Paper is Safer

Our paper pile in 2016. A cost we're willing to accept.

We have always filed paper income tax returns. It's a procedure that has worked for us for over 50 years, and it's much easier to prove something to the IRS with a physical document, for example a post office receipt, than with an image that can be easily doctored. From 2012:

I'm old-fashioned: I prefer mailing a paper version of our tax return. There's a solidity to the accomplishment, and its heft conveys a sense of the work involved. (I also confess to a streak of rebelliousness: electronic filing is for the IRS' convenience, not ours, no matter what they say about getting our refund a few days sooner..)

I always feel disquieted when sending sensitive information electronically. E-mailed documents or those transmitted via "secure portals" are much easier for a crook to intercept than a mailed envelope. From 2023:

We are old-school and communicate on paper whenever possible when doing business with the government. Electronic documents, emails, and payments get misdirected often enough that we are comfortable using tried and true, albeit slower methods.

(Most taxpayers who use professional help don't have the option of filing on paper. Paid preparers of 11 or more tax returns must file their clients' returns electronically. We prepare our own taxes and still do 4 or 5 paper returns for friends and family.)

It turns out that there were good reasons for our feelings of distrust. E-filing has resulted in some taxpayers getting screwed (a technical tax term): [bold added]

The problems with e-filing aren’t widely known, even by tax professionals. Paper is more secure, as demonstrated by recent malware attacks on e-filing tax software and preparation companies such as Wolters Kluwer, and by data breaches involving taxpayers’ personal information such as with the company TaxSlayer. E-filing income-tax returns can also lead to unfair treatment by the IRS.

The IRS accepts returns that are e-filed or paper returns deposited in the mail by the filing deadline. If a return has enough information for the IRS to calculate the proper tax, it is considered valid. But such protections don’t fully apply to electronic returns. Authorizing your preparer to e-file on your behalf doesn’t protect you as a taxpayer, because the IRS doesn’t consider an electronic return until it acknowledges receipt.

In recent years, courts have upheld harsh financial penalties for taxpayers who thought they had properly e-filed. Christopher Haynes’s certified public accountant e-filed his 2010 return before the deadline in 2011. The IRS rejected the return on a triviality: A Social Security number was entered on a line designated for an employer identification number. Mr. Haynes didn’t know this until he received a penalty notice from the IRS in August 2012. A district court upheld the penalty, ruling in a summary judgment in the government’s favor that Mr. Haynes’s reliance on his CPA to e-file didn’t constitute reasonable cause to abate the penalty. An appellate court later vacated the decision, and the final outcome isn’t yet clear. (Mr. Haynes didn’t respond to requests for comment.)

Wayne Lee’s CPA failed to e-file his client’s returns for 2014, 2015 and 2016. The accountant told the IRS that the software he used couldn’t handle Mr. Lee’s complex returns. But Mr. Lee said the accountant never told him about this problem. In 2019 the IRS assessed Mr. Lee more than $70,000 in penalties and barred him from applying his six-figure 2014 overpayment to taxes owed in 2015 and 2016. An appellate court ruled that reliance on his CPA wasn’t an excuse for making errors. The court noted that taxpayers can confirm timely filing with the IRS by phone or on the IRS website. Alternatively, instead of e-filing, the preparer can attach Form 8948 (Explanation for Not E-filing) to Form 1040 and file a paper return instead.

When a dispute can’t be resolved within the IRS, a taxpayer can petition the Tax Court—either by mail or by e-filing—seeking a favorable outcome. E-filing a petition with the Tax Court, however, also is risky. Antawn Sanders said he encountered technical problems while trying to e-file a Tax Court petition and spent almost an hour trying to submit it before the midnight filing deadline. The document ultimately uploaded 11 seconds into the next day. The court rejected it as late.

Roy Nutt e-filed his Tax Court petition on the day it was due at 11:05 p.m. Central Time. That meant it arrived at 12:05 a.m., the next day, in Washington, where the Tax Court is located. The court rejected the filing because it was five minutes late. An appeal is pending. Had Mr. Nutt mailed a hard copy to the Tax Court postmarked before midnight, it would have been accepted.

The security risks posed by e-filing are equally serious. The IRS works with a third-party vendor, ID.me, to verify taxpayers’ identities. Registering with ID.me is a prerequisite to obtaining an IRS online account or using the new IRS Direct File tax program. Taxpayers must submit copies of their Social Security cards or employer identification numbers and other documents to ID.me as proof of identity. I advise my clients not to use ID.me because it is a private database of personal information. My clients have no control over it and must trust that it won’t be hacked.

E-filing is widely used and isn’t always voluntary. The IRS mandates e-filing of certain forms for every tax-exempt organization, preparers who file 11 or more returns, and for any business filing 10 or more returns; each W-2, 1099, and payroll return counts toward the 10.

E-filing has also spurred tax forms to proliferate, making it more complex and costly for taxpayers to file returns. For example, Form 1040, which before 2018 was two pages long, now runs as long as eight pages.

Considering that e-filing isn’t as forgiving as paper filing and raises other risks, paper returns seem the safest bet. Unlike e-filed returns, paper ones won’t get rejected for failure to click on a box. You might even get away with missing a deadline by mailing a day late—though I wouldn’t 'recommend cutting it close.

We operate under a general rule regarding government agencies and large companies: if they want you to change your ways and you don't see what you get out of it, you can be assured that the benefit to them is great and that there are risks that they are keeping hidden from you.

We'll file on paper until they force us to do otherwise.