Chapter 6 – IRS e-fle Rules and Requirements

All Providers must follow IRS e-file rules and requirements to continue participation in IRS e-file . Requirements are included in Revenue Procedure 2007-40, throughout this publication and in other publications and notices that govern IRS e-file (See Publication 3112 , IRS e-file Application and Participation). All Providers must follow all rules and requirements, regardless of where published. Some rules and requirements are specific to the activities performed by the Provider and are included in appropriate chapters of this publication. The following list, while not all inclusive, applies to all Providers of individual income tax returns, except Software Developers that do not engage in any other IRS e-file activity other than software development. A Provider must:

1. Maintain an acceptable cumulative error or reject rate.

2. Follow the requirements for ensuring that tax returns are properly signed.

3. Use the standard/non-standard Form W-2 indicator.

4. Use the Tax Refund-Related Product or Financial Product indicator.

5. Include the Electronic Return Originator’s (ERO’s) Electronic Filing Identification Number (EFIN) as the return EFIN for returns the ERO submits to an Intermediate Service Provider or Transmitter.

6. Include the Intermediate Service Provider’s EFIN in the designated Intermediate Service Provider field in the electronic return record.

7. Submit an electronic return to the IRS with information that is identical to the information provided to the taxpayer on the copy of the return.

In addition to the above, participants in Online Filing must adhere to the following:

1. Ensure that no more than five electronic returns are filed from one software package or one e-mail address.

2. Supply a taxpayer with a correct Submission ID.

Tax refund-related products are financial products based on taxpayers receiving a tax refund. Financial institutions offer a variety of financial products to taxpayers based on their refunds. Such products include a Refund Anticipation Loan (RAL), which is money borrowed by a taxpayer from a lender based on the taxpayer’s anticipated income tax refund, and a Refund Anticipation Check (RAC), which directs the refund to a financial institution which disburses fees and the balance to the taxpayer. The tax refund-related products continually evolve, and new products appear, such as pre-refund advance products. These pre-refund advance products generally are free to the taxpayer (i.e., without interest or fees) and should not be considered as RALs. The IRS isn’t involved in or responsible for RALs, RACs or other financial products. This is considered a business contract between the Provider and the taxpayer. Providers that assist taxpayers in applying for a tax refund-related financial product should:

• Ensure taxpayers understand that by agreeing to a refund-related financial product they won’t receive their refund from the IRS as the IRS will send their refund to the financial institution.

• Inform taxpayers that RALs are interest bearing loans and not a quicker way of receiving their refunds from the IRS.

• Inform taxpayers that if the financial institution does not receive a direct deposit within the expected time frame for whatever reason, the taxpayers may be liable to the lender for additional interest and other fees, as applicable for the RAL or other tax refund-related product (see explanation below).

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• Inform taxpayers of all fees and other known deductions to be paid from their refund and the remaining amount the taxpayers will receive.

• Secure the taxpayer’s written consent as specified in Treas. Reg. § 301.7216-3(a) to disclose tax information to the lending financial institution in connection with an application for a refund-related financial product.

• Ensure that the tax return preparer isn’t a related taxpayer (within the meaning of Internal Revenue Code §267 or §707A ) to the financial institution or other lender that makes a RAL agreement.

There are no guarantees that the Department of the Treasury deposits refunds within a specified time or in their entirety. For example, it may delay a refund due to processing problems or, it may offset some or all of the refund. The Department of the Treasury isn’t liable for any loss suffered by taxpayers, Providers or financial institutions resulting from reduced refunds or not honored direct deposits, causing Treasury to issue refunds by check.

Software Developers/Transmitters should note that the IRS has changed the designations and definitions of financial products to include:

1. “No Financial Product”

2. “Pre-Refund Advance Product – Taxpayer Charged an Advance Fee (RAL)”

3. “Post-Refund Financial Product (Refund Transfer – RAC)”

4. “Pre-Refund Advance Product – Taxpayer Not Charged an Advance Fee”

5. “Other/New Product”

6. “Text Field to Explain Other/New Product”

The advertising standards in Publication 3112 , IRS e-file Application and Participation, and Federal, state, and local consumer protection laws apply to Providers of individual income tax returns in several ways.

Providers must not use improper or misleading advertising in relation to IRS e-file, including the periods for refunds and tax refund-related products including RALs. Any claims by Providers concerning faster refunds by electronic filing must be consistent with the language in official IRS publications. If Providers advertise the availability of a RAL or other tax refund-related product, the Provider and financial institution must clearly refer to or describe the funds as a loan or other financial product, not as a refund. The advertisement of a RAL or other tax refund-related product must be easy to identify and in readable print. That is, it must make clear in the advertising that the taxpayer is borrowing against the expected refund or receiving another tax refund-related product and isn’t obtaining the refund itself.

A Provider must not advertise that individual income tax returns may be electronically filed prior to the Provider’s receipt of Forms W-2 , W-2G and 1099-R , as the Provider is generally prohibited from electronically filing returns prior to receipt of Forms W-2, W-2G, and 1099-R. Advertisements must not imply that the Provider does not need Forms W-2, W-2G and 1099-R, or that it can use pay stubs or other documentation of earnings to e-file individual income tax returns.

In using the direct deposit name and logo in advertisement, the Provider must use the name “Direct Deposit” with initial capital letters or all capital letters, use the logo/graphic for direct deposit whenever feasible and may change the color or size of the direct deposit logo/graphic when it uses it in advertisements.

Under Treas. Reg. §301.7216-2d(1) , disclosure of tax return information among providers for the purpose of preparing a tax return is permissible without the taxpayer’s consent. For example, an ERO may pass on tax

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return information to an Intermediate Service Provider and/or a Transmitter for the purpose of having an electronic return formatted and transmitted to the IRS. However, if the tax return information is disclosed or used in any other way without the taxpayer’s consent, an Intermediate Service Provider and/or a Transmitter may be subject to the penalties described in I.R.C. §7216 and/or the civil penalties in I.R.C. §6713 for unauthorized disclosure or use of tax return information. Providers that obtain taxpayers’ advance written consents to disclose or use their tax return information for a purpose other the preparation and filing of the related return, such as offering financial products or services, must ensure the consents comply with all requirements specified in Treas. Reg. § 301.7216-3 and Revenue Procedure 2013-14.

Preparer penalties may be asserted against an individual or firm meeting the definition of a tax return preparer under I.R.C. §7701(a)(36) and Treas. Reg. §301.7701-15 . A person that prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any tax return may be subject to preparer penalties. Preparer penalties that may be asserted under appropriate circumstances include, but are not limited to, those set forth in I.R.C. 6694 , 6695, 6701 and 6713 .

Under §301.7701-15 , Providers are not tax return preparers for the purpose of assessing most preparer penalties as long as their services are limited to “typing, reproduction or other mechanical assistance in the preparation of a return or claim for refund.” If an ERO, Intermediate Service Provider, Transmitter or the product of a Software Developer alters the return information in a non-substantive way, this alteration is considered to come under the “mechanical assistance” exception described in §301.7701-15(f)(1)(viii) . A non-substantive change is a correction or change limited to a transposition error, misplaced entry, spelling error or arithmetic correction.

If an ERO, Intermediate Service Provider, Transmitter or the product of a Software Developer alters the return in a way that does not come under the “mechanical assistance” exception, the IRS may hold the Provider liable for preparer penalties. See Treas. Reg.§301.7701-15(c) ; Rev. Rul. 85-189, 1985-2 C.B. 341 (which describes a situation where the Software Developer was determined to be a tax return preparer and subject to certain preparer penalties).

A penalty may be imposed, per I.R.C. §6695(f), on a tax return preparer who endorses or negotiates a refund check issued to any taxpayer other than the tax return preparer. The prohibition on tax return preparers negotiating a refund check (including an electronic version of a check) is limited to a refund check for returns they prepared.

A tax return preparer that is also a financial institution, but has not made a loan to the taxpayer based on the taxpayer’s expected refund, may

• cash a refund check and remit all the cash to the taxpayer,

• accept a refund check for deposit in full to a taxpayer’s account provided the bank does not initially endorse or negotiate the check or

• endorse a refund check for deposit in full to a taxpayer’s account pursuant to a written authorization of the taxpayer.

A preparer bank may also subsequently endorse or negotiate a refund check as part of the check-clearing process through the financial system after initial endorsement. Under Treas. Reg. 1.6695-1(f) , a tax return preparer, however, may affix the taxpayer’s name to a refund check for the purpose of depositing the check into the account in the name of the taxpayer or in joint names of the taxpayer and one or more persons (excluding the tax return preparer) if authorized by the taxpayer or the taxpayer’s recognized representative. The IRS may penalize any tax return preparer that violates this provision.

In addition to the above-specified provisions, the IRS reserves the right to assert all appropriate preparer and non-preparer penalties against a provider as warranted.

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