The Truth About the IRS and E-Signatures Published March 30, 2023
The IRS is tasked with a challenging and vitally important job – protecting American taxpayers’ most private data, their personal and business tax records. Appropriately, the IRS has high-security standards, one of which is creating a significant but understandable barrier when it comes to third parties obtaining tax records on a taxpayer’s behalf. Let’s dig into the current state of the IRS’ electronic signature (e-signature) options and what the future has in store for lenders.
In 2021 the IRS rolled out a new option that allowed for e-signatures on Forms 8821 and 2848, forms that enable tax information to be disclosed to a third party. While this may seem like cause for celebration, this new process comes with its own operational considerations that make it more cumbersome than lenders, and borrowers hoped it would be. Obtaining an e-signature in remote transactions when the borrower is not in person with the lender is made particularly complicated by IRS-mandated security measures. Accompanying the IRS’ e-signature option is an IRS authentication policy built to ensure that the signer is who they say they are.
Failure to adhere to this policy could release information to an unintended party. This could equate to unauthorized disclosure of tax information–which is a federal crime.
Tax Guard Helped Pioneer E-Signatures on Form 8821
How do we know so much about the IRS and its e-signature requirements for Form 8821?
It’s not just an area of interest—for years, we’ve been using our expertise in this area to advocate on behalf of our customers. Going back to 2015, Tax Guard led conversations with the IRS regarding e-signatures on Form 8821. The IRS has a long-standing policy to allow or deny e-signatures on a form-by-form basis. For example, e-signature policies related to tax returns and disclosure forms, such as Form 8821, are all treated differently by the IRS.
By 2017, Tax Guard was working hand-in-hand with legislators, Senators Michael Bennet (D-Colo.) and Rob Portman (R-Ohio) to craft the language that was eventually incorporated into The Taxpayer First Act, (SEC. 2302, to be exact), which mandated the IRS implement an e-signature process for Form 8821 and 2848. It was eventually passed into law on July 1, 2019, as a part of a bipartisan bill that aimed to modernize the IRS and protect taxpayer rights.
After helping codify the IRS’ approval of e-signatures into law, the IRS translated Congress’ mandate into their operational policies for e-signatures requirement. Upon reviewing their policies, it became increasingly clear that there are no shortcuts to safely securing tax information. And nor should there be— tax records contain sensitive financial data, and bad actors can more easily carry out fraud without the proper safeguards in place.
E-Signatures Are Deceptively Easy
Initially, the simple act of producing an e-signature seems to be more convenient for borrowers versus signing with a “wet” or physical signature. An e-signature on IRS Form 8821 is used to verify customer identity and satisfy the IRS’ security requirements. Unfortunately, when it comes to utilizing an e-signature on this form in a remote transaction (not in person), the process is burdensome, time-consuming, and creates friction for both borrowers and lenders.
Ultimately, the e-signature authentication on Forms 8821 and 2484 is much more labor-intensive than Tax Guard’s decision to remain with the “wet” signature option for now —and with good reason. When dealing with releasing information as sensitive as tax data, it’s not only the IRS that must adhere carefully to specific security guidelines.
Organizations like Tax Guard that access taxpayer data on behalf of borrowers must also perform their due diligence and begin this process by closely examining the third party in the equation: the signer. It’s crucial that the company facilitating this transaction complies with all of the IRS’ disclosure and authentication processes.
Here’s where the rubber meets the road. If the authorized third party doesn’t personally know the signer and is utilizing their e-signature on Form 8821 or Form 2848, the third party has to attest under the penalty of perjury that the 3-step process of inspecting, recording, and verifying the client’s identity has been adhered to.
The Breakdown: Exploring the IRS-Compliant E-Signature Authentication Process
When dealing with an e-signature in a remote transactions, tax professionals and borrowers must jump through many hoops to verify an individual signer’s identity before they can access that individual’s tax records. Actions that must be taken include:
- Inspecting a valid government-issued photo identification (ID) of the taxpayer and comparing the photo to the taxpayer via a self-taken picture (a selfie) of the taxpayer or video conferencing to compare. Examples of government-issued photo ID include a driver’s license, employer ID, school ID, state ID, military ID, national ID, voter ID, visa or passport.
- Recording the taxpayer’s name, Social Security number or Individual Taxpayer Identification Number (ITIN), address, and date of birth.
- Verifying the borrower’s name, address, and SSN or ITIN through secondary documentation, such as a federal or state tax return, IRS notice, Social Security card, credit card, or utility statement. For example, suppose a taxpayer changed their address in 2020. In that case, a 2019 tax return can be used to verify the taxpayer’s name and SSN or ITIN, and a recent utility statement can be used to verify the taxpayer’s new address.
The process isn’t any easier if you’re trying to get business tax transcripts for a commercial loan, or SBA tax return transcript requirements. Additional documentation must confirm that the individual signing the form has the authority to sign on behalf of the business, and the following 4 steps must be followed:
- Confirming the individual who is signing the form has the authority to sign on behalf of the business entity taxpayer. To determine who has this authority, refer to the signature instructions for the form you are using.
- Inspecting a valid government-issued photo ID of the individual authorized to sign on behalf of the business entity taxpayer and compare the photo to that individual via a self-taken picture of the individual or video conferencing. See above for examples of appropriate government-issued IDs.
- Recording the name, Employer Identification Number (EIN), and address of the business entity taxpayer.
- Verifying the business entity taxpayer’s name, EIN, and address through secondary documentation such as a tax information reporting form (e.g., W-2, 1099, etc.), IRS notice or utility statement.
The Bottom Line: The Simplest Solution Is the Tax Guard Solution
After a side-by-side analysis of both the e-signature and wet signature policies, lenders find Tax Guard’s “wet signature” process is still the best approach for compliance, reliability, and customer experience to obtain IRS data exactly when they need it. While e-signatures on Form 8821 are possible, the IRS’ current robust security requirements and red tape make it inefficient for both lenders and borrowers.
Be wary of any company touting a lightning-fast electronic way to authenticate the signer and e-sign IRS Form 8821. Providing an e-signature might be easy, but to avoid tax fraud, authentication is intentionally very difficult. Tax Guard has deep knowledge of these processes and knows lenders are looking for products that combine ease of use, speed, and thorough due diligence. With all this in mind, we’re fully prepared to provide borrowers and lenders with an optimal lending experience.
At Tax Guard, we continue to advocate for lenders and borrowers to ensure they benefit from an easy-to-use digital process. Our team of experts is currently working with IRS partners on a compliant and viable e-signature option that could streamline the current Form 8821 e-signature processes.
As the pioneers in revolutionizing tax data for lenders, we’re consistently at the forefront of this conversation with the IRS. We remain focused on ensuring lenders have best-in-class due diligence solutions that serve their customers without increasing risks.