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Author: Navaal Mahdi

The New RMD Rules-in Layman’s Terms

Posted on by Navaal Mahdi

By Bob Jennings of TaxSpeaker 

In November 2019, before the Budget Bill was passed, the IRS increased life expectancy tables to more accurately reflect American’s longevity. The adjustment was unrelated to the Budget Bill. Who knows if another change will come (it is under discussion), but there is no direct change as of now from the Budget Bill for the tables. Use Pub. 590-B for life expectancy tables.

The big law change that occurred in the Budget Bill was a change in the required minimum distribution rules from age 70 and ½ to age 72 for people turning 70 and ½ after 12/31/2019. Read on for the explanation.

As to Required Minimum Distributions (RMD), if you were 70 and ½ before 1/1/2020 (born before 7/1/1949) nothing has changed. You must take your RMD for 2019 and 2020 and 2021 just like before the bill. As an example, Ralph turned 70 ½ on December 4, 2019. He was required to take his 1st RMD by 12/31/2019 because he is under the old law. Under a special, one-time rule, he could delay that 1st payment until 4/1/2020, but he would still be required to take his 2019 payment by 4/1/20, AND still required to take his 2020 payment by 12/31/2020, and so on. He is unaffected by the new age rule.

If you were not 70 and ½ by 12/31/2019 then a new era has arrived for you. Your first RMD will not be required until the year you turn 72. And yes, you can delay the first one until April 1 of the year you turn 73, although you would be required to take both the distributions that year. If Ralph was born July 4, 1949, he was just shy of 70 and ½ on 12/31/19, so the new rules would apply to him. He will need to take his 1st RMD in the year he turns 72, or 2021. That first RMD may be delayed until 4/1/2022, but he does still have to take a 2022 distribution by 12/31/2022 as well.

How Form 2848 Can Prevent Potential Fraud

Posted on by Navaal Mahdi

By The IRS Liaison Office

Question: How can practitioners receive an entire listing of all Forms 2848 to remove former clients, in an effort to prevent potential fraud?

As the Form 2848 instructions now explain, practitioners can request a list of active authorizations. They can submit a Freedom of Information Act request to the IRS Centralized Authorization File unit, which keeps track of practitioners’ filed tax authorizations. This FOIA request is called a CAF77 request. The IRS also requires proof of identity with the letter; attach a copy of your driver’s license or a notarized statement swearing to your identity. Fax or mail the request to the FOIA office in your respective areas. Access the following link for more details: https://www.irs.gov/privacy-disclosure/freedom-of-information-act-foia-guidelines. The IRS requires a specific format and provides a sample CAF77 request letter as a template. Select Sample CAF Client Listing request and adjust it accordingly.

Fixing the Error — How Do We Solve Depreciation Mistakes?

Posted on by Navaal Mahdi

By TaxSpeaker

Depreciation errors are corrected by either filing an amended return or filing a change in accounting method form. Depreciation errors that are NOT subject to the accounting method change filing requirements require amended returns and include:

Amended Returns:

  • You claimed the incorrect amount because of a mathematical error made in any year.
  • You claimed the incorrect amount because of a posting error made in any year.
  • You claimed the incorrect amount on property placed in service by you in tax years ending before the statute of limitations has expired.
  • You are changing the amount of Section 179 claimed or not claimed.
  • Election to apply the $2,500/$5,000 de minimis safe harbor rules (within its own time period requirements of return due date plus extension).
  • Election not to claim bonus depreciation under 168k (within its own time period requirements of return due date plus extension).

Amending returns will only correct depreciation errors that have occurred in the last three years. Errors that have occurred before that cannot be “caught up” on current or amended returns and will only be “caught up” when the asset is sold using a Form 3115 and Code 107 as discussed below.

Change in Accounting Method Form 3115:
Form 3115, Change in Accounting Method, is used to correct most other depreciation errors, including the omission of depreciation. If you forget to take depreciation on an asset, the IRS treats this as the adoption of an incorrect method of accounting, which may only be corrected by filing Form 3115. When changing methods of accounting from not taking depreciation (incorrect method) to taking depreciation (correct method) use Code 7 on Form 3115 if the asset is still in use, code 107 if disposed.

The IRS’s automatic consent procedures for taxpayers who have adopted an impermissible method of accounting for depreciation (or amortization) and have either claimed no allowable depreciation, less depreciation than allowable, or more depreciation than allowable is provided in the guidance at Rev. Proc. 2015-13 and 2018-31.

Generally, Form 3115 must be attached to the taxpayer’s tax return for the year of change by the original due date (including extensions). A copy must also be filed with the IRS no later than when the original is filed with the taxpayer’s return.

Taxpayers who qualify under the automatic procedure are permitted to change to a method of accounting under which the allowable amount of depreciation is claimed. The unclaimed depreciation from years prior to the year of change is taken into account as a net negative (taxpayer favorable) adjustment in the year of change, generally effective for tax years ending on or after December 31, 2001 and are deducted in full on the return for the year of change.
Changes that are considered to be a change in accounting method are:

  • Changing from not taking depreciation to taking depreciation. (Because this is a change from an impermissible method to a permissible method use Code 7 on Form 3115)
  • Changes in methods or conventions, (Because this is a change from 1 permitted method to another, use Code 8 or 200 if MACRS on Form 3115)
  • Changes to or from a required life, (Because this is a change from 1 permitted method to another, use Code 8 on Form 3115)
  • Correcting depreciation on leasehold improvements from using the incorrect life of the lease term to the correct life of the asset (generally 39 years). (Use Code 199 on Form 3115)

Rev. Proc. 2015-13 is also to be used to correct depreciation after an asset has been sold and the 12/30/03 regulation changes correct other depreciation errors. The Procedure’s additional primary value is to recover depreciation deductions mistakenly overlooked, for which, under the “allowed or allowable” rule the taxpayer had to reduce basis in the asset. This Revenue Procedure effectively makes the “allowed or allowable” penalty disappear! Code 107 on Form 3115 is to be used to “catch up” omitted depreciation on an asset when it is sold.

Changes that do not require Form 3115 because they are not considered changes in a method include, and which may only be made on an amended return:

  1. A change in computing depreciation because of a change in the use by the same taxpayer,
  1. Changes in placed-in-service dates.
  1. A change in useful lives,
  1. Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct bonus depreciation). If you elected not to claim any bonus, a change from not claiming to claim bonus is a revocation of the election and is not an accounting method change. Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. You must submit a request for a letter ruling to make a late election or revoke an election.

Other depreciation corrections still qualify for the automatic change provisions of  Rev. Proc. 2015-13.

  • Rev. Proc. 2015-13  allows the use of one Form 3115 to correct mistakes on more than one asset.

Explanation of the 2-year rule:
The use of an incorrect method of depreciation, which would include taking no depreciation, is considered the use of an incorrect accounting method. Once an incorrect accounting method has been used for two years, a Form 3115 is required to change accounting methods back to a correct method, or in this case, since not taking depreciation is incorrect, to begin taking depreciation a Change in Method form must be filed. To change to the correct method, meaning to take the overlooked or correct depreciation requires the filing of the change in accounting method form, Rev. Proc. 2015-13  in most cases. (Instructions to Form 3115)

If no depreciation had been taken and only one year has passed the return may be corrected via amendment because the incorrect method had only been used for one year.

Examples of depreciation change in accounting methods:

  1. Using an incorrect method (or no method, which is also impermissible!),
  1. Changing a method or convention, (like 200DB to S/L)
  1. Change to or from a recovery period assigned by the Code,
  1. Changing to or from bonus depreciation,
  1. Changing from non-depreciable to depreciable, or vice-versa.

Form 3115 will have to be filed, with the entire amount of incorrect or overlooked depreciation deducted in full in the year of correction via this Form 3115. The total depreciation adjustment is called a Section 481(a) adjustment, which, if negative may be deducted in full in the year of change.

If positive, it may be added in ratably over 4 years, or if positive but less than $50,000 in total the taxpayer may elect to add it in to income in full in the year of change.

The form may be filed at any time for any year, and if for a prior year sale, is accompanied by an amended tax return, effective for a Form 3115 filed for taxable years ending on or after 12/30/2003.

  • Use Code 7 as the Code number of change on Page 1 of Form 3115 if correcting an error while the asset is still owned by the taxpayer.
  • Form 3115 will use Code 107 as the Code number of change on Page 1 of Form 3115 if the asset has been sold and Rev. Proc. 2007-16 applies.

Rev. Proc. 2015-13 requires that a signed copy of Form 3115 be filed to the IRS office. No advance approval is required to correct the error, as this is an automatic approval change in most cases. There is no user fee.

An original of the Form 3115 should be included with the tax return filed for the year of change. The original must be filed by the due date of the return, plus extension. There is a 6-month automatic extension of this due date providing the return was timely filed, and an amended return (with this change) is filed within 6 months.

When filing Form 3115, the additional statements listed below must be attached:

  • A detailed description of the former and new methods of accounting,
  • A statement describing the taxpayer’s business or income-producing activities,
  • A statement of the facts and law supporting the new method of accounting, new classification of the item of property, and new asset class,
  • A statement identifying the year in which the item of property was placed in service.

On Form 3115 at the top of the page make sure of this notation:

Filed Under Rev. Proc. 2015-13

Accountable Plans

Posted on by Navaal Mahdi

By Bob Jennings, CPA, EA, CFP® of TaxSpeaker

Many employees incur job related expenses such as mileage, travel, entertainment, dues, licenses, supplies, office equipment, etc. An employee whose employer requires the employee to provide for and pay for such expenses essentially makes the employee pay income and social security tax on the expenses.

Because employee miscellaneous itemized deductions are no longer deductible on a Federal return under the 2017 Tax Cuts and Jobs Act, these are the worst expenses an employee can incur, and the employee must push strongly for an accountable expense plan (or direct employer payment) of these expenses.

Many employers do not recognize the cost to the employee and also do not recognize the savings they could obtain by establishing an accountable expense plan. Accountable plans should be used by most employers for reimbursing auto expenses, travel, licenses, dues, and meals & entertainment. An accountable plan is an allowance or reimbursement policy (not necessarily a written plan) under which amounts are nontaxable to the recipient if the following requirements are met:

  • There must be a business connection to the expenditure.
  • There must be adequate accounting by the recipient within a reasonable period of time. (Usually 60 days) (advances must be made no more than 30 days before the expense)
  • Excess reimbursements or advances must be returned within a reasonable period of time. (120 days) IRC §62(c); Reg. §1.62-2.

Without an accountable plan in place all employee expenses fall under the miscellaneous expense non-deductible rule, and any cash payments by the employer to the employee are taxed as wage income. With an accountable plan, any amounts reimbursed to the employee are not reportable to the employee nor deductible by the employee. The TaxSpeaker USB Drive includes an example accountable plan.

 

Innovative New Program to Help Tax Clients Access Health Insurance

Posted on by Navaal Mahdi

By Stephanie Klapper, Deputy Director, Maryland Citizens’ Health Initiative

Tax preparers play a big role in people’s lives. Soon, thanks to the Maryland Easy Enrollment Health Insurance Program, preparers will have an opportunity to help clients in another important way—by helping them gain access to quality, affordable health care. Starting this January, Marylanders will be able to indicate on their tax returns whether they would like Maryland Health Benefit Exchange to determine if they are eligible for free or low-cost health coverage. Maryland Health Benefit Exchange manages the State of Maryland’s health insurance marketplace, Maryland Health Connection.

Using tax returns to start the application process for health insurance makes a lot of sense because about 130,000 Marylanders who file tax returns are eligible for free or low-cost health insurance through Maryland Health Connection. Many of these Marylanders don’t even realize that they are eligible for financial assistance for health insurance! Tax preparers can reach many of these Marylanders through their tax returns. Not only does this help the taxpayer, it helps reduce health care costs for all. People without health insurance often receive medical care in the most expensive way possible—through a trip to the emergency room that results in uncompensated care. These high costs drive up everyone’s insurance premiums. When more people are insured, uncompensated care drops.

This upcoming tax return season is the pilot for the Maryland Easy Enrollment Health Insurance Program. Here’s how it will work: Tax Forms 502 and 502B will include questions for Marylanders to indicate whether they, their spouse, and/or their dependents have health coverage and their dates of birth. Marylanders who are uninsured then can select to authorize the Comptroller of Maryland to share information from their tax return with Maryland Health Benefit Exchange to determine pre-eligibility for no-cost or low-cost health care coverage.

Once the tax return is submitted, the Comptroller’s Office will send the relevant information to Maryland Health Benefit Exchange. Next, the Exchange will send a letter to the tax filer letting them know if they are preliminarily eligible for free or low-cost health coverage and ask them to take further steps to confirm eligibility and enroll in health coverage. To complete their enrollment, they can visit the MarylandHealthConnection.gov, call 855-642-8572, or receive free in-person assistance from trained experts throughout the state.

With your help, thousands of Marylanders will receive quality, affordable health coverage this tax season. And this is just the beginning. In the future, we anticipate building ways that Marylanders will be able to use their tax returns to enroll in health coverage even more seamlessly. I am proud to serve with Sandy Steinwedel on the Maryland Easy Enrollment Health Insurance Program Advisory Board, which will provide input on how to make this landmark program work in the best way possible for years to come.

If you have questions about the new program, stop by our table at the upcoming Maryland Income Tax Update seminars offered by MSATP. For dates, times and locations, visit our seminars page.

Interview Day At McDaniel College

Posted on by Navaal Mahdi

McDaniel College’s annual Interviewing Day, which took place on October 2, 2019, provided students with the opportunity to “speed interview” with businesses in the Baltimore area, including accounting firms, banks, insurance agencies, and investment companies. At the event, students were able to interview for internships or jobs, or to gain experience in the interviewing process itself. More than 175 interviews were conducted in a three-hour time period.

More than 50 sophomores, juniors, and seniors at McDaniel College majoring in accounting economics, business administration, and economics participated. This annual event allows McDaniel’s economics and business administration students to find jobs or internships with the possibility of full-time employment following graduation.

MSATP would like to recognize Christian Hauffman who is sophomore at McDaniel College. Christian received one of the Maryland Society of Accountants annual accounting scholarships in September. We wish all of the accounting students at McDaniel great success!

World War II – The Greatest Health Care Change of All Time

Posted on by Navaal Mahdi

By Jonathan Pocius of Payroll Services, LLC

I recently attended a meeting with several colleagues with a healthcare guest speaker. Being a licensed insurance broker I always enjoy listening to new strategies.

I learned a little known fact: World War II gave birth to the private health care market. In 1942, Congress passed the Stabilization Act of 1942 freezing wages and salaries for workers. In order for companies to continue to recruit and pay employees, Employers started providing Employer paid health care. Prior to this, individuals paid for their own medical care in cash.

The discussion was around how to control health cost and ways to possibly change it. Ultimately, the conversation focused on one major area, and that was behavioral changes.

Many plans offer incentives (wellness plans) to get individuals to do certain things. Stop smoking, get $500. Lose 20lbs get $200, etc. We have implemented many of these types of plans within our groups but they are extremely difficult to maintain. We see an initial “boom” in usage, and then a steep drop off.

Between 1985 and 2010 the Body Mass Index (BMI) of 30 or more (obesity) spiked from an average of 10% to over 25% nationwide. Indiana University – Perdue, did a study showing 87.5% of health care costs are lifestyle related.

If 87.5% of health care cost are lifestyle related, and wellness plans typically are short term success, what options do we have? Could it be in providing better “long term coaching” for individuals to better their lifestyles? Could it be putting more responsibility to the individual to control their own cost? Besides, should or can the Employer really be forced to try and change their employee’s lifestyle to reduce a major expense?

For small groups (companies with less than 50 full time equivalents) the answer is extremely difficult. There is only so much that can be done since rates are community based. We use certain strategies like the “bridge strategy” and “first dollar coverage.”

For larger groups (over 50 full time equivalents), there are more options.

Ultimately, the solution to rising healthcare cost does not lie with government intervention or incentive plans. The solution is with individual Americans taking more responsibility for their lifestyles. Recognizing that good health is not contained in a magic pill, but in exercise, health foods, avoiding smoking and other unhealthy activities. Until Americans embrace these simple concepts and act, health care cost will continue to rise.

Do you have questions on your healthcare plan? Contact jonp@payrollservicesllc.com or visit us at www.payrollservicesllc.com to get a free strategy session.

Unlimited Time Off: An Employees Dream Or a Potential Liability?

Posted on by Navaal Mahdi

By Jonathan Pocius of Payroll Services, LLC

A new trend is popping up in some companies: Unlimited Time Off.

UTO policies are becoming more popular in startups, tech companies and nonprofit organizations trying to make up for salary gaps. There are pros and cons to UTO Policies, however there are serious questions that need to be considered before implementing a UTO Policy.

Many questions are now being asked in regards to UTO Policies. How do the new Paid Time Off laws throughout the nation work with a UTO Policy? Many States have laws that require the company to pay out any time off the employee has earned on separation. How much of UTO is paid out? FLSA provides an employee up to 12 weeks unpaid leave guaranteeing a similar position upon return. Does a UTO policy mean that all 12 weeks are now paid? In many States, the amount of time off an employee has to be shown on the paystub — what should be displayed now? These questions have not been resolved and pose big potential liability problems. The unfortunate part is most of these answers will not be answered through regulation or DOL opinions, but through lawsuits.

Aside from the potential legal ramifications, UTO also has some expectations that may not promote a “healthy workplace”. Studies show that employees with UTO policies rarely take more time off than the average employee. Time Off is designed to allow staff to refresh and come back with a good mental state. With UTO, employees are not taking the time off. Additionally, UTO is met with the expectation to get your job done and then “do as you please”. In a normal vacation most employees “check out” from work. With UTO, if the expectation is to get your job done, does the employee truly get a chance to “check out”. Is working during vacation truly considered time off? These are the questions being raised among HR Professionals when considering the validity of UTO.

UTO does have a big benefit to the company, and that is the message it sends to the employees. UTO sends the message that the company is not tracking an employee’s time off and is giving total flexibility to the employee. No scheduling requirements or permission necessary. UTO conveys a message of trust to the employee. Enough trust to believe that the employee will ensure their job, tasks and responsibilities are always taken care of. Finally UTO sends a message that you are treating employees as individuals. An individual that has real life needs that can pop up at any time.

UTO does send powerful messages to employees as long as the company lives by their message. Many companies cannot offer this flexibility. How many companies can afford to let employees take time off whenever they like on the spot? How many companies have an entire employee base they trust to get their job, tasks and responsibilities done?

UTO still has many questions that need answered both practical and legal. Before implementing an UTO Policy be sure to understand the uncertainty around the topic.

Records Retention Guidelines to Remember

Posted on by Navaal Mahdi

Records Retention Guidelines to Remember

Warm weather and rainy days bring the urge to purge. But before you clean your file cabinets or declutter your computer files, it’s important to review these guidelines.

 

Federal Tax Records

Most tax advisors recommend that you retain copies of your finished tax returns indefinitely to prove that you actually filed. Even if you don’t keep the returns indefinitely, hold onto them for at least six years after they’re due or filed, whichever is later.

It’s a good idea to keep records that support items shown on your individual tax return until the statute of limitations runs out — generally, three years from the due date of the return or the date you filed, whichever is later. Examples of supporting documents include canceled checks and receipts for alimony payments, charitable contributions, mortgage interest payments and retirement plan contributions. You can also file an amended tax return during this time frame if you missed a deduction, overlooked a credit or misreported income.

Which records can you throw away today? You can generally throw out records for the 2015 tax year, for which you filed a return in 2016.

You’re not necessarily safe from an IRS audit after three years, however. There are some exceptions to the three-year rule. For example, if the IRS has reason to believe your income was understated by 25% or more, the statute of limitations for an audit increases to six years. Or, if there’s suspicion of fraud or you don’t file a tax return at all, there’s no time limit for the IRS to launch an inquiry.

In addition, records that support figures affecting multiple years, such as carryovers of charitable deductions or casualty losses for federal disasters, need to be saved until the deductions no longer have effect, plus seven years, according to IRS instructions.

There are also some cases when taxpayers get more than the usual three years to file an amended return. For example, you have up to seven years to take deductions for bad debts or worthless securities, so don’t toss out records that could result in refund claims for those items.

 

State Tax Records

The previous guidelines are all geared toward complying with federal tax obligations. Ask your tax advisor how long you should keep your records for state tax purposes, because some states have different statutes of limitations for auditing tax returns.

Plus, if you’ve been audited by the IRS, states generally have the right to resolve their own issues related to that tax year within a year of the federal audit’s completion. So, hold on to all tax records related to an IRS audit for a year after it’s completed.

 

Essential Personal Records

Your files probably contain more than just tax information. Certain essential documents should be kept indefinitely. Examples include:

  • Birth and death certificates,
  • Marriage licenses and divorce decrees,
  • Social Security cards, and
  • Military discharge papers.

These should be kept in a safe location, such as a locked file cabinet or safety deposit box. If stolen, essential documents can be used to steal your identity. In turn, a stolen identity can be used to file for bogus tax refunds or apply for credit under your name.

 

Bills and Receipts

In general, it’s OK to shred most bills — like phone bills or credit card statements — when your payment clears your bank account or at year end. However, if a bill or receipt supports an item on your tax return, follow the tax guidance above.

If you purchase a big-ticket item — like jewelry, furniture or a computer — keep the bill for as long as you have the item. You never know if you’ll need to substantiate an insurance claim in the event of loss or damage.

 

Real Estate Records

Keep your real estate records for as long as you own the property, plus three years after you dispose of it, and report the transaction on your tax return. Throughout ownership, keep records of the purchase, as well as receipts for home improvements, relevant insurance claims and documents relating to refinancing.

These documents help prove your adjusted basis in the home, which is needed to figure any taxable gain at the time of sale. They can also support calculations for rental property or home office deductions.

 

Investment Account Statements

To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, and dividend reinvestment and investment expenses, such as brokers’ fees. It’s a good idea to keep these records for as long as you own the investments, plus until the expiration of the statute of limitations for the relevant tax returns.

Likewise, the IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. With Roth IRAs, it’s more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you’re ever questioned.

If an account is closed, treat IRA records with the same rules that apply to stocks and bonds. Don’t dispose of any ownership documentation until the statute of limitations expires.

 

Got Questions?

Before you clear your files of old financial records, discuss the records retention requirements with your tax advisor. You don’t want to be caught empty-handed if an IRS or state tax auditor contacts you.

#TechTips: eSignatures

Posted on by Navaal Mahdi

By Jonathan Rivlin, CPA

We’re going to kick this post off with a confession:  I don’t like eFiling. In fact, I hate eFiling. In the early aughts, when this new system was forced upon our profession, I thought it would be a great thing for our clients. And in some respects it is. But the bulk of the benefit has insured to the government – which isn’t inherently bad, but surely we should get some sort of share of that benefit. Instead we have gotten a brand new vector of audit exposure, a host of legal responsibilities, and the maddening reality that our tax season doesn’t end after the filing deadline.

I don’t just write advice posts, I’m an avid consumer of other practitioners’ posts – and referring to himself in the third person – try it, it’s empowering!  There have been many posts on boosting our staff morale by suggesting that we close our offices on the day after the filing deadline.

Well, if you’re an eFiler (which is all of us), you can’t close your office the day after a filing deadline.  There will always be a few returns that get rejected from the eFiling system. Some are administrative, a transposed SSN. Others are due to ID fraud or an ex spouse violating a dependency claim agreement (which will still be relevant even without dependency exemptions – so much for a simplified Code). 

The point here is that prior to eFiling, we would prepare the return, deliver said return to  our client, along with our invoice, and send them on their way to the USPS – done and done; we did our job and got paid. 

Now, we prepare the return, deliver it to the client, wait with baited breath for the client to execute the eFile release form(s) (some states like MD have their own form, other states will accept the federal release form – it’s a patchwork – see the post on Sales Tax apps), then we wait for the USPS to send the signed forms back to us, then we can eFile the returns, then we have to wait for the eFile to complete, then we have to send the confirmation letters to the client – each step along this tortured path presents a point of failure.

Also with eFile, we HAVE to submit that return within 3 days of receiving an executed release form, regardless of whether the client has paid us or not.

And so we suffered.

Then we got the idea of sending the tax return through email as a PDF (NEVER DO THIS AGAIN – read on for why…)

Then, we improved on that by making two PDFs, one for the tax return and one for the eFile Release Forms; one the client looks at, the other the client ignores and conveniently forgets they have when they’re applying for a mortgage and ask you to (drop everything and)  send them a copy of their return.  Guess which is which.

Then, with the first rumors of ID theft, we began adding passwords to those PDFs and/or hashing out the SSNs.  Then the software providers and IRS couldn’t agree on what forms needed a hashed out SSN so the hashing was ditched.

Let’s take a moment to delve deeper into the password enabled PDF.

Perhaps your tax software allows you to add such a thing to your PDFs.  Usually this is some algorithmic approach such as “last 4 of SSN + 5 digit zip”.  Perhaps you purchased Adobe and are able to create your own passwords.  All is good for emailing right?  Nope. 

As per the Oracle of Indiana Bob Jennings, a fraudster can download a program – for $30 – whose sole purpose is to strip passwords from PDFs.  As the late Robin Williams once quipped, “…It’s like handling toxic waste with an oven mitt…” As Dr. Evil once quipped, “…just one calorie, not quite evil enough…”  (I like cinema if you couldn’t tell by now.)

There’s another issue here. Let’s say you send your password enhanced PDF via email to your client.  Your client then signs the doc and makes a new PDF to send back to you.  What happened to the password?  If it’s a new PDF, there is no password!

Take a moment and visualize this scenario: You send your password equipped PDF to your client. Your client is not that tech savvy and has poor security and surfing hygiene. They have malware on their computer; they have no idea about this, they’re just annoyed at how slow their computer is. They download the PDF, enter the password, sign the PDF and re-save it and send it back to you. That now unsecured PDF is intercepted in the interwebs.

Try explaining how you’re not culpable to a plaintiff’s attorney. Try reasoning with your malpractice carrier provided attorney why you shouldn’t settle. 

OR – you can start using digital signature providers.

One of the few things that Intuit does well is how they added eSignatures to Lacerte. With a few mouse clicks, you can “assemble” and deliver the tax return to your client. Your client can “read” and sign the tax return FROM THEIR PHONE, and all of this can be done within minutes! 

But this costs money you say. Yes; yes it does – this is Intuit after all; everything costs money. 

You know what else costs money? Envelopes, postage, paper, toner, prints in excess of your copier’s monthly base allotment – and TIME. Staff time, your time; time is money.

Buy back your time and save on all that administrative crazy by using the eSignatures feature in your tax software.

I use Lacerte, but I’m sure this process is similar in other software packages. Once you complete the return, there’s (in Lacerte) a button on the client overview tab to initiate the digital signature process.  Clicking this button will bring up a pop-up. If you’ve already entered the taxpayer and spouses’ email addresses, they’ll be populated in the pop-up. Select the number of days you want the digital signature email to remain active and how many days in between reminders, then hit send. Intuit bills you for usage on your monthly REP statements. You can also purchase in bulk for price point savings.

That’s it!  Seriously, that’s it. There’s nothing to print out – no more queues for assembly. No more administrative overhead. You finish the return, click a few buttons and the return is both assembled (converted to PDF) and delivered (via a secure medium).

Let that sink in.

There are also digital signature solutions in non-tax software based apps. Our secure portal will be adding digital signatures soon. And TaxCaddy offers digital signatures. In our firm, we used TaxCaddy and Lacerte’s digital signatures. TaxCaddy’s solution is half the price as Lacerte’s – because of course it is. However, Lacerte’s solution is more efficient to use. In practice, we used TaxCaddy during the earlier parts of tax season, resorting to Lacerte during the last couple of weeks of the season.

I can’t stress this enough: Digital signatures is literally the least tech savvy thing you can do. If you’re hesitant about switching to the cloud, that’s one thing, but not using digital signatures is not a defensible position.

And unfortunately, there really isn’t a middle ground.  If you’re going to deliver the tax return via an electronic medium, you are committing malpractice by using email as that medium. If you don’t want to use digital means, then go back to paper and snail mail.  Some of your clients won’t care; they may even prefer it! But there’s one constituency that will care – the younger practitioner that you’ll want to buy you out if you ever want to retire. 

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