Internal revenue service mandatory corporate e file program
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INTERNAL REVENUE SERVICE MANDATORY CORPORATE E-FILE PROGRAM. AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS November 13, 2006. BACKGROUND.

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INTERNAL REVENUE SERVICE MANDATORY CORPORATE E-FILE PROGRAM

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Internal revenue service mandatory corporate e file program

INTERNAL REVENUE SERVICEMANDATORY CORPORATEE-FILE PROGRAM

AMERICAN INSTITUTE OF

CERTIFIED PUBLIC ACCOUNTANTS

November 13, 2006


Background

BACKGROUND

  • On, January 11, 2005, IRS issued temporary regulations that require corporations to electronically file (e-file) Forms 1120 and Form 1120S for tax periods ending on or after December 31, 2005, using the new IRS Modernized e-File system if they:

    • Have total assets of $50 million or more for tax year 2005 returns;

    • File at least 250 returns during the calendar year, such as Forms W-2 and other employment tax returns;

    • Were required to file the same type of corporate income tax return for the preceding taxable year; and

    • Have been in existence for at least one year (one calendar year for 1120S) prior to the due date (excluding extensions) of its corporate income tax return.

  • Tax exempt organizations with total assets of $100 million or more and file at least 250 returns per year are required to file Form 990 electronically for tax years ending on or after December 31, 2005.


Background1

BACKGROUND

  • For tax year 2006, the electronic filing requirement will be expanded to include:

    • Corporations and tax-exempt organizations with $10 million or more in total assets that file 250 or more returns during the calendar year.

    • Private foundations and charitable trusts will be required to electronically file Form 990-PF regardless of asset size for tax years ending on or after December 31, 2006, if they file at least 250 returns.


Background2

BACKGROUND

  • Partnership Mandate:

    • For tax year 2006 returns due in 2007, partnerships with over 100 partners are required to e-file.

    • The previous IRS 1065 (legacy) e-file program will be converted to an XML-based format.

    • For the 2006 tax year only, the IRS will accept partnership e-file returns based on the older legacy e-file program or on the new XML-based format (however, most e-file software vendors are expected to only support the new XML format for purposes of 2006 returns).


Powerpoint objective

POWERPOINT OBJECTIVE

  • While the electronic filing mandate applies to certain exempt organizations and partnerships, this PowerPoint will focus on the IRS e-file requirements relating to corporations.


Reasons for e file mandate

REASONS FOR E-FILE MANDATE

  • The administrative benefits of e-filing include:

    - Faster tax processing at the IRS;

    - Fewer return errors;

    - Reduced cycle time;

    - Quicker identification of emerging audit trends; and

    - The potential for more current resolution of taxpayer

    uncertainties.

  • Succinctly, the e-filing of Forms 1120 and 1120S (including the Schedule M-3 where required) will allow the Service to more quickly and efficiently assess returns for compliance risk.


Initial issues for consideration

INITIAL ISSUES FOR CONSIDERATION

  • Form 7004 – Application for Automatic Extension of Time to File Corporate Income Tax Return

    - Corporations may consider electronically filing their extensions

    to (1) proactively identify potential e-filing issues and (2) help

    preparers get accustomed to the new process.

    - If the Service rejects the electronic extension for processing, it

    must be paper filed by the later of the due date of the return or 5

    calendar days after the date the IRS gives notification the return is

    rejected.

  • Corporations and preparers should review state e-file requirements carefully (if any). The corporation might be required to e-file its federal return, but still find that it is necessary to file a paper return with the state.


General requirements

GENERAL REQUIREMENTS

  • The mandated e-file threshold for corporations is determined based on total assets at the end of the tax year as reported on Schedule L of Form 1120/1120S.

  • The 250 federal return minimum includes income tax returns, employment and excise tax returns and information returns, such as Forms W-2, 1099, 940, and 941.

    - Example: A corporation that has 245 employees must e-file its Form 1120 or 1120S, assuming the entity also meets the asset threshold test. This corporation will be filing (i) 245 Forms W-2, (ii) each quarterly Forms 941, and (iii) an annual Form 940, for a total of 250 returns.


General requirements1

GENERAL REQUIREMENTS

Entity level at which the mandate criteria thresholds are applied:

**Please see the controlled group example scenarios provided by the IRS on their

Frequently Asked Questions web site.


General requirements2

GENERAL REQUIREMENTS

  • Consolidated returns:

    - 250 return count threshold applied at top consolidation level or controlled group level, whichever applies, and asset threshold is applied on a consolidated basis.

    - Subsidiary data is required to be included in the e-return in “stacked” return format.

    - The consolidated return can not be e-filed if the parent/top consolidation return is a Form 1120-L or 1120-PC.


General requirements3

GENERAL REQUIREMENTS

  • IRS issued specific XML formats – taxpayers are generally required to use for:

    - All forms

    - Most supporting data unless specified as PDF

    by IRS rules.

    - Elections

  • IRS requires entire return in one transmission file:

    - If multiple software packages or other formats (Word, Excel, etc.) are used for return preparation, all information must be merged into one IRS transmission file.

  • Certain transition rules may apply. Refer to the Tax Year 200X Directions for Corporations Required to e-File on the irs.gov website.

    • Tax Year 2005 Directions

    • Tax Year 2006 Directions


E filed return responsibilities

E-FILED RETURN RESPONSIBILITIES

  • Taxpayer (corporation) – has overall responsibility for accuracy of return.

  • Paid preparer – prepares/reviews the return. Signs e-signature form (8879-C/S or 8453-C/S) as paid preparer.

  • ERO (Electronic Return Originator) – (1) Electronically sends the return to a transmitter who transmits the return to the IRS, or (2) directly transmits the return to the IRS.

  • An accounting firm may sign the e-signature form as both the paid preparer and ERO. Alternatively, if the accounting firm is not performing the responsibilities of the ERO, it may sign the e-signature form solely as the paid preparer.

  • If the client prepares and e-files the return, the client acts as the ERO but does not sign Form 8453-C/S as such (only signs the taxpayer signature section).

  • Transmitter – The company that receives the return from the ERO, and transmits the return to the IRS. The transmitter will usually be the software provider, but may also be the tax practitioner or “large” taxpayer corporation if their transmitter software has been certified by the IRS.


E file key definitions

E-FILE KEY DEFINITIONS


E file process

E-FILE PROCESS

  • Upon clearing all the diagnostics generated by the software’s internal review, the ERO submits the electronic file via Internet to the transmitter. Or, if the ERO uses “remote server” software, then the ERO indicates to the transmitter that the return is ready for transmission to the IRS.

  • The transmitter date stamps the file received from the ERO. IRS will honor this date, which is conceptually similar to a U.S. postmark. If software does not support electronic postmarking, the transmittal date applies.

  • Transmitter transmits the return to the IRS. IRS notifies transmitter whether the return was accepted or rejected.


E file process1

E-FILE PROCESS

  • If the return has been rejected, IRS notifies the transmitter of the rejection errors.

  • Through the transmitter, the ERO generally checks the status of the return; whether accepted or rejected for errors.

  • The ERO clears any reject errors, re-creates the electronic return, and submits the corrected e-return to the transmitter for transmission to the IRS.


E file process2

E-FILE PROCESS

  • Due date considerations:

    - All prescribed due dates for filing paper tax returns apply to electronic returns.

    - The electronic portion of the return must be e-postmarked on or before the due date, including extensions, to be considered timely.

    - A return transmitted on or shortly before the due date that is rejected must be re-transmitted and accepted within 20 (5 for Form 7004) calendar days after the original transmission date. The clock does not restart if rejected again after the extended due date and during this 20 day period. (Corporations and preparers should be aware that some states may have established a shorter time frame for correcting a return.) The 20 day perfection period is to cure reject errors—not to correct/change numbers on the return. If the return numbers are incorrect, an amended return should be filed.

  • The electronic return is not considered filed until it has been acknowledged by the Service as accepted.

  • Recommendation: e-file early to allow time to work through any potential rejection issues.


Waiver of electronic filing requirements

WAIVER OF ELECTRONIC FILING REQUIREMENTS

  • Review IRS Notice 2005-88, released November 2005.

  • Waiver criteria: Technology constraints or undue financial hardship.

  • Waiver request must be in writing, stating:

    - Steps taken and reasons why unsuccessful

    - Declaration of undue hardships

    - Steps to be taken to ensure future ability to e-file.

    - Other details outlined in Notice.

  • File request with Ogden Campus 45 days before return due date. Have a plan B for case where the waiver request is denied.

  • Situations where waivers are generally granted for tax year 2005: (1) catastrophic events, (2) NOL/substituted returns, (3) Chapter 7 bankruptcy, (4) final or last return filed.

  • IRS has not and does not anticipate granting many waivers.

  • See the IRS waiver guidance page on IRS.gov.


Engagement planning for 2006 e filing

ENGAGEMENT PLANNING FOR 2006 E-FILING

  • Become familiar with the process for preparing returns under the e-filing mandate; including any transition rules.

  • Analyze all forms, statements, and elections required for tax year 2005 return.

  • Consider change in facts and circumstances that would impact the tax return forms, statements, etc. required for tax

    year 2006.

    4.Determine required format (XML, PDF, paper) for each form, statement, and election based on e-filing rules.

    5.Gain an understanding of how your primary tax software is going to support the e-file process.

  • Determine the additional time that will be necessary to prepare each engagement including scheduling/staffing.

  • Consider outlining return preparation/review timeline with the objective of accelerating the actual filing date.


Future trends

FUTURE TRENDS

  • Expansion of electronic filing requirement.

  • Amended tax returns accepted for 2006 tax year and forward.

  • Form 1120 Federal/State program expansion.

  • Inclusion of Form 1065 in the MeF platform. Form 1040 expected for 2009 tax year.

  • Modification or elimination of transition rules.

  • IRS goal is to collect all data prescribed by form instructions and regulations in electronic XML format.


Resources

RESOURCES

  • Access the IRS e-file website at www.irs.gov

  • “E-File for Large and Mid-Size Corporations” website can be found at: http://www.irs.gov/businesses/corporations/article/0,,id=146959,00.html

  • IRS Publication 4163, Modernized e-File Handbook (for all 1120 e-file returns).

  • Taxpayers: IRS e-File for Large Taxpayers Filing their Own Corporate Income Tax Return.

    - e-Services Registration how to instructions can be found at:

    http://www.irs.gov/pub/irs-schema/eservices_registration_process.pdf

    - Taxpayer online application how-to instructions can be found at:: http://www.irs.gov/pub/irs-schema/eservices_efile_application_process.pdf

  • Tax Practitioners: Publication 3112, IRS E-File application instructions (not for taxpayers).

  • List serve e-mail distribution process created to keep interested parties informed. Sign up at:

    http://www.irs.gov/businesses/content/0,,id=154842,00.html


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