The topic of esignatures for tax forms is relatively new.
This is because the IRS requires paper signatures on all tax forms.
However, some tax forms have seen their rules change in recent years.
The IRS is always looking for ways to improve its operations.
The IRS offers taxpayers the option to sign certain forms electronically or digitally. This is a way to reduce the burden on the tax community.
It also allows taxpayers to file paper forms electronically until December 31, 2021. The agency is trying to balance the e-signature option and critical security and protection against identity theft and fraudulent activity.
The IRS provides an overview of how to use electronic signatures on specific forms, as it recognizes the importance of these signatures for the tax community.
There is an efficient way to get your tax work done quickly and accurately. It all starts with two industry-leading software programs that will help you streamline and work efficiently in your business.
What is an Electronic Signature?
An electronic signature (also known as an e-signature) is a way to sign documents using a digital ID electronically.
This applies to tax forms. Although many tax forms can now be completed electronically, rules state that they must be signed in writing.
The IRS recognizes that filling out, printing, and mailing tax forms can be a burden, and they are working to improve their system.
The current law allowing e-signatures for tax documents will be effective until 31 October 2023.
It may be extended starting in October 2023.
An e-signature has the main advantage of saving time when tax returns are prepared for workers.
You can also apply an electronic signature on your document to prevent it from being edited further. This protects against document manipulation once the taxpayer has submitted the form.
You can save money by using an e-signature. Instead of printing the document, you will not have to do so. This means you won't spend as much money on paper and ink.
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Add an electronic signature to a form.
A software program that allows you to add an electronic signature to your tax forms is required. The IRS officially recognizes eSignly esignature.
The IRS accepts two types of electronic signatures for tax documents.
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Digital signatures - This is a possibility if your software allows you to sign documents digitally.
It's more secure than an image signature.
- Imaged Signatures: This involves hand-signing a form and scanning it. Then, you save it as an image.
What is a Digital Signature?
Despite their similarities, there are subtle differences between digital signature and electronic signatures.
Both are used to authenticate documents, but they do different things.
Digital signatures are the technology that encrypts a signature. This ensures that the signer isn't lying about their identity.
The difference is that esignatures indicate that a signatory agrees to the terms of a particular document.
Does the IRS accept electronic signatures?
The IRS has made recent changes to its rules regarding tax document signatures.
Nonresidents are subject to the most common forms of tax used during tax season.
Electronic Signature Benefits
Electronic signatures can help accountants and accounting firms improve productivity and provide benefits for all-day processes.
Here's why:
- Faster Document completion: Time is money in accounting. Particularly in tax accounting, accountants live by deadlines. Skipping deadlines can also result in costly penalties and fees. Accounting firms and professionals are using electronic signatures to obtain completed documents from clients quickly. This ensures that forms and payments can be processed on time.
- Enhanced Convenience. Accountants are busy and don't want to deal with messy paperwork. Electronic signatures allow documents to be signed from anywhere in seconds. This adds convenience to everyone's day.
- Securer: Accounting documents often contain personal identifying information (PII), such as bank account numbers and social security numbers. There are chances that physical papers may get lost or stolen. With digital documents, accounting firms are able to offer additional benefits. They can ensure limited visibility, password-controlled access, free digital signature, and other features.
- Industry-Compliant: Compliance and regulatory requirements are essential for finance and accounting professionals. FINRA guidelines can be easily met, and IRS electronic forms requirements can be met with knowledge-based authentication (KBA) and multi-factor authentication(MFA) options through electronic signatures.
- Faster Payment: With electronic signatures, accountants can send invoices electronically and pay them immediately. Email the invoices or embed signing forms onto your website for approval and payment to speed up filling and submission.
- Improved Team Collaboration: When multiple people or departments need to work together on an account or other document, electronically signed accounting documents make it easier and more efficient. This enables the team to easily edit and sent documents.
- Higher accuracy: Accounting is a critical area of precision. Multiple parties can sign a document at once, or multiple fields may require signing. Additionally, different information may be needed. Electronic documents allow for greater accuracy and enable accounts to assist signers by marking the areas that require signatures and providing data. Document creators can change or correct mistakes in minutes and send them back to signatories.
- Higher Savings: In the end, electronic documents and signing are much cheaper than pen-and-ink and paper signing. By switching to digital signatures, accounting firms can reduce overheads.
You can Electronically Sign Many Tax Forms
The number of taxpayers filing tax returns electronically has increased dramatically since the IRS started accepting electronic signatures for tax forms.
More than 94% of individual returns were filed electronically in 2020. Customers expect to file their tax returns electronically. It makes sense to digitize more of your tax preparation processes.
Electronic signatures are becoming an essential business tool for accountants. You can now turn around tax and financial documents in hours instead of days.
This allows you to focus on client work rather than how your approval processes work.
However, not all electronic signature software is created equal. How efficiently your company incorporates this technology can impact your business's overall success.
Selecting an e-signature tool that has proven successful with tax professionals is important.
The Tax Season: Benefits of using electronic signatures
Digital technology has made tax filing and submission much simpler. To e-file income tax returns, taxpayers only need to attach their digital signature to the document.
Under the Information Technology Act 2000, digital signature software verifies that the recipient has authenticated tax return documents and has not been altered in transit.
With e-signatures, tax preparers can eliminate the need to print, email, or fax legal forms. Here are some benefits accountants and tax preparers can enjoy from e-signature technology.
Accelerate the Entire Workflow
The traditional method of sending tax documents by mail can take several weeks, if not months, to receive tax returns.
However, it is no longer necessary to print, sign, and send all tax documents by mail. You can sign your tax returns electronically.
Online signatures can be a quick and easy solution to tax-filing headaches. It is faster to send important documents digitally than to distribute them manually.
You can manage the work in just a few weeks or even days. You can also reduce the amount of paper you use.
More Convenience
The legally binding signatures have improved with the development of communication within communities. The introduction of electronic filing by the Internal Revenue Service in 1986 was a first step.
However, the number of electronically filed returns rose to almost 100 million in 2017 after adding esignatures in 2014.
Both tax preparers and consumers could see how e-signatures make the entire process seamless.
Clients can quickly complete their tax returns using e-signatures. Tax preparers can also serve more clients. This saves them time and money and eliminates all the hassle.
Customer Experience Pleasant
Most clients use their smartphones and expect their accountants to be tech-savvy. 83% of accountants believe that clients today expect more from them.
Thanks to the paperless tax-filing process, accounting professionals can quickly fill out complex client forms.
Customers can electronically sign and submit tax returns, as well as other forms, using electronic signatures. It improves customer satisfaction.
Boost Data Security
The IRS has taken extra measures to protect e-signed tax returns from cyberattacks. There are also certain requirements that taxpayers must adhere to.
Some types of online signatures offer greater security. Digital signatures, for example, offer higher security than a basic electronic signature.
Be aware of which e-signature you are using to complete your tax returns documents. Cyber threats cannot penetrate digital signatures.
It allows taxpayers to confidently send and receive tax documents containing sensitive information such as Social Security numbers or financial records.
The IRS's first e-filing legal requirement requires verifying the unique signer's identity. This is done by linking the e-signature with the associated electronic record.
These authentication methods are used to verify this:
A) Knowledge-Based Authentication
KBA is authentication that proves the identity of the person providing it. The IRS uses this authentication when an individual remotely signs forms 8878 or 8879.
Before accessing any document, it asks the signer to provide correct information, such as D.O.B. Once all information is correct, the signer is prompted to answer simple questions based on a public record database.
B) Email-Based Authentication
This authentication type requires the signer to verify their identity via clicking on an email link. The signer will then be asked to agree to receive and sign tax filing documents electronically.
To protect the integrity and data within tax documents, the IRS requires that they be signed. Digital signatures have the tamperproof feature.
This ensures that no intruders have access to or have modified the document. A complete audit trail must also accompany signed documents.
This log details the date and time of creation, execution, signer's IP address, who viewed it, and other pertinent data.
The IRS requires the tax filing documents and audit trail to be on file for at least two years. You can also save them online to reduce paper usage and conserve storage space.
Signatures on Returns and Forms
On paper-filed returns and forms, taxpayers are required to sign in ink with a handwritten signature. The IRS allows e-signatures to be used on certain forms and returns.
This is in response to the COVID-19 pandemic. Late last year, the IRS announced that the IRS would extend the use of electronic signatures for relevant forms until October 31, 2023.
Types of ESignatures Accepted
The IRS accepts a variety of electronic signatures on the appropriate forms. To create or capture an electronic signature, no specific technology is necessary.
Acceptable methods are:
- A signature block that contains a typed name.
- A scanned or digitalized handwritten signature image is attached to an electronic record.
- A handwritten signature can be entered onto an electronic signature pad
- A stylus device that allows you to write a handwritten note, signature, or command on a screen.
- A signature that is created using third-party software.
The IRS accepts images of signatures, both scanned or photographed. This includes file types supported by Microsoft 365 like tiff and jpg, jpeg and pdf, Microsoft Office suite, or Zip.
Relevant Paper-Filed Formulas
Temporary use of esignatures is only applicable to the below-listed paper-filed forms. This does not apply to other paper-file forms such as Form 1040 and Form 1120.
If the form cannot be electronically filed, taxpayers or their representatives must still sign any paper-filed forms by hand.
The following forms allow temporary e-signatures:
- Form 11-C, Occupational Tax and Registration Return for Wagering
- Formula 637, Application to Register (For Certain Excise-Tax Activities),
- Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return,
- Form 706-A, U.S. Additional Estate Tax Return,
- Form 706-GSD(D), Generation-Skipping Transfer tax Return for Distributions
- Form 706-GS (D-1), Notification for Distribution from a Generation-Skipping Trust
- For Terminations: Form 706-GST(T), Generation-Skipping Transfer tax Return for Terminations
- Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts,
- Schedule R-1 Form 706 for Generation-Skipping Transfer Tax
- Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return,
- U.S. Form 709 Form 709, U.S.
- Form 730, Monthly Return of Tax for Wagers
- Form 1042 Annual Withholding Tax Return to the U.S. Source Income of Foreign People,
- Form 1120-C U.S. Income tax Return for Cooperative Organizations
- Form 1120FSC, U.S. Revenue Tax Return for a Foreign Sales Corporation
- Form 1120-H for U.S. Income tax Return for Homeowners Associations
- Form 1120-IC DISC Interest Charge Domestic International Sales Corporation Return
- Form 1120-L U.S. Life Insurance Company Income tax Return
- Form 1120-ND Return for Nuclear Decommissioning Funds & Certain Related Persons
- U.S. Property and Casualty Insurance Company Income tax Return Form 1120-PC
- Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts,
- Form 1120-RIC, U.S. Revenue Tax Return for Regulated Investor Companies
- Form 1120-SF U.S.
- Form 1127, Application to extend the time for payment of tax due to undue hardship
- Form 1128, Application for Adopting, Modifying, or Retaining a Tax Year
- Form 2678, Employer/Payer Appointment for Agent
- Formula 3115, Application to Change in Accounting Method
- Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt Of Certain Foreign Gifts
- Form 3520-A Annual Information Return of Foreign Trust to a U.S. Owner,
- Form 4421, Declaration- Executor's Commissions & Attorney's Fees
- Form 4768, Application to extend the time to file a return and pay U.S. estate (and generation-skipping transfer) taxes
- For information return on tax-exempt private activity bond issues, complete Form 8038.
- Form 8038-G, Return Information for Tax-Exempt Governmental Bonds
- Form 8038-GC Information Return for Small Tax-Exempt Governmental Bond Issues and Leases, as well as Installment Sales
- Form 8283: Noncash Charitable Contributions
- For IRS e-file Signature Authorization forms, please use Form 8453, Form 8878, and Form 879 series.
- Formula 8802, Application to U.S. Residence Certification
- Form 8832 Entity Classification Election
- Information regarding Beneficiaries Acquiring Property From a Decedent. Form 8971.
- Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement; and
- Elections follow Section 83(b) of the Internal Revenue Code.
Use Cases
It is long gone that clients were required to sign for their tax preparers by printing, faxing, or coming to them.
eSignly allows you to send and sign most documents required for accounting and tax purposes.
- Asset purchase agreements
- Confidentiality agreements
- Contracts for employment
- Engagement letters
- Independent contractor agreements
- IRS Forms 8878 & 8879
- Formation of LLC
- Practice continuation agreements
- Agreements granting power of attorney
Guidelines for Using an Electronic Signing Solution
For forms 8878 & 8879, pen-on-paper signatures only were accepted before 2014. These forms allow an Electronic Return Originator to file tax returns to the IRS electronically.
New IRS rules in March 2014 allowed taxpayers to electronically sign forms, making it easier to file tax returns electronically for clients.
Tax preparers and accountants should follow a few guidelines when creating eSignatures on behalf of clients. They should select a secure and reliable free electronic signature solution that meets IRS requirements for eSignatures.
- Identification of the signer
- Maintaining the integrity of electronic records
- Create a digital paper trail with the taxpayer's IP address and computer login ID.
The Key Takeaway
eSignly allows tax preparers digitally sign and transmit tax documents securely via the cloud. This is protected by SSL (Secure Sockets Layer).
This allows tax professionals to transition their practice into the digital world seamlessly.
E-signatures are a time saver for your tax practice. They allow your clients to sign documents such as tax returns electronically from anywhere.
There are many standalone e signature software and apps, but relying solely on them can quickly make it difficult for you to run your practice.
Multiple apps can be frustrating for your clients and time-consuming for you. You should choose an all-in-one solution to ensure smooth practice management.
It allows you to manage everything, from client onboarding to document requests and signing. This is where reliable software such as eSignly can help.
