Paper Filing Your Tax Returns

Efiling started with a pilot program in the 1980s before expanding nationwide in 1990. It was a way for the government to save on processing costs (it was announced at $25 per return which is essentially passed on to you as the consumer but that’s another story) and minimize processing errors. But as we all know, one size does not fit all and there may be circumstances where its more appropriate to file a paper tax return.

Taxpayer Elects to File a Paper Return

First and foremost, there is still a segment of the population who still does not trust the internet. Especially when you regularly hear about the data breaches taking place. Even the Internal Revenue Service announced that personal information of more than 100,000 taxpayers had been compromised. For these groups of taxpayers, paper filing is still the preferred method.

Sale of Residence

Prior to May 1997, taxpayers were allowed one lifetime exclusion of $125,000 of gain upon the sale of their primary residence which was reported on IRS form 2119. With the subsequent change in the law to its current form (the first $250,000 of gain for a single, $500,000 for a married filing jointly) the gains on most sales are no longer taxable.

So the IRS discontinued form 2119. But escrow companies are still reporting on form 1099-S the sale price of your primary residence property to the Internal Revenue Service. Since not required, software vendors may not be including any worksheet submission with the e-filed return to match your property sale now on file with the Internal Revenue Service.

Filing a paper return allows you to attach a software vendor worksheet (if one is produced) or a self-prepared one. Without it, you will probably receive a discrepancy letter from the Internal Revenue Service saying you have unreported income.

A Gazillion Stock Sales

I’m exaggerating, of course but if you have a broker managed account, you know what I mean. I have seen client’s year end reporting statements with 10, 20, 100, even 200 pages of stock trades which does not make it practical in keypunch it into the software program.

So the Internal Revenue Service suggests you key in the summary totals into your program to be electronically filed and send a copy of the individual stock trades (using IRS form 8453 as the transmittal) to the Texas Service Center. But most people ask, why do both? Why not just attach the broker schedules to your return that you paper file. It also keeps all your documents together instead of going to different locations.

Mortgage Interest Credit

You qualified for the Mortgage Interest Credit upon the purchase of your residence and receive a Certificate of qualification. That form needs to be attached to your return or your credit will be disallowed. Moreover, the Service is not situated whereby it keeps on record for future filings that the credit exists. So going forward, you need to keep filing paper returns with the certificate attached or risk having the credit denied.

Fractional Interest in a Rental Property

You have joint ownership in a rental property. As the point person, all correspondence comes to you, including the 1099-MISC for the total rent collected by the property manager. The discrepancy comes when your e-filed return only shows your fractional percentage. Filing a paper return allows you to attach a schedule showing 100% of the rental income (thus matching the 1099-MISC) and expenses and your fractional share.

Change in Retirement Account Trustee

You want to move your retirement account from one trustee to another. Under normal circumstances, a direct transfer is done between the two entities. The disbursing trustee then issues a 1099-R and in box 7 lists the code G notifying the IRS it’s a non-taxable rollover. Sometimes, however, the monies are disbursed directly to the beneficiary whom you deposit with another retirement trustee within the prescribed 60 day period.

However in doing it in this fashion, the disbursing trustee will now enter a code “1” in box 7 calling it an early withdrawal subject to taxes and penalties. You probably need to file a paper return attaching documents to explain what just transpired and to show the funds are not taxable. Otherwise the IRS may override what you entered in favor of the vendor filed code and again send you a discrepancy notice.

Joint Mortgage Interest

As a parent you want to help your child who does not qualify for a home mortgage so you sign on as the co-borrower. In doing so, you pay your portion of the mortgage payment. The problem here is the financial institution will issue the 1098 mortgage loan statement in the name (and social security number) of the primary borrower, your child.

This will cause a discrepancy when the Service tries to match your interest expense claimed against an assumed 1098 that was never filed. Submitting a paper return will enable you to attach the loan document with your name on it and a calculation of your prorated share of the interest expense that matches the deduction taken on your return.

Taxpayer Passes Away

You are preparing a tax return of a deceased taxpayer that is due a refund. The Internal Revenue Service requires the attachment of form 1310 which must be signed by the trustee or personal representative claiming the refund. You also need to attach the document that authorizes the trustee or personal representative to act on behalf of the decedent. Because of all the attachments, a paper return needs to be paper filed.

These are just a few instances that may necessitate the filing of a paper return. And while e-filing is fine for most people with standard forms where everything matches, there is also a small segment of the tax paying population where trying to put a square peg in a round hole does not work. For these taxpayers their individual facts and circumstances need to be evaluated before making the appropriate decision as to which filing method is appropriate.