Operating as an Electronic Return Originator (ERO) requires strict adherence to Internal Revenue Service (IRS) and state-level guidelines. Failure to maintain compliance results in penalties, suspension of e-filing privileges, or legal action. This guide identifies seven common operational pitfalls and provides instructional steps for mitigation.
1. EFIN Security and Application Management
The Electronic Filing Identification Number (EFIN) is a critical asset. Mismanagement often leads to unauthorized use.
Common Pitfalls:
- Sharing EFINs with third-party preparers or other firms.
- Failing to update the e-Services application when business ownership, physical address, or responsible officials change.
- Neglecting to monitor EFIN volume periodically.
How to Avoid:
Treat the EFIN as a secure credential. Never lease or loan an EFIN. Log into your IRS e-Services account at least once per year to verify that the application details are current. Review the "EFIN Status" page to ensure the number of returns filed matches your internal records. If discrepancies exist, report them to the IRS e-help desk immediately.
2. Incomplete Form 8879 Documentation
IRS Publication 1345 mandates that an ERO must receive a completed and signed Form 8879, IRS e-file Signature Authorization, before transmitting a return.
Common Pitfalls:
- Transmitting returns before receiving the signed Form 8879.
- Using incorrect or generic Personal Identification Numbers (PINs).
- Failing to retain the form for the required three-year period.
How to Avoid:
Establish a hard stop in your workflow. No return should be transmitted without a verified signature. Digital signatures must meet the requirements outlined in Publication 1345. Store signed forms in a secure, encrypted digital environment or a locked physical file. For firm-wide consistency, use TIG Tax Pros ERO services to standardize document collection and retention protocols.
3. Absence of a Written Information Security Plan (WISP)
The Safeguards Rule under the Gramm-Leach-Bliley Act requires financial institutions, including tax preparers, to implement a WISP.
Common Pitfalls:
- Operating without a documented security plan.
- Failing to implement Multi-Factor Authentication (MFA) on all systems.
- Using unencrypted email for transmitting sensitive taxpayer data.
How to Avoid:
Follow IRS Publication 4557 to draft a WISP. The plan must include a designated security coordinator, risk assessments, and incident response procedures. Implement MFA on tax software, email, and cloud storage. Ensure all staff receive annual security training. Documentation of this training should be kept on file for audit protection.
4. Failure to Perform Due Diligence (Form 8867)
Tax professionals must meet four due diligence requirements for returns involving the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and other specific credits.
Common Pitfalls:
- Checking boxes on Form 8867 without conducting actual interviews.
- Relying solely on verbal client statements without corroborating documents.
- Failing to document the specific questions asked and the answers provided by the client.
How to Avoid:
Use a standardized due diligence checklist for every return. Retain copies of documents reviewed, such as school records, medical statements, or utility bills that prove residency and relationship. Penalties for due diligence failures are assessed per return and can be financially devastating. Detailed notes within your tax software are essential for demonstrating compliance during an IRS Earned Income Provider (EIP) visit.
5. Improper Handling of Rejected Returns
The IRS requires EROs to notify taxpayers within 24 hours if a return is rejected and cannot be corrected by the ERO.
Common Pitfalls:
- Assuming a return is filed because it was "sent."
- Neglecting to check acknowledgments (ACKs) daily.
- Missing filing deadlines because a rejection was not addressed.
How to Avoid:
Monitor the status of every transmitted return daily. Assign a dedicated staff member to manage the "Reject Queue." If a return is rejected, identify the error code, correct it, and retransmit. If the error requires client input, document the date and time the client was contacted. If the return cannot be e-filed after multiple attempts, provide the client with a paper return and instructions for mailing.
6. Gaps in Identity Verification
Identity theft is a significant risk in tax administration. EROs are the first line of defense.
Common Pitfalls:
- Failing to verify government-issued photo IDs for new clients.
- Inadequate verification processes for remote or virtual clients.
- Not keeping records of the verification process.
How to Avoid:
For in-person clients, inspect original photo identification and Social Security cards. For remote clients, utilize Knowledge-Based Authentication (KBA) or secure portals that require identity verification. Keep a log or scanned copy of the IDs as part of the client's permanent file. This practice protects the firm from involvement in fraudulent return schemes.
7. State-Specific Compliance: Georgia Department of Revenue
EROs operating in Georgia must adhere to both federal and state mandates. The Georgia Department of Revenue (DOR) has specific requirements for Electronic Return Originators.
Common Pitfalls:
- Failing to register for the Georgia Tax Center (GTC).
- Not staying updated on Georgia-specific tax credit changes or e-file mandates.
- Ignoring the Georgia "e-file mandate" which requires preparers who file more than 10 individual income tax returns to file electronically.
How to Avoid:
Register your firm on the GTC to manage state-level tax accounts. Regularly review the Georgia Department of Revenue website for updates to the "Tax Preparer Information" section. Ensure your software is configured to handle Georgia-specific forms like the Form 500. For firms looking to expand into the Georgia market, our service bureau support provides the infrastructure needed to maintain state compliance without an EFIN.
Professional Development and Resources
Maintaining a compliant ERO operation requires ongoing education. Professionals should utilize resources provided by TIG Tax Pros to stay informed of regulatory shifts.
Recommended Actions:
- Attend annual tax preparation courses to stay current on Federal and State Law.
- Implement professional development resources for all staff members.
- Utilize ERO services to streamline electronic filing and ensure operational efficiency.
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Excerpt: Avoid IRS compliance issues with our guide on 7 ERO operation pitfalls. Learn how to secure your EFIN, manage Form 8879, and protect your tax business.
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