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New York Eliminates e-File Opt-Out
By Chris Gaetano
Posted on 10/14/10

Starting Jan. 1, 2011, tax practitioners currently subject to New York’s electronic filing requirements will no longer be able to opt out of electronic filing, and failure to comply could potentially result in a $50 fine. The policy change was signed into law as a provision in one of this year’s New York state budget bills in August.

The original e-filing mandate, which went into effect in 2006, required paid preparers in New York to file client tax returns electronically if the practitioner prepared more than 100 returns over the course of a year -- and to continue doing so each subsequent year.

However, practitioners used to be able to opt out of the requirement on behalf of their clients by filing Form TR-800 IT, Taxpayer Opt-Out and Reasonable Cause Record for Tax Return Preparers, which could be used if a client did not want to use the system or if the practitioner had other reasonable cause not to e-file a return, according to Brad Maione, a spokesperson with the state Department of Taxation and Finance.

Starting Jan. 1, 2011, however, the option to use this form will be eliminated for returns and documents that are required to be filed electronically, which includes all general business and New York State S corporation returns and extensions, as well as all monthly sales tax returns and Prompt Tax sales returns. If someone still has reasonable cause not to e-file, then he must maintain adequate documentation proving it, said the state tax department’s website. This documentation will need to be provided to the state if or when the practitioner receives a penalty bill for failing to e-file.

The state tax department will consider what constitutes reasonable cause and adequate documentation on a case-by-case basis, Maione said, giving examples. One scenario that the department would deem an acceptable reason for opt-out would be if a return cannot be e-filed because the tax preparer’s software doesn’t support all the required parts of the return, in which case the preparer would be asked to identify the software to the state and explain which parts couldn’t be filed for that return. Another example Maione gave would be if an e-filed return is rejected multiple times, in which case the preparer would be asked to submit proof of these rejections.

The state tax department’s website also elaborates on what it calls “special circumstances” where the filer won’t have to electronically file certain parts of certain forms:

  • Filers won’t have to enter every transaction on Schedule D for individual income tax returns -- instead, they will be able to use summary statements in the electronically filed return and, if the state needs the detailed transaction information, it will request it.
  • Filers won’t have to attach copies of the 2010 return they filed with another state or local government to the form IT-201, IT-203 or IT-205 when filing the form IT-112-R.

If the filer’s approved e-file software doesn’t support the e-filing of a required attachment, like a credit form, that filer would be allowed to file a paper return.

Manhattan/Bronx Chapter member Jonathan M. Horn, who chairs the statewide Taxation of Individuals Committee, said that he understands why the state wants to make this change, noting that some unscrupulous preparers were charging extra for e-filing, which caused most of their clients to opt out and paper file instead. As a result, the state tax department has imposed a penalty for practitioners who charge extra for e-filing, in the amount of $500 for the first offense and $1,000 for each subsequent offense, according to the tax department’s website.

But Horn said once the opt-out officially ends on Jan. 1, 2011, he will need to charge his clients an extra $50 to cover the state penalty if they insist on doing a paper filing. He said he will also be changing his engagement letter which currently says “you will have the option to e-file your return” to “you must agree to e-file your return.”

Eileen F. Hamlin, a former Utica Chapter president, said that she is a big advocate of e-filing, but said that if people don’t want to e-file -- if they’re just more comfortable with paper filing -- then they should not be required to do it.

“I think that if they would prefer not to, then that should be their right,” said Hamlin, who also sits on the New York, Multistate and Local Taxation Committee.

Nassau Chapter member Richard L. Feldman noted that, in his personal experience, people who don’t like to e-file -- representing a very small minority of his overall clients -- tend to be older individuals who don’t trust computers and would prefer to paper file like they have for years.

“I have one [client] in particular … he wants to know the return he signs is what goes in the mail and goes to the state, and the electronic method, I guess, takes a little control away from the taxpayer,” said Feldman, also a member of the New York, Multistate, and Local Taxation Committee.

This line of reasoning, though, didn’t resonate with Manhattan/Bronx Chapter member Louis E. Feinstein, who said that it’s not productive to fight a change that is inevitably coming. Feinstein, a member of several NYSSCPA statewide committees, said he thinks there are better fights that people can pick with the state tax department than e-filing.

“We’re in the 21st century and it seems crazy to have people arguing that computers and electronic filing should not be used. Or arguing that electronic filing should not be mandated,” he said.

Feinstein said he understands that people feel eliminating the option to opt out of e-filing is unfair to older filers who may not want to give out their bank information over the Internet, but said that anyone banking in this day and age has already allowed his information to be put out there.

Dollars and Sense

Horn said that the state could have tried other methods of addressing the issue of coerced paper filing, which includes privacy concerns and reluctance to trust new technology, instead of eliminating the opt-out completely.

But for the state, the bottom line is increasing compliance with the existing mandates for e-filing, said Maione. He added that the tax department will be monitoring compliance and sending out warning letters to practitioners who do not appear to be following those mandates.