E-filing requirements for exempt organizations.

The IRS's electronic filing (e-filing) program started with individual returns. After it proved successful, the Service expanded the program to include quarterly and annual payroll reports, and partnership, corporation, fiduciary and exempt organization returns. This item addresses the availability, benefits and requirements of e-filing for exempt organizations.

Availability

Most charities and nonprofit organizations can e-file; in February 2004, the IRS made the following forms available for e-filing: Form 990, Return of Organization Exempt from Income Tax; Form 990-EZ, Short Return of Organization Exempt from Income Tax; Form 1120-POL, U.S. Income Tax Return of Political Organizations; and Form 8868, Application for Extension of Time to File an Exempt Organization Return. In January 2005, Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as a Private Foundation, was added to the e-filing program. E-filing is not available for amended returns, final returns or Form 990-T, Exempt Organization Business Income Tax Return.

With sophisticated technology the norm in the business world today, e-filing (which can be done up to, and including, midnight of a return's extended due date) provides a secure way for a taxpayer to satisfy its annual filing obligation, while reducing the return's data error rate significantly. Paper returns have an average error rate of 27%, while electronically filed returns average 1%-2%; see www.irs.gov/charities/article/0,,id= 160626,00.html. In addition, the IRS processes e-filed returns on receipt and, within 24-48 hours, sends acknowledgments to the electronic return originator (ERO), via the ERO's software provider.

Who can provide e-filing?: Only software providers who have received Service approval can provide e-filing. Many of these software vendors check for accuracy during the preparation process, ensuring that more returns, when transmitted to the IRS via the software provider, are free from error. Even with these software checks, the Service occasionally rejects returns that the software treats as qualified. It sends an electronic notice that informs the ERO of the reason for the rejection.

Error correction: Once the ERO corrects the error, the return can be resubmitted electronically. According to IRS Pub. 4206 (Rev. 2-2006), Information for Authorized IRS e-file Providers of Exempt Organization Filings, if a return is rejected, the taxpayer has 20 days to correct and retransmit a rejected return, provided it was originally transmitted on or before the due date or extended due date. If the reason for the rejection cannot be corrected, a paper return must be filed by the later of the return due date or 10 calendar days after the IRS last gave notification that the return was rejected. This means that, for returns submitted on the due date (or extended due date), the taxpayer has 10 calendar days to file a paper return. The paper return should include an explanation of why the return is being filed after the due date and include a copy of the final rejection notification.

Mandatory E-Filing

Although e-filing is primarily by taxpayer choice, the Service has issued regulations requiring it for certain exempt organizations. IR News Release 2005-8 and TD 9175 (1/11/05) summarize the mandatory e-filing requirements. Organizations whose tax year ends after Dec. 30, 2005, with total assets of $100 million or more, and who file at least 250 returns (including income tax, excise tax, information and employment tax returns) during the 2005 calendar year, are required to e-file. For tax year 2006, exempt organizations with assets of $10 million or more who file at least 250 returns must e-file. Private foundations and charitable trusts filing at least 250 returns must e-file their 2006 returns, regardless of asset size.

Illustration: The IRS gave the following as an example of the 250-return threshold: "If a tax-exempt organization ... has 245 employees, it must file Form 990 electronically because each Form W-2 and quarterly Form 941 is considered a separate return; therefore, the organization ... would file a total of 250 returns (245 W-2's, four 941's, and one 990)"; see http://ftp. irs.gov/efile/article/0,,id=108211,00. html. The 250-return threshold applies to the calendar year ending with or within the taxpayer's tax year; see Temp. Regs. Sec. 301.6033-4T(d)(3). For organizations with a fiscal year ending in 2006, calendar 2005 returns (Forms W-2, etc.) are counted in determining the 250-return threshold.

Nonfiling penalties: Exempt organizations required to e-file (based on the above rules), but that do not, are deemed not to have filed a return, even if a paper return is submitted; see Temp. Regs. Sec. 301.6033-4T(c). Under Sec. 6653(c)(1)(A), if the organization's gross receipts exceed $1 million, the nonfiling penalty is $100 per day, up to a maximum of $50,000; the penalty starts on the return's due date. If the organization's gross receipts are $1 million or less, the penalty is $20 per day, up to a maximum of the lesser of $10,000 or 5% of gross receipts. An additional penalty of $10 per day, up to $5,000, will be charged to the person responsible for nonfiling, unless he or she shows the failure was due to reasonable cause; see Sec. 6652(c)(1)(B).

For this purpose, "person" means "any officer, director, trustee, employee or other individual who is under a duty to perform the act in respect of which the violation occurs"; see Sec. 6652(c) (5)(C).

Waivers

The IRS issued Notice 2005-88, which provides guidance and outlines specific steps to request a waiver from the e-filing requirement. Waivers may be granted when the exempt organization cannot meet the requirements due to technology constraints or when compliance would result in an undue financial burden. The waiver request should be submitted to the IRS at least 45 days before the return's due date (including extensions), for the Service to have sufficient time to process it. The IRS e-filing unit e-help desk assists tax professionals with questions or problems; it can be reached at [phone].

FROM NANCY E. PAPADOPULOS, CPA, WITT MARES PLC, NEWPORT NEWS, VA