Tax Clinic Warns of Effects of Proposed E-Filing Regs

Comments on the Proposed Regulations Under Section 6011

The following comments are submitted by the Tax Clinic at the Legal Services Center of Harvard Law School on September 21, 2021. Lauren Deutsch is the principal drafter of the comments. Gary Burleson, Jon-Yin Chong, Jessie Dawe, Keith Fogg, Karli McIntyre, and Audrey Patten offered additional assistance. For questions, please contact Lauren Deutsch at ldeutsch.jd22@hlsclinics.org.

1. Background

The IRS has proposed amendments (hereinafter the “proposed regulations”) to the Regulations on Procedure and Administration (26 CFR part 301) under section 6011¹ of the Internal Revenue Code that would impose electronic-filing requirements on persons required to file certain returns.² The proposed regulations are authorized by the Taxpayer First Act of 2019 (TFA), which the President signed into law on July 1, 2019.³ The proposed regulations would impose electronic-filing requirements on persons required to file certain returns, including but not limited to various information returns, partnership returns, returns of electing small-business corporations, and corporate income tax returns.⁴

The proposed regulations note that electronic filing has become more common, accessible, and economical.⁵ They also highlight the benefits of increased electronic filing, such as more timely and accurate IRS processing and faster and better customer service.⁶ Such benefits are particularly valuable in light of the COVID pandemic, which has been reported to have caused a backlog of nearly 8 million paper-filed business tax returns in 2020.⁷

However, the proposed regulations also downplay the legitimate hurdles that electronic filing imposes upon certain entities. For instance, the proposed regulations note that any burden on “small entities” imposed by the heightened electronic-filing requirements will be “slight” and “insignificant.”⁸ While the proposed regulations highlight the availability of hardship waivers for certain individuals, we assert that such waiver availability is lacking in clarity, scope, or both. Additionally, while the proposed regulations discuss and address the general benefits of increased electronic filing, they fail to fully channel those benefits by setting out procedures to make certain information included on electronically filed returns more easily and completely available.

We support the attempt to continue generally incentivizing e-filing via the proposed regulations, but we offer comments on two separate concerns. First, aspects of the proposed e-filing regulations may impose insurmountable obstacles upon discrete populations — including various religious communities such as the Amish, remote Native Alaskan populations, and elderly individuals without adequate technological literacy — without providing for, or clarifying, administrative exemptions or hardship waivers. Second, the proposed e-filing regulations miss out on a critical opportunity for the IRS to begin routinely including state withholding information on its wage and income transcripts.

1. Comments and recommendations on the impact on various discrete populations

a) The impact on various religious groups, such as the Amish

First, some religious groups, including the Amish, do not use technology or lack access to technology.⁹ The proposed regulations would impose a severe and unwarranted hardship upon those groups.

More than 350,000 Amish individuals are estimated to live in the United States as of 2021.¹⁰ The Amish subscribe to Christian beliefs and tend to live in tight-knit communities, typically in rural areas concentrated in Pennsylvania, Ohio, and Indiana.¹¹ Amish individuals pay taxes, and many Amish individuals are business owners; some larger Amish businesses may generate more than $5 million in sales annually.¹²

Though Amish beliefs and practices vary by community, the Amish generally believe in the importance of living largely separate from the rest of society; such a way of life helps to maintain strong community ties, protect the members' spiritual priorities, and limit distractions.¹³ For many Amish individuals, this way of life is supremely important — living within “the world's system” by adopting various practices of outside society is fundamentally incompatible with the Amish emphasis on God, family, community, and tradition.¹⁴ Critically, this means that the use of computers and the Internet is widely nonexistent throughout Amish communities.¹⁵ Even Amish businesspeople, who occasionally selectively adopt certain technologies out of absolute necessity, have been described as using computers and the Internet only in “exceptional cases.”¹⁶

An Amish tax preparer who spoke with our clinic has expressed deep concern to us regarding the proposed regulations, fearing that as they stand, they do not provide room for legitimate religious exemptions to the electronic-filing mandates. As a member of his Amish community, he has long prepared returns for fellow members of his tight-knit community; he does not use the Internet in doing so, instead relying on paper returns. He has shared with us the reality of how the proposed regulations will impact Amish businesses like his.

One specific area of concern that we envision impacting the Amish is the rapid, proposed incremental reduction of the information return threshold.¹⁷ Prior to the Taxpayer First Act of 2019, the Secretary was prohibited from requiring any person from filing their returns electronically unless said person was required to file 250 returns per year.¹⁸ The proposed regulations would, in accordance with the Taxpayer First Act, amend § 301.6011-2, which addresses information returns, to reduce the electronic filing threshold for certain information returns (including, for instance, Forms W-2 and 1099) from 250 to 100 for returns required to be filed during calendar year 2022, and from 100 to 10 for returns required to be filed during calendar years after 2022.¹⁹ This is a drastic reduction that may well sweep up many small Amish businesses that currently do not come particularly close to clearing the 250-return threshold.²⁰

Another specific area of concern that we envision potentially impacting the Amish is the proposed regulations' impact on § 301.6011-3, which addresses partnership returns.²¹ A number of Amish small businesses are, presumably, classified as partnerships for federal tax purposes.²² The proposed regulations would require partnerships to file partnership returns electronically if they are required to file at least 10 returns of any type (including information returns) during the calendar year.²³ Thus, an Amish partnership that is required to file 12 Forms 1099, along with their yearly partnership return, during calendar year 2023 will be required to file the 1099s and the partnership return electronically. This is a significant departure from the current regulations, which require electronic filing only for partnerships with more than 100 partners.²⁴ Presumably, a number of smaller Amish partnerships that do not currently need to e-file their partnership returns will clear the proposed threshold.²⁵

The proposed regulations would provide for the granting of a waiver of the above-discussed e-filing requirements for “undue hardship,” but the language specifies that the principal factor in determining hardship will be the increased “cost” of e-filing versus paper filing.²⁶ Our interpretation is that “cost” refers to financial cost. It is unclear whether the proposed regulations would allow for the granting of hardship waivers for reasons beyond financial cost. If not, we propose expanding the grounds upon which waivers may be granted: perhaps via language such as “Other factors in determining hardship, such as religious objections, difficulty accessing technology, or difficulty using technology, may be considered.” If it is already envisioned that the hardship waiver process will occasionally consider factors beyond the principal factor of cost, we nevertheless propose clarifying this language, perhaps via the same language suggested above. Additionally, it is also potentially concerning that the proposed regulations specify that a request for a hardship waiver must be made in accordance to postings, guidance, forms or instructions, including those on the IRS.gov website.²⁷ Amish communities will not see these website postings as their members stay off the internet for religious reasons.²⁸ Thus, in addition to ensuring that any updated guidance or forms are well-publicized, the publicity needs to be targeted to communities that might not go to the IRS website. Additionally, the regulation should provide for leniency in the imposition of penalties on Amish taxpayers who in good faith request a hardship waiver even if their request is not up to the latest guidance or updates.²⁹

Further, it may also be the case that the “hardship” waiver process is designed for taxpayers facing difficulties e-filing, and not for taxpayers who permanently object to e-filing on religious grounds. The administrative exemption route currently covering certain tax preparers may be more appropriate.³⁰ Thus, we propose instead considering allowing tax preparers to attach something like Form 8948 (or, alternatively, expanding the category of returns that Form 8948 covers, as currently, only returns on individuals, estates, and trusts are covered, and the proposed regulations affect other types of returns).³¹ A tax preparer of covered returns can currently attach Form 8948 to a paper return as an explanation for why the return is not being e-filed.³² One of the boxes the preparer may check is: “The preparer is a member of a recognized religious group that is conscientiously opposed to filing electronically.”³³ This category would cover Amish preparers.

An expanded Form 8948, or a similar form for preparers meant for different types of returns, would not cover Amish taxpayers who file their own returns. However, it would cover certain Amish preparers, which would still be a welcome development for the Amish preparer to whom we spoke in developing our comments.³⁴ Perhaps an ideal solution would be to pair an expanded Form 8948 (or similar form) with an expanded or clarified category of those who will be granted hardship waivers, so that Amish partnerships who file their own taxes, instead of using a preparer, can continue doing so. It should be noted that presumably not all Amish taxpayers can easily access a preparer if there is not already a preparer within the community; the Amish generally live in rural areas, in tight-knit and insular communities.³⁵ Thus, we propose that a multi-faceted solution that would cover both preparers and non-preparers may be appropriate.

b) The impact on various Native tribes, such as Native Alaskan tribes

In rural Alaska, many lack adequate access to Internet and computers. In 2020, the Federal Communications Commission (FCC) reported that only 60% of people living on tribal lands have access to broadband compared to 97% of Americans living in urban areas.³⁶ The vastness of Alaska, the rugged terrain, and the dispersed and scattered nature of the population all render the digital divide particularly severe among Native Alaskans.³⁷ In 2020, as the COVID pandemic forced students and employees nationwide to rely on the Internet for even more aspects of their daily lives, the already expensive, overburdened, and unreliable Internet access in Native Alaskan communities became even more inaccessible. However, the FCC provided at least a partial solution — a priority window during which federally recognized Tribes and Native Alaskan villages could claim, at no cost, licenses that would allow them to provide broadband to their communities.³⁸ Upon the closing of the window, the licenses were to be sold at auction.³⁹

The effort has been a commendable partial solution to the challenges that many Native Alaskan tribes face, and a number of tribes have applied for and been granted licenses.⁴⁰ However, it cannot be said that the effort has fully bridged the digital divide. The COVID pandemic — which highlighted and intensified the need for reliable Internet — made it particularly difficult for many tribes to apply before the window's closing.⁴¹ Not only did some tribes have difficulty submitting applications by Internet, but the pandemic itself put pressure on tribal governments to focus their attention and efforts on their communities' health, well-being, and education, and applications for broadband simply weren't as urgent as these other concerns.⁴² In fact, sources have noted that some tribes faxed or mailed in handwritten applications, explaining that the digital divide makes it “so challenging for [Native Alaskan tribes] to do even a simple email, let alone fill out something online.”⁴³

Furthermore, similar efforts have been undertaken in the past.⁴⁴ For instance, GCI, the largest telecommunications provider and investor in Alaska, completed the expansion of their TERRA network in 2018.⁴⁵ The goal of the TERRA project was to provide high-speed Internet to parts of rural Alaska. While TERRA successfully reached 85 villages, there are 229 federally recognized tribes in Alaska; therefore, the majority of Native Alaskan tribes are not on the TERRA network.

As with the Amish, we fear that the reduction of the information return threshold, from 250 all the way down to 10, may have a drastic impact on some Native Alaskans. For example, we envision that some commercial fishing captains⁴⁶ may be particularly vulnerable. These captains may regularly file, say, 20 Forms 1099 yearly — nowhere near the 250-return threshold, but easily past the 10-return threshold that the proposed regulations would implement after calendar year 2022.⁴⁷ The captains may very well be located in an area that lacks adequate Internet access; further, some may logically lack the digital literacy necessary to themselves e-file, if they never or rarely use the Internet. One may counter that the commercial fishing captains could simply pay someone else to e-file for them, but if everyone within the community faces the same challenges and lack of digital access, this is impractical. Travel to a region of Alaska with better Internet access may be infeasible, given Alaska's particularly rugged terrain and vastness. Finally, though volunteer-based programs do critical work helping rural Alaskans file their taxes, it should not be presumed that such programs can completely meet the e-filing needs of every single rural Alaskan and Alaskan Native.⁴⁸

As earlier explained, the decision whether or not to grant a hardship waiver of the various e-filing requirements will be based principally on financial cost.⁴⁹ Though perhaps some Native Alaskans' e-filing hypothetical hardships may be construed as cost (it would be expensive to pay for high-speed Internet to e-file, or to travel to another area to do so), other factors, particularly access, seem to be the larger hurdle. It is unclear from the proposed regulations whether the waiver process could also consider other hardship factors, like access or a lack of digital literacy, that may impact Native Alaskan taxpayers. If not, we thus propose expanding the grounds upon which waivers may be granted: perhaps via language such as “Other factors in determining hardship, such as religious objections, difficulty accessing technology, or difficulty using technology, may be considered.” If it is already envisioned that the hardship waiver process will occasionally consider factors beyond the principal factor of cost, we nevertheless propose clarifying this language, perhaps via the same language suggested above. We note that Code section 6011(e)(3)(D), as it currently reads, already provides for an exception for certain tax preparers located in areas without Internet access who would otherwise be required to file individual income tax returns electronically.⁵⁰ Though this exception relates to an e-filing requirement separate from those relevant to the proposed regulations, we point out that section 6011 has already recognized the need to make e-filing exceptions for individuals living in areas without Internet access.

Additionally, because the proposed regulations specify that a request for a hardship waiver must be made in accordance to postings, guidance, forms or instructions, including those on the IRS.gov website — and because it follows that such Native Alaskan taxpayers may have trouble accessing or navigating these website updates — we recommend that, in addition to ensuring that any updated guidance or forms are well-publicized, the publicity needs to be targeted to communities that might not go to the IRS website.⁵¹ Further, the regulation should provide for leniency in the imposition of penalties on those taxpayers who in good faith request a hardship waiver even if their request is not up to the latest guidance or updates.⁵²

Finally, we highlight the fact that the proposed incremental stepdown, from 250 to 10 returns (for returns required to be filed after calendar year 2022), could have a particularly troublesome impact on Native Alaskans due to the above-discussed serious digital divide among communities in rural Alaska. We feel that an incremental stepdown to 100 for information returns required to be filed during calendar year 2023, and to 10 for information returns required to be filed during calendar years after 2023, would help to alleviate some of the impact on Native Alaskans. This longer stepdown timeline would buy the FCC and other organizations more time to continue bridging the digital divide in rural Alaska. Broader, and perhaps even universal, access to Internet in rural Alaska is coming, but it will not arrive overnight; lengthening the stepdown timeline would give Native Alaskans a better chance to meet their filing burdens without the added hindrance of Internet inaccessibility.

c) The impact on populations lacking digital literacy, including older Americans

While the majority of Americans are digitally literate, a disproportionate number of older Americans (ages 65+) are not. Only 73 percent of Americans ages 65 and up use the Internet; Internet use is even more limited among Americans ages 75 and up.⁵³ Additionally, in-home Internet access is limited for older Americans (with only 69 percent of those ages 65 and up having broadband access in-home).⁵⁴ The pandemic has cut off many older Americans from usual Internet sources like libraries, but even in a post-pandemic world, a number of older Americans without easy or realistic access to community Internet sources may be effectively cut off from the Internet.⁵⁵ Without practice using the Internet, opportunities for developing digital literacy are slim. Even in technology epicenter San Francisco, 40% of older adults lacked basic digital literacy skills in 2019.⁵⁶ And e-filing requires, at the very least, basic digital literacy to navigate.⁵⁷

Older Americans also own and operate successful businesses. Small businesses with older owners are less likely to go under than those with younger owners.⁵⁸ And in addition to long-time business owners, older Americans are increasingly becoming later-in-life entrepreneurs.⁵⁹ Older Americans who own businesses may lack the ability to e-file, whether that is due to a lack of access to the Internet and technology, or a lack of digital literacy necessary to navigate e-filing software. The proposed 6011 regulations would impose a number of e-filing requirements on elderly small business owners.

For instance, as explained earlier, the proposed regulations would require small business owners to file certain information returns electronically if they are required to file at least 100 returns during calendar year 2022, and at least 10 returns during calendar years after 2022.⁶⁰ We envision a subset of older Americans who operate small businesses, perhaps within the gig economy. Their businesses may be relatively small — small enough not to fear clearing the current e-filing of 250 information returns — but substantial enough to trigger the rather low threshold of 10 for years after 2022. Presuming that these envisioned businesses operate in communities with adequate Internet, one may argue that, if such older individuals lack the ability to e-file themselves, they can simply pay someone in the community to do it for them. Such is a cost of doing business. However, we wonder if, and fear that, such a cost could be enough to push some subset of these older small business owners out of business (particularly if their businesses are relatively modest to begin with). The hardship waiver process may alleviate some of these concerns, especially in more extreme cases. However, the hardship waiver process is seemingly discretionary — the proposed regulations note that waivers “may” be granted — and the proposed regulations note that the process will take “the amount” of the increased cost of e-filing into primary consideration, without noting an objective threshold or standard that said increased cost must meet.⁶¹ Therefore, we propose a clearer hardship waiver process, perhaps by means of illustrative examples, or some set of objective standards that must be met to qualify for a waiver.

As earlier explained, the decision whether or not to grant a hardship waiver of the various e-filing requirements will be based principally on financial cost;⁶² it is unclear whether such granting could also consider other hardship factors that may impact older taxpayers, such as a lack of digital literacy, or an inability to access the Internet or a computer. If not, as earlier explained, we again propose expanding the grounds upon which waivers may be granted: perhaps via language such as “Other factors in determining hardship, such as religious objections, difficulty accessing technology, or difficulty using technology, may be considered.” If it is already envisioned that the hardship waiver process will occasionally consider factors beyond the principal factor of cost, we nevertheless propose clarifying this language, perhaps via the same language suggested above.⁶³ Additionally, because the proposed regulations specify that a request for a hardship waiver must be made in accordance to postings, guidance, forms or instructions, including those on the IRS.gov website — and because it follows that such elderly taxpayers may have trouble accessing or navigating these website updates — we again recommend that, in addition to ensuring that any updated guidance or forms are well-publicized, the publicity needs to be targeted to communities that might not go to the IRS website.⁶⁴ Further, the regulation should provide for leniency in the imposition of penalties on those taxpayers who in good faith request a hardship waiver even if their request is not up to the latest guidance or updates.

We note that some IRS initiatives and programs, such as Tax Counseling for the Elderly, already exist to help the elderly properly file.⁶⁵ Thus, the IRS has already recognized that the elderly face disproportionate hurdles filing taxes. Expanding or clarifying the hardship waiver process so as to better accommodate elderly taxpayers, including elderly small business owners, is consistent with prior governmental efforts to lessen the burden that the tax filing process imposes on hard-working, older Americans. Additionally, making it as easy as possible for older Americans facing technological hurdles to file is in the IRS's best interest — doing so will theoretically increase the number of timely, accurate forms filed.

Finally, we worry that, overall, though the proposed regulations note that they will not have a “significant economic impact” on small entities, the outsized economic impact on elderly owners of small business entities may be an overlooked and unintended consequence.⁶⁶ We note that the proposed regulations certify that they will not have a significant economic impact on small entities due to the IRS's requirements under the Regulatory Flexibility Act (RFA).⁶⁷ The RFA would here require the IRS to perform a regulatory flexibility analysis describing the effect of the regulations on small businesses, analyzing alternatives that might minimize adverse economic consequences, and making the analysis available for public comment; however, this regulatory flexibility analysis requirement is waived if the IRS “certifies that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities.”⁶⁸ Here, we note that the IRS's “stat[ing] in a perfunctory way” that the regulations will not have a significant economic impact on a substantial number of small entities arguably evades the RFA's required analysis that, if performed, may have highlighted some of the adverse consequences on small businesses that we have envisioned.⁶⁹

2. Comments and recommendations on the omission of state withholding information from wage and income transcripts:

The proposed regulations, which attempt to continue incentivizing and increasing the number and types of returns filed electronically, miss a critical attempt to further streamline certain already-collected information. In particular, the proposed regulations miss an opportunity to begin routinely including electronically collected state withholding information on wage and income transcripts.

When an information return, such as a Form W-2, is electronically filed, all of the applicable state withholding information is collected by the e-filing software. Thus, electronically filed information returns that the IRS receives already include this state withholding information.

Nevertheless, if an entity requests a wage and income transcript from the IRS, the transcript that the IRS provides does not include such state withholding information, despite the IRS having received and holding such information by virtue of the return having been e-filed.

The proposed regulations are more broadly aimed at channeling and increasing the benefits of electronic filing — more timely and accurate IRS processing, and faster and better customer service. Including state withholding information pulled from electronically filed information returns on wage and income transcripts would help to achieve these broader goals. For instance, we envision a taxpayer who is trying to catch up on state and federal filings. Including state withholding information on requested wage and income transcripts may decrease the amount of follow-up requests that said taxpayer may later make to the IRS in the pursuit of such omitted state withholding information. Doing so may also increase the accuracy and timeliness of subsequent returns filed by such taxpayer, given that he will be working off of more accurate and complete information and will not have to estimate it or spend time searching for it elsewhere.

Thus, we recommend that the proposed regulations attempt to address this issue. For example, the proposed regulations may consider amending § 301.6011-2(b) to include language along the lines of: “All information contained within returns filed electronically will be retained and included on subsequent transcripts.”