In a flurry of information letters, the IRS announced that e-Filing is now open. According to IR-2011-5, the benefit of e-filing is that taxpayers may receive faster refunds and ensure that their tax return is accurately reported.

IRS Commissioner Doug Shulman stated, "IRS e-File is the best option for everyone, especially for people impacted by recent tax law changes. e-File ensures people can file accurately and get refunds quickly. With a new legislative e-File mandate for tax preparers, we anticipate that more tax return preparers will be using e-File this year and we urge people who prepare their own taxes to give it a try."

The e-Filing may be accomplished through three different methods. Tax return preparers may e-File, commercial software may offer the option or there is IRS Free File.

The Free File program is available on www.irs.gov. Taxpayers should click on "Free File" and will be permitted to access tax software to prepare their returns. Free File is available for taxpayers with 2010 adjusted gross income of $58,000 or less.

In the view of the IRS, Free File is "perfect for first-time filers, families looking to save money or older Americans adept at using the Internet."

Those who file electronically will also need an electronic signature. The electronic signature requires a five-digit personal identification number (PIN). There are three ways to obtain your PIN.

1. Self Select – You may use your tax software and select your own five-digit PIN. If you used a PIN in 2009, you may use that number. Alternatively, you may enter your adjusted gross income from your 2009 return to obtain your PIN. The PIN can be a five-digit number, but may not be all zeros.

2. Practitioner PIN – If you are using a paid tax preparer, you may sign IRS Form 8879 and authorize your paid preparer to generate your five-digit PIN. The paid preparer will retain Form 8879, but will not mail it to the IRS.

3. IRS Issue of PIN – If you do not know your 2009 adjusted gross income or your 2009 PIN, the IRS will request a temporary Electronic Filing PIN (EFP). The Electronic Filing PIN may be obtained using your tax preparation software or through www.irs.gov. With the Electronic Filing PIN you may complete your electronic signature.

If your spouse is a military person serving in a combat zone, you are permitted to use the self-select PIN. You will need to obtain IRS Form 8453, attach a Power of Attorney and mail it to the IRS.

Delayed Returns Open February 14

In IR-2011-7, the IRS established an initial filing date for nine million taxpayers.

Because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed on December 17, the IRS requires time to reprogram their computers for some taxpayers. Out of the 140 million returns for 2010, about nine million taxpayers are affected.

The affected taxpayers itemize deductions using Schedule A, claim the higher education tuition and fees deduction or claim the educator expense deduction. For these returns, the IRS plans to have its computers available to process returns on February 14, 2011.

If you are e-Filing with a tax return preparer, it may be possible to file an earlier return. Some tax return preparers are receiving and holding the electronic returns. They plan to submit all of these returns on February 14.

Paul Cinquemani is the Director of Member Services, Business Development and Government Relations at The National Association of Tax Professionals. He indicated that there was relief in the tax community when the IRS published the February 14 date. He noted that the delay was not as long as might have been expected and suggested that the IRS had "performed admirably" during prior years.

Cinquemani did suggest that there is a potential challenge for tax professionals this year. They will lose one month of the time that normally is used to send out their easiest returns. The result could be an overload of taxpayers attempting to complete their returns in March and early April.

Ban on Tax Patents Introduced

In a bill co-sponsored by Senate Finance Chair Max Baucus (D-MT) and Sen. Charles Grassley (R-IA), the Senators propose a ban on tax patents. The bill would ban "any strategy for reducing, avoiding, or deferring tax liability, whether known or unknown at the time of the invention or application for patent."

Sen. Baucus noted, "The patenting of common tax strategies undermines the fairness of our tax system. Taxpayers shouldn't have to pay royalties to others just to file their tax returns and comply with the tax code."

Sen. Grassley agreed that the patents on tax strategies were not appropriate. He stated, "Tax patents undermine a tax system based on voluntary compliance. Our legislation reins in the cottage industry of those trying to own tax planning strategies that should be available to everyone or that would encourage inappropriate tax avoidance."

The Congressional Research Service (CRS) published a comprehensive report on tax patents on January 13, 2011.

The CRS report noted the four requirements for a tax patent. First, the invention must be novel or different from other patented items. Second, the invention is patentable if "nonobvious" to a person of ordinary skill in that particular field. Third, the patent or invention must be useful and provide a tangible benefit. Fourth, it must be within the permissible categories of patentable subject matter.

Business patents were permitted after a Federal Circuit decision in State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998). The patent was initially denied on a data processing system for implementing a hub and spoke investment system.

However, the Federal Circuit overruled the District Court. The lower court had held that the patent method was a pure numeric process and, therefore, did not qualify. The Federal Circuit reversed and noted that a business process that met normal patent standards could be patented.

Following the decision, a substantial number of business patents were issued, including tax patents. By January 6, 2011, 130 tax patents had been issued and 155 had been published for opposition by the U.S. Patent and Trademark Office.

The patent issue was also addressed in Bilsky v. Kappos, 130 S.Ct. 3218 (2010). In Bilsky, the proposed patent was a method for hedging risk in the field of commodities trading. The Supreme Court determined that the Bilsky method was not patentable, but emphasized in a plurality opinion that business patents could be granted. Justice Breyer noted that business patents are permissible under four guidelines. These include the following:

1. Subject Matter – The subject matter range is broad but not without limit.
2. Machine-or-Transformation Test – The preferred method to determine whether the process is patentable or not.
3. Sole Standard – The machine-or-transformation test is not the only permissible method.
4. Utility – Even if an item creates a "useful, concrete and tangible result," it may not be patentable.

Following the two court cases, the issue of tax patents is still not clearly resolved. Therefore, Sen. Baucus and Sen. Grassley propose a legislative ban on tax patents.

Applicable Federal Rate of 2.8% for February – Rev. Rul. 2011-4; 2011-6 IRB 1 (18 Jan. 2011)

The IRS has announced the Applicable Federal Rate (AFR) for February of 2011. The AFR under Section 7520 for the month of February will be 2.8%. The rates for January of 2.4% or December of 1.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.