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January 14, 2011

To:  AARP Tax-Aide Leaders

From:  Lynnette Lee-Villanueva

Subject:  CyberTax 2011-01: Handling of delayed filing of returns impacted by current tax relief law

IRS announced on December 23, 2010, that some taxpayers would need to delay filing their federal returns until mid-late February 2011 if they were impacted by the recent legislative changes included in PL 111-312, Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The delay impacts taxpayers, who file at least one of the below,

        (1) Schedule A (Form 1040), Itemized Deductions;

        (2) Tuition and Fees Deduction claimed on Form 1040, line 34 or Form 1040A, line 19;

        (3)  Educator Expense Deduction claimed on Form 1040, line 23, or Form 1040A, line 16;

        (4)  Form 4684, Casualty and Thefts

        (5)  Form 8859, District of Columbia First-Time Homebuyer Credit.

In regards to this announcement the information below provides guidance relevant to the operation of your AARP Tax-Aide site.  Approximately 400,000 returns (based on last year data) prepared by all volunteer programs fall into the above categories.  Although TaxWise can prepare these returns now, IRS expects they cannot begin accepting these returns until mid-to-late February.

AARP Tax-Aide is leaving the decision on how the impacted taxpayers will be handled at the local level, as you are in the best position to determine how your site is set-up to handle these taxpayers. The site may choose to either 1) ask the taxpayer to return to the site at a later date when the return can be e-filed or 2) prepare and hold the return until the return can be e-filed.  With option two please note that the site will need to put in place a system to track the returns being held in order to ensure that no returns are missed when the e-file is completed at a later date.  We understand that site circumstances can be unique and vary from site to site.  We encourage you to analyze your site set-up and choose the option which works best for your site operations.  Some things to consider when making your decision may include:

• TaxWise Online site verses disk transfer operation – a TaxWise Online site has the ability to hold the returns in one central location.  A disk transfer operation site where Counselors utilize stand alone laptops would need to establish a procedure to transfer all returns being prepared and held to one central place.  We strongly discourage option 2 if you are a disk transfer site.

• If you do decide to prepare and hold then the returns must be kept at the ERO level.  They should not be held on individual computers.

• How busy your site is in February – If you are a walk-in site with heavy traffic in February you may choose to ask these taxpayers to return in March when you have a slower volume of taxpayers.

• Appointment verses walk-in – appointment schedulers can advise taxpayers to make an appointment later in the season when their return can be completed and e-filed without being held.

TaxWise will allow the return to be prepared and printed.  The return will be held at the diagnostics stage where it will not be cleared to generate an e-file.  The 8879 will print for the taxpayer to sign, but it may not be assigned a DCN or Submission ID.  This number will have to be hand written on our retained 8879 when the e-file is created at a later date. Once the taxpayer signs the 8879 at the time the return is prepared their process is complete.  They will leave the site with their completed return and will not need to return to the site when their return is actually transmitted.

The Quality Review of the return must be completed at the time the return is prepared, prior to the taxpayer leaving the site with the copy of their return.

While these changes impact federal returns only, preparers will be unable to create the state e-file if the federal return is impacted.

The IRS is asking use not to prepare and transmit returns on behalf of taxpayers without all applicable credits and deductions resulting in the taxpayers need to file an amended return (1040X) later.  This could create a duplicate filing error and further delay the processing of the taxpayer’s return. That said, we understand and will support the rare need to file for a refund without waiting due to extreme financial hardship, such as pending mortgage foreclosure. A 1040X should be filed at a later date to make sure a completely accurate return is ultimately submitted and the taxpayer receives the full return they have coming them.

Stockpiling rules defined in Publication 1345, Handbook for Authorized e-file Providers, do not apply in this situation.

Prior to submission of returns being held, preparers will need to re-run diagnostic to create the e-file once IRS is capable of processing these returns. If there are changes to the taxpayer’s return which differ from the amount on the original return by more than $50 to “Total income” or “AGI” or more than $14 to “Total tax”, “Federal income tax withheld,” “Refund” or “Amount you owe”, new signatures are required. Refer to Publication 1345 for more information.

TaxWise users are encouraged to create a “return stage” that allows easy identification of completed returns being held until IRS is able to process them. For instructions on creating a return stage, TaxWise users should refer to the TaxWise User Guide or in the Defaults documents on the Extranet. Additionally, there are reports, such as Client List and Preparer Status, available in TaxWise and on the TaxWise Support Site that should be utilized by site administrators to manage and ensure held returns are timely processed.

The IRS is preparing a poster with information explaining the delay for use at the site and a notice that can be given to taxpayers who have their returns prepared and held.  These documents were not available at the time this CyberTax notice was sent, but they will be sent to you when they are received from the IRS.

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