to worry about receiving a compliance letter saying that they did not file," Olson said. "They have a traceable document to prove that they did."

Other clients have expressed concerns about whether their personal and financial information is safe when it is filed electronically. Olson assured them that it is — and that it is getting safer as time passes. She expects that next year's returns will be submitted via the Internet using a compressed transmission and "very high" encryption standards.

Forms that can't be e-filed

It's true that some forms currently cannot be filed electronically. But that shouldn't stop you from e-filing the rest of the return.

"If a particular form hasn't been formatted electronically, usually we will allow you to attach it to the signature document," Olson said. "Take Form 502AC (Subtraction for Contribution of Artwork). We don't have it formatted so that you can send that to us electronically, but you can still take the subtraction and attach the form to the signature document that you retain in your office. We don't require the 502AC to complete the processing of the return but may need it for review at a later date. If there is any question about the subtraction in the future, we can request (the form) from you.

"Additionally, beginning in January 2006, you will be able to electronically file a Maryland tax return that requires a Form 500DM by attaching the 500DM to the signature document," she added.

Some forms that could not be e-filed a few years ago have since been formatted. Form 505 (Maryland Non-Resident Income Tax Return) is an example.

A summary of what can and can't be e-filed is available in the Maryland Comptroller's 2004 E-File Handbook. It is available online at taxpros.marylandtaxes.com/efileinfo/2004eflhdbk.pdf.

E-filing when money is owed

The benefits of e-filing when a refund is expected are well documented: The return is transmitted and processed quickly, and the refund can be deposited directly into a taxpayer's bank account within a couple of days.

But what about taxpayers who owe money? How does e-filing benefit them?

Such taxpayers often will wait until the last minute to file their returns and write a check. But Olson said e-filing offers a great deal of flexibility.

"They can e-file early or at the last minute; it doesn't matter," she said. "If they e-file in January, they don't have to pay until the due date. They can pay by direct debit and we'll warehouse that data; we won't take (the money) until they tell us to take it. And whether they e-file early or late, they can still send a check."

E-filing at the last minute

It's April 15 and you e-file a client's return. On April 16, you find out the return has been rejected and you have to resubmit it. Will the return be considered late?

No, said Olson.

"Even though it has been rejected, we have placed time-and-date acknowledgement on the original return; it can still be considered to have been filed timely," she said. "If we reject it, the electronic return in error must be resubmitted within 24 hours of receipt of the rejected Maryland acknowledgment. In addition, the Electronic Return Originator (ERO) must call the Maryland help desk within 24 hours should errors occur three times for the same return. Errors in filing, as determined by error acknowledgments, must be cleared within three days."

"We will be happy to work with you on these types of issues," she added. "Communicating with the Maryland help desk regarding returns that are rejected at the filing deadline can help you to avoid late penalties."

Cost

Tax preparers do have to pay a bit more to e-file their clients' returns, but some CPAs surveyed have found a solution. They have told their clients ahead of time that they will be filing all of their returns electronically and have explained the benefits of doing so in detail. They also have raised their rates slightly across the board to cover the increased expense of e-filing. Few have reported receiving any negative feedback from clients.

"It may cost a little more, but you get what you pay for," Olson said. "Clients are receiving extra services when they file electronically."

Another option, said MACPA State Tax Committee Chair Andy Bareham, would be to raise rates for paper-based returns. Doing so might convince more clients to file electronically.

Rejection codes

Some CPAs surveyed have experienced confusion about Maryland's "error rejection codes" — four-digit, numeric codes that are used to indicate errors in a return or reasons why a return has been rejected.

Olson recommended that CPAs visit the Maryland Comptroller's Web site and download the state's e-filing handbook, which contains a complete list of rejection codes and an explanation for each.

The handbook and rejection codes can be found at taxpros.marylandtaxes.com/efileinfo/2004eflhdbk.pdf.

"Even if a software company changes the wording (of a rejection code's explanation) somewhat, they would not change the numeric code associated with it," Olson said. "If you find that you are having trouble with an explanation, you might want to flip through the handbook and compare what you've received with what's in the handbook."

E-filing in more than one state

A shortcoming in current tax preparation software makes it difficult to e-file returns in more than one state. Olson said she plans to investigate further and ask software developers if a solution can be found.

What's on the horizon?

Olson said Maryland is among the states that are working with the IRS to develop a standard e-filing model for corporate tax returns. Currently, Maryland and other states ask preparers to physically attach at least a portion of a federal corporate return to a state return. Under the groundbreaking fed-state program, both returns could be filed electronically, and the federal return would automatically be attached to the state return upon transmission.

"It should be a pretty streamlined process," Olson said.

The project is scheduled to launch in January 2006 (for tax year 2005).

Contact this Author: < William Sheridan > bill@macpa.org

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