Electronic Filing Mandate for Third-Party Preparers

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1 Electronic Filing Mandate for Third-Party Preparers Description: Amend the electronic filing requirement for third-party preparers who submit 50 or more returns/reports to 11 or more returns/reports to mirror the IRS. Preparers would be mandated to file the following returns/reports electronically: PA-40 (Personal Income Tax Return) RCT-101 (Corporate Net Income Tax, Capital Stock/Foreign Franchise Tax, and Corporate Loans Tax Return) PA-3 (Sales, Use and Hotel Occupancy Tax Return) PA-W3 (Employer Quarterly Return of Income Tax Withheld) REV-1096(a) (Liquid Fuels and Fuels Tax Report) PA-20S/PA-65 (S Corporation/Partnership information return) This provision could be implemented six months after enactment. Six months would allow time for the department to educate tax preparers to maximize third-party tax preparers compliance with the requirements. Cost Savings: The annual cost savings is estimated at $260,000. Why is this needed: The initiative creates uniformity with the IRS regarding third-party electronic filing requirements and provides cost savings for tax administration. In addition, having more electronic data will aid in selecting returns for examination (those with a greater probability of error, overstatement of deductions/withholdings, fraud, etc.) and discovery of erroneous refunds and understated tax due. As a result of this mandate, the department expects a transition of 400,000 current paper returns to electronic returns. The mandate will expedite processing time and refunds as well as lower the error rate. In addition, mirroring the IRS mandate will make the filing process easier for third-party tax preparers. Stakeholder Outreach: The department has received favorable feedback from both PICPA and PSPA on this initiative. Other States/IRS: Currently the IRS mandates an 11-or-more-returns/reports threshold. Eight other states mirror the IRS. States that mandate a 25-or-more-returns/reports threshold will most likely conform to the current IRS threshold in the near future. States that mandate 11 or more returns/reports be filed electronically to mirror the IRS: California Indiana Maine Massachusetts Michigan Minnesota New Jersey New York States that mandate 25 or more returns/reports be filed electronically: Alabama New Mexico Nebraska West Virginia States that mandate 50 or more returns/reports be filed electronically: Connecticut Oklahoma Kansas Virginia Wisconsin 1

2 Electronic Payment Mandate for Corporation Taxes Description: Mandate electronic payment of corporate tax payments of $1,000 or greater. Currently, payments of $10,000 or greater are required to be made electronically. The proposed effective date beginning Jan. 1, 2014, would give appropriate opportunity for the department to educate taxpayers on the change to maximize compliance. Cost savings: The cost savings is projected to be $30,000 for FY Why is this needed: This initiative will expedite the department s review time and crediting of tax refunds to the taxpayer as well as provide cost savings for tax administration and faster collection of revenue. An estimate derived from data for the 2011 tax year showed 40% of all corporate tax payments were made electronically. Without a mandate, the department estimates that improvements to e- TIDES alone (scheduled to be in place in March 2013) will increase the number of electronic payments to approximately 60%. Once the updated e-tides programming is in place, the department outreach can occur through various mediums (seminars, website, FAQs, notifications). A reduction of 20,000 paper checks for payments greater than $1,000 is expected. Other States/IRS: Currently seven states mandate electronic payment of corporation taxes, and the IRS highly recommends corporations pay electronically: Florida New York Illinois Texas Massachusetts Washington Minnesota 2

3 Electronic Payment Mandate for Business Trust Fund Taxes Description: Mandate sales/use tax and employer withholding payments over $1,000 be remitted electronically. Currently, payments of $10,000 or greater are required to be made electronically. The proposed effective date beginning Jan. 1, 2014, would give appropriate opportunity for the department to educate taxpayers on the change to maximize compliance. This initiative should be phased in to not disrupt the Revenue Modernization Project. Cost Savings: The annual cost savings would be approximately $300,000. Why is this needed: This initiative will expedite the department s review time and crediting of tax refunds due to the taxpayer as well as provide cost savings for tax administration and faster collection of revenue. In the first year after implementation, the Bureau of Business Trust Fund Taxes (BTFT) could expect to realize an increase from current e-remittance levels of 81% for sales/use tax and 83% for employer withholding to 90% and 92% respectively. For calendar years 2015 and beyond, the department could anticipate annual participation increases of one to two percent. Penalty provisions similar to electronic fund transfer penalties (3 percent of tax due up to maximum of $500 per return payment) are necessary to ensure taxpayer compliance. A reduction of 460,000 paper checks is expected. Other States/IRS: Currently 18 states mandate electronic sales tax payment and 17 states mandate electronic employer withholding payment. IRS mandates are based on the company s number of employees and dollars withheld. 3

4 Electronic Payment Mandate for Personal Income Tax Description: Mandate electronic payment for personal income tax payments of $1,000 and over. The proposed effective date beginning Jan. 1, 2014, would give appropriate opportunity for the department to educate taxpayers on the change to maximize compliance. The majority of payments the department receives are below this level with more than 1.9 million payments being less than $1,000. A reduction of 600,000 paper checks is expected. Cost Savings: The annual cost savings would be approximately $100,000. Why is this needed: This initiative will expedite the department s review time and collection of revenue, as well as provide cost savings for tax administration. The department has highly encouraged taxpayers to pay electronically for years, however taxpayers continue to pay via other means. Other States: Currently four states mandate electronic payment of personal income tax: California, Illinois, Massachusetts and South Carolina. 4

5 Act 46 of 2003 Expanded Enforcement Authority Description: The department has established the use of Act 46 of 2003 citations for effective enforcement and collection of delinquent business trust fund taxes against taxpayers with sales tax licenses refusing to cooperate in resolution of their state tax debt. This proposal would extend that authority by reducing the appeal period for sales tax license revocation from 90 to 30 days. Decreasing the appeal period will enhance the efficiency of field agent collections activity and accelerate delinquent account resolution and the remittance of unpaid trust fund taxes. This additional compliance and collections tool will assist the department by strengthening the enforcement program focused on delinquent business taxpayers. The proposed effective date for the legislation could be immediate or 1/1/2014 to provide the department the opportunity to educate the public. Revenue: Revenue gains unknown at this time. Why is this needed? Current Act 46 enforcement begins with a notice that warns a seriously delinquent sales tax licensee of the department s intent to revoke the sales tax license. If the taxpayer fails take steps to resolve the tax debt, our next action will be to revoke the sales tax license. An Act 46 citation is issued only after the statutory 90-day appeal period following the initial assessment of delinquent tax has run its course. An additional 90-day period for the delinquent taxpayer to appeal the sales tax license revocation allows the seriously delinquent taxpayer to continue the bad behavior for three more months, continuing to conduct business operations, even further collecting and not remitting sales tax. Other States: No comparison to other states is relevant. 5

6 Additional Citation Authority for Business Trust Fund Tax Delinquents (Other than Sales Tax Licensees) Description: Currently, Act 46 of 2003 provides the department with citation authority against sales tax licensees with tax delinquencies. This proposal would develop a similar type of citation process for taxpayers without sales tax licenses that are delinquent for employer withholding to address noncompliance. This tool will assist by strengthening the enforcement program focused on delinquent business taxpayers. The proposed effective date for the legislation could be immediate or 1/1/2014 to provide time for implementation. Revenue: Revenue gains unknown at this time. Why is this needed: The department, via its field agents, does not possess adequate tools to enforce collection from delinquent taxpayers not licensed for sales tax. This tool would compel employer withholding compliance through the filing of citations with magisterial district judges. Department experience suggests that much of the benefit increased tax compliance and collections is achieved through multiple enforcement tools. Other States: Pennsylvania is the only state with this type of authority. 6