I didn't make the rules all I can say is last time it was paint only. If you did use another program then only thing allowed by the rules is brush tool and pencil tool so that would mean no layering, Photoshopping or any other type of editing only those to tools allowed to create a photo - basically I think its meant so that if one uses ms paint and another uses a different "software" no one has a disadvantage if everyone follows the rules and only uses those to tools. though again I didn't make the rules but that's how I would take them.
Also I don't know anything about encoding, etc. or what not but if I have a problem I always print screen an image paste it and get rid of the excess crap on the image so I still have the original image. Maybe try that instead if you are having issues.