2006 return requirements.

For tax year 2006, the mandate expanded to fliers of Forms 1120 and 1120S that have assets of $10 million or more and file 250 "other" returns. In October 2006, Large and Mid-Size Business Commissioner Deborah Nolan notified those corporations that, based on the assets reflected on their last return, they were required to e-file under the expanded mandate.

Some taxpayers in this second wave of mandated fliers may encounter challenges because of the small size of their tax staffs. In an October 2006 KPMG/Tax Executive Institute survey of tax directors whose corporations filed mandated 2005 returns, 88% said they had incurred either modest or substantial additional compliance costs. Not surprisingly, a majority of the additional expense related to the purchase, training and support costs associated with return-preparation software. For many of those corporations, the costs might have run even higher had their tax departments not had access to in-house technology support for installing and using the software; 86% of the respondents had internal information technology resources to draw on.

The IRS has narrowed the transition options for the second year of the mandate; improvements to both Service systems and commercially available software have reduced the need for some exceptions. For 2006, fewer .pdf forms will be allowed; paper or .pdf alternatives for filing 2005 international forms have been eliminated. A transition option will continue to allow summary data to be entered for certain high-volume transactional forms. Also, in response to privacy concerns expressed by corporate tax directors, the IRS will permit corporate fliers to complete Schedule E, Compensation of Officers, without including officers' names and Social Security numbers; see www.irs.gov/businesses/corporations/article/0,,id=163357,00.html, Section 3.

Another significant change for 2006 returns is that a taxpayer may e-file more than one return. Unlike last year (when only one electronic return per taxpayer was permitted), a taxpayer filing an initial 2006 return and then filing a subsequent (superseding) return before the original or extended due date must now e-file both returns; the same applies for amended returns. (For a discussion of superseding returns, see Keenan, Tax Practice & Procedures, "Superseding Return Filed on Extended Due Date Starts SOL" p. 236, this issue.)

Waivers: For taxpayers that do not believe they can comply with the e-file mandate, Temp. Regs. Sec. 301.6011-5T provides an opportunity to request a waiver. The taxpayer must demonstrate that either undue hardship or technology issues prevent it from e-filing. The IRS provided detailed instructions for documenting the waiver request in Notice 2005-88. In discussions that preceded the 2005 return filings, the Service predicted that few waivers would be needed or approved, because the transition options would eliminate most significant obstacles. Only 113 waivers were granted for the 2005 tax year, with 48 of those related to entities filing their last required return. The IRS generally did not approve a waiver request if the software purchased or licensed by a taxpayer or preparer did not include all of the features needed to comply with the MeF requirements, taking the position that compliant software is available in the marketplace and taxpayers are expected to obtain it.

Tax Year 2006 Directions for Corporations Required to e-file is an especially useful reference for taxpayers and tax advisers, available at www.irs.gov/businesses/corporations/article/0,,id=163357,00.html. The Service's website also houses a comprehensive set of continuously updated frequently asked questions. The AICPA's IRS Practice & Procedures Committee has prepared a presentation that can be downloaded from the AICPA website; visit http://tax.aicpa.org/Resources/Corp orations+and+Shareholders/and click on "AICPA PowerPoint on IRS Mandatory Corporate E-File Program."

FROM MICHAEL P. DOLAN, DIRECTOR, IRS POLICIES & DISPUTE RESOLUTION, KPMG LLP, WASHINGTON, DC