As you file your clients’ tax returns, know the truth behind these five myths about the third-party designation, or “checkbox” authorization and also understand its specific limitations.
Many practitioners are familiar with the third-party designation, or “checkbox” authorization, available on individual tax returns and most business tax returns. This designation allows taxpayers to authorize another party to discuss their tax return with the IRS.
The purpose of the checkbox authorization is to assist the IRS in the processing of a tax return. To achieve this purpose, the IRS grants specific privileges to third-party designees. Privileges vary slightly by return, but generally, third-party designees can:
- Provide the IRS with information missing from the return.
- Call the IRS for information about return processing or the status of refunds and payments.
- Request transcripts or copies of notices related to the return.
- Respond to some notices related to matters such as math errors and return-processing delays.
In 2010, 58 million individual tax returns selected a third-party designee. Even though this designation is widely used, its scope is often misunderstood. Myths persist, and not all taxpayers or tax professionals understand its specific limitations. As you file your clients’ returns this tax season, know the truth behind these five myths about the third-party designation:
Myth 1: “The IRS will contact me about any issues on my client’s return.”
The original intent of the third-party designation (introduced in 2001) was to allow the IRS and tax professionals to share information to expedite return processing, and reduce the amount of notices related to return processing. Tax professionals and taxpayers sometimes confuse the third-party designation with other tax authorizations that grant more authority, such as Form 2848, Power of Attorney and Declaration of Representative, and Form 8821, Tax Information Authorization. However, as a third-party designee, you shouldn’t expect to be automatically and completely kept in the loop on your client’s tax situation.
In practice, the IRS rarely contacts tax preparers when there is an issue with processing the tax return. Most of the errors in return processing are handled by the e-file acceptance process. With more than 80% of tax returns e-filed every year, the filing landscape has changed, but the continued presence of the third-party designation on tax returns often leads tax preparers and taxpayers to believe the myth that the IRS will contact the tax preparer if any issues arise.
Myth 2: “I’ll automatically receive copies of my client’s notices.”
Many taxpayers believe this myth, but the checkbox designation does not allow designees to automatically receive copies of clients’ notices.
The third-party designation allows you to call the IRS to request copies of your client’s notices related only to the processing of the specific tax return and tax year. For instance, you can request return-processing notices related to math errors and offsets on the return, but you cannot request copies of notices related to compliance issues, such as audits, appeals and collection.
Even though the third-party designation allows you to request notices after the fact for a limited period of time, this is often unnecessary because your client receives the notice and will likely bring it to your attention. To get copied on your client’s notices, you’ll need to obtain a higher level of authorization.
Myth 3: “I can talk to the IRS about anything concerning my client’s return.”
With the checkbox designation, you can discuss only the processing of your client’s tax return with the IRS. This designation is very limited. The IRS will not discuss or provide any information about compliance-related issues, such as underreporter notices, penalty assessments, and audit or collection issues on your client’s account. In practice, when you call the IRS as a third-party designee, don’t be surprised if the IRS representative asks you to obtain a higher level of authorization, such as Form 2848, if you want to discuss more in-depth issues.
Myth 4: “Only the paid preparer can act as the designee.”
This myth is only true for certain business returns (Forms 709, 990, 1041, 1065, and 1120), which explicitly restrict the third-party designation to paid preparers. This limitation is reflected on the form where the third-party designation option appears in conjunction with the paid preparer signature line.
For Form 1040 series individual returns and 94X series business returns, anyone – even a firm – can act as a third-party designee. However, the form instructions have caused confusion about firm designees. According to Form 1040 instructions, “your preparer, a friend, a family member, or any other person you choose” can serve as a third-party designee for the tax year and tax return. While these instructions are clear about the types of individuals who can be designated, they don’t imply that firms can be authorized.
In July 2013, the IRS updated its Internal Revenue Manual to clarify that a “person” can include a company or business for the purposes of the third-party designation. The IRS has not yet updated most form instructions to make this definition clear, but your clients can add your firm as designee on tax returns that do not explicitly restrict the designation to paid preparers.
Myth 5: “This designation lasts forever.”
The third-party designation always expires on the one-year anniversary of the tax return’s original due date. The expiration is automatic, and you cannot extend it, even if you obtain an extended due date for the tax return. This is typically not an issue because most processing problems occur within one year of the return being filed. From the IRS’ perspective, the third-party designation is serving its original purpose.
A better way: Use Form 8821
Although the checkbox designation is serving its purpose for the IRS, your clients may be expecting more, including:
- Confidence that you are kept in the loop on their post-filing issues
- Assurance that you’ll automatically receive copies of their IRS notices and can proactively start addressing any issues that arise
- Authorization coverage that extends for more than one year and covers more than return-processing issues
Form 8821, Tax Information Authorization, extends your authority to receive copies of your client’s IRS correspondence and discuss your client’s account with the IRS. With Form 8821, you or your firm can serve as the appointee, and you can obtain authorization for any tax return across multiple tax years, including three tax years in the future. Also, unlike the third-party designation, Form 8821 authorization is good for seven years unless it’s withdrawn earlier.
If your client faces more complex post-filing issues, you can use Form 2848, Power of Attorney and Declaration of Representative, to represent your client before the IRS.
This tax season, understand the most common myths behind the third-party designation, and consider a better alternative with Form 8821. You’ll be able to tailor the right authorization for each of your clients and provide superior service all year long.