Running a tax business is about more than just numbers. As an Electronic Return Originator (ERO), you’re the gatekeeper between the taxpayer and the IRS. That’s a big responsibility. If you’ve been doing this for a while, it’s easy to get comfortable and let a few things slide. But when it comes to ERO compliance, "comfortable" can quickly lead to "penalized."
Whether you are managing a solo practice or running a large service bureau operation, staying compliant is the only way to protect your IRS EFIN and your livelihood. At TIG Tax Pros, we see the same mistakes over and over. Most of them are simple fixes.
Here are the 7 most common compliance mistakes EROs make and exactly how to fix them.
1. Keeping Outdated or Incomplete Records
Many tax pros think that once a return is filed and the client walks out the door, the job is done. Not quite. The IRS requires EROs to maintain specific records for several years. If an auditor knocks on your door and you can't produce a signed Form 8879, you’re in trouble.
Common recordkeeping gaps include missing copies of Forms W-2, 1099, or documentation of due diligence for refundable credits.
The Fix:
Implement a "digital-first" recordkeeping strategy. Use professional tax software that automatically archives every document sent and received.
- The 3-Year Rule: Keep copies of all returns and signed authorization forms for at least three years.
- Audit Yourself: Once a month, pick five random client files and check if every required document is present.
If you are just starting out, check out The Ultimate Guide to ERO Services to understand the foundational requirements of recordkeeping.
2. Failing to Verify Taxpayer Identities
Identity theft is the IRS’s biggest headache. As an ERO, you are the first line of defense. Failing to properly verify a client’s identity isn’t just a mistake: it’s a compliance violation that can get your EFIN suspended.
Simply looking at a driver's license isn't always enough, especially with the rise of sophisticated forgeries. In a digital world, this gets even harder.
The Fix:
Create a strict identity verification protocol for every client, every year.
- Primary ID: Always require a valid, government-issued photo ID.
- Secondary Verification: Use Knowledge-Based Authentication (KBA) for remote clients.
- Stay Informed: Read our guide on Identity Theft Protection for Tax Professionals to learn the latest steps to safeguard your practice.
3. Mismanaging Your EFIN Information
Your Electronic Filing Identification Number (EFIN) is tied to your business and your person. One of the biggest mistakes EROs make is failing to update their IRS e-file application when things change. Did you move offices? Change your phone number? Add a new partner? If the IRS records don’t match your current operations, you are out of compliance.
Worse, some EROs "lend" their EFIN to others. This is a massive "no-go." You are responsible for every return sent through your EFIN.
The Fix:
- Update Quarterly: Log into your IRS e-Services account at least once a quarter to ensure your application details are 100% accurate.
- Control Access: Never share your EFIN credentials. If you have employees, use software that allows for sub-user accounts so you can track who did what without sharing your master ID.
- Professional Support: Leverage TIG Tax Pros ERO support to help navigate EFIN management and application processes.
4. Weak Information Security (Ignoring GLBA)
The Gramm-Leach-Bliley Act (GLBA) requires all "financial institutions": which includes tax preparers: to protect client data. If you are storing client PDFs on an unencrypted laptop or using a basic "123456" password for your tax software, you are a target.
The IRS Publication 4557 outlines exactly what you need to do to stay compliant with data security. Ignoring this is a one-way ticket to a data breach and heavy fines.
The Fix:
- WISP: You must have a written Information Security Plan (WISP). It’s not optional anymore.
- Encryption: Use end-to-end encryption for all client communications. Never ask a client to email their SSN or W-2 as a regular attachment.
- Software Matters: Use secure, cloud-based software provided by TIG Tax Pros that includes built-in security features.
5. Skipping Due Diligence on Refundable Credits
The IRS is particularly aggressive about due diligence regarding the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and American Opportunity Tax Credit (AOTC). You can’t just take the taxpayer’s word for it; you have to ask the "probing questions."
If you fail to document these questions and the taxpayer's answers on Form 8867, you face significant per-return penalties.
The Fix:
- Standardize: Use the checklists provided in your tax software for every refundable credit.
- Document Everything: If a client’s situation seems unusual (e.g., a 21-year-old claiming a 15-year-old sister), write down the specific questions you asked and the documents you reviewed to verify the relationship and residency.
- Education: Stay updated on Tax Preparer Certification and requirements to ensure you’re meeting the latest IRS standards.
6. Improper Authorization (The Form 8879 Problem)
You cannot hit "send" on an e-filed return until you have a signed Form 8879 in your possession. Many EROs try to speed up the process by filing the return while the client is "on the way" to sign. This is a major compliance violation.
Another mistake is accepting signatures that aren't legally binding for e-file purposes, such as a typed name in a standard email.
The Fix:
- Wait for the Signature: Never, under any circumstances, transmit a return without a signature.
- Use E-Signatures Properly: Use IRS-approved electronic signature methods that include identity verification.
- Review Before Signing: Ensure the client has reviewed the final return before they sign the 8879. They are certifying the accuracy of the data.
7. Ignoring IRS Acknowledgments
Filing the return is only half the battle. You are responsible for ensuring the IRS actually accepts it. Many EROs fail to monitor their "Rejected" queue, leading to missed deadlines and angry clients.
If a return is rejected, you usually have a "perfection period" to fix it, but if you aren't checking your software daily, you’ll miss it.
The Fix:
- Daily Dashboard Checks: Make it a habit to check your transmission status every morning.
- Notify Clients: If a return is rejected, contact the client immediately to get the necessary information for a correction.
- Operational Efficiency: For more on streamlining these tasks, see our Quick Tips to Grow Your Tax Business.
How TIG Tax Pros Can Help
Compliance doesn't have to be a nightmare. At TIG Tax Pros, we specialize in supporting EROs and Service Bureau operations. We provide the tools, software, and mentorship needed to ensure your tax business operations are audit-ready and efficient.
If you’re feeling overwhelmed by the technicalities of ERO compliance, we offer comprehensive services to get you on track. From setting up your practice in minutes to providing ongoing support, we’ve got your back.
- Become a Partner: Become a TIG Tax Pro
- Our Services: Explore our ERO Support Services
- Software Solutions: Check out our SaaS offerings
Final Thoughts
Compliance is the foundation of a successful tax business. By fixing these seven common mistakes, you aren't just avoiding penalties: you're building trust with your clients and professionalizing your brand. Take an hour this week to audit your own processes. A little bit of prevention now will save you a massive headache during the peak of tax season.
Professional Disclaimer:
The information provided in this blog post is for educational and informational purposes only and does not constitute legal, tax, or financial advice. ERO compliance requirements are subject to change by the IRS and other regulatory bodies. While we strive to provide accurate and up-to-date information, TIG Tax Pros makes no representations or warranties regarding the completeness or accuracy of this content. Always consult with a qualified professional or refer to official IRS publications (such as Pub. 1345 and Pub. 4557) to ensure your business remains in full compliance with current laws and regulations.
For more updates and professional development resources, visit the TIG Tax Pros Blog.