The Tax Attic with Jerry Coon

Jerry Coon, Enrolled Agent

Jerry Coon, Enrolled Agent

Penalty provisions in fine print

E-file saves taxpayers millions

The Worker, Homeownership and Business Assistance Act of 2009, as signed into law by President Obama on November 6, among several important provisions, had a penalty provision inserted within the fine print of the law. I think there is a lot of fine print in some of these laws being passed by Congress. This particular penalty provision concerns the filing of partnership and Sub S Corporation tax returns.

Our tax system is set up so that both partnerships and Sub S Corporations are reporting entities, technically called pass-through entities. This means usually that neither one has to pay any tax. The tax returns are used to report the income and expenses of the partnership or Sub S. These items are passed through to the partners of the partnership or the shareholders of the Sub S via a Form K-1. These partners and shareholders then report the income and expenses of the reporting entity on their personal tax returns and are responsible for any tax due to that income.

This presents a small problem to the Internal Revenue Service when it comes to penalizing a partnership or a Sub S for not filing a tax return on time. For the most part, penalties are based on the amount of tax due. No tax due = no penalties.

Congress has ridden to the rescue, in this instance, and instituted flat-dollar-amount penalties based on the late filing of tax returns. For partnerships and Sub S Corporations, the Worker, Homeownership and Business Assistance Act of 2009 has increased these late-filing penalties to $195 per partner or shareholder per month the return is filed late. Not too many years ago, the penalty was $50. For instance, for a partnership that has five partners and is late filing its return by two months, the penalty will be $195 times 5 partners, or $975 per month, times 2 months equals $1,950. That’s a lot of penalty! At those rates, no one is going to knowingly file a partnership or Sub S return late.

Another provision in the law affects tax preparers and indirectly taxpayers. Starting in the year 2011, any tax preparer filing more than 10 tax returns must file those returns electronically. Previously, the IRS was not allowed to demand that tax preparers use the e-file system—suggest and hope for the best, but not demand. Each state was allowed to make such laws, however, requiring tax preparers to use the e-file system. Currently, many states, including Michigan, have such laws in effect. In Michigan’s case, any preparer filing at least 200 returns has to use the e-file system.

The IRS was committed to getting at least 80% of all returns filed into the e-file system. They were making steady headway in that regard, but they were not going to reach their goal until 2015 without some help from Congress. Well, they got it, and I think they will get that 80% in 2011.

Why the big push toward e-filing? Two reasons; the first reason is cost savings. The costs to process paper returns are considerably higher than e-filed returns. It is estimated that the cost to process each e-filed return is 35 cents. It cost $2.87 to process each paper-filed return. Based on these figures, last year it cost the IRS approximately $192 million to process all of the paper returns it received. If these returns had been submitted electronically, the cost would have been $23 million—a savings of $169 million. That’s $169 million that could have been better used in other matters.

The second reason to e-file more returns is accuracy. The error rates are considerably higher for paper-filed returns than e-filed returns. In addition, it costs untold millions of dollars to deal with all of the follow-up correspondence to correct these errors. It is estimated that paper-filed returns have an error rate of 25%. E-filed returns have an error rate of 2.5%.

The reason for this vast disparity is simple. The software used to prepare e-filed returns runs a validation check before the return is submitted to the IRS. The overwhelming number of errors for those using software are caught before the IRS even sees the return. With paper-filed returns, the errors are not caught until the IRS processes the return and then the mail correspondence merry-go-round starts.

E-file is a good thing. It saves the tax-paying public millions of dollars. We, the tax-paying public, need the federal government to find a few more ways to save millions of dollars. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns
Action Tax Service on Northland Drive in Rockford.
His telephone number is (616) 866-4704 and
his e-mail address is


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