RTS #012 – What’s all the fuss about IRS form 8821?

Depending on how long you’ve been following Retirement Tax Services (or our friends over at The Perfect RIA), you may have heard us talk about IRS form 8821 and what a powerful tool it can be. We love it, and we use it with all of our clients, but we get a lot of questions from Advisors on how we use it and whether they can use it too. So let’s get into it.

Form 8821 is a Tax Information Authorization. It allows a taxpayer to give permission to the IRS to share information with a “designee.” The person named as the designee can access the IRS’s transcript data (past tax returns, payments, penalties, assessments, etc.) and get notified if the IRS ever communicates with the taxpayer. Depending on what software you use to pull the data (we use Tax Help Software), you are also able to access information related to identity theft and audit risk, among other things.

The IRS can lag on having the information available, but we’ve had plenty of times where it was nearly priceless to have this access in helping clients address issues that have come up with the IRS.

While this is something we do for all of our taxpayers so we can access the data and share the results with our Premiere members, it’s not without its challenges to put in place. The individual named as the designee on form 8821 has to have an IRS CAF (Centralized Authorization File) number and a PTIN (Preparer Tax Identification Number). Neither of these is difficult to obtain; as a Financial Advisor, you wouldn’t need to get a separate license; it’s a matter of filling out some paperwork and waiting for it to get processed (which can take several weeks).

The bigger hurdle is that to be able to access the taxpayer data electronically; you have to personally file at least 5 tax returns with the IRS every year. This would mean you would need the expertise, tools, and opportunities to prepare 5 tax returns each year, and you now are taking on the liability of having signed off on those tax returns. In addition, you would need to have the software and processes in place to get the 8821s for your clients signed, submitted, and tracked.

There are advisors who jump through hoops to get this all done, but it is not a small undertaking. Having an 8821 on file is a supplement to getting client tax returns every year, not a replacement.

What can you do about it?

This leaves you with 3 options if you want the benefits of having an 8821 on file for your clients.

1. Go through the process yourself of getting a CAF number and PTIN and then filing 5 tax returns every year, along with getting 8821s signed and submitted for all of your clients.
2. Find a CPA you have a relationship with that would be open to partnering with you on this so the 8821s are in their name and you have an information sharing agreement so they can share the reports with you (in theory, this is possible but not something many CPAs are familiar with so you would have to first get them on board with the value proposition for your shared clients and for the CPA to go through the hassle).
3. Become an RTS Premiere member since the 8821 is part of the service we offer for any clients we prepare a tax return for. To be considered for Premiere membership, you need to be an existing Essentials member (you can sign up here) and then meet with Steven to get all of your questions answered and make sure we would be a great fit to work together. There are currently a limited number of spots available for Premiere members for the 2023 tax filing season.

Happy Tax Planning!