IRS forms, schedules, and instructions - TEI comments and IRS response.

IRS Forms, Schedules, and Instructions - TEI Comments and IRS Response

Introduction

The increasing complexity of the tax law during the 1980s has spawned not only uncertainty, but also ever increasing compliance burdens. These burdens leave the realm of the potential or hypothetical and enter reality when taxpayers undertake to complete the tax forms and schedules that are developed to implement the law. Thus, statutory provisions are "translated" into the real world by the IRS's tax forms, schedules, and instructions - they paint a vivid portrait of the trememdous recordkeeping and compliance burdens imposed by the Internal Revenue Code. It is critical, therefore, that proper attention be focused on the development and revision of forms, schedules, and instructions to reduce ambiguity, minimize data collection burdens, and ensure consistency of application.

As an organization of tax professionals who must cope with both the complexity and the tedium of the tax laws on a daily basis, Tax Executives Institute believes it is uniquely qualified to comment on the means through which the law is implemented. We believe that our diversity and the professional training of our members enable us to bring an important, balanced, and practical perspective to the forms, schedules, and instructions drafted by the Internal Revenue Service.

At the outset, we wish to commend the IRS Forms Division for the herculean job it has done in developing forms to implement the Tax Reform Act of 1986 and other recent legislation. Given the uncertain scope of many statutory provisions and the lack of timely regulatory guidance, the Forms Division has frequently faced a daunting task. We offer the following comments and suggestions to facilitate the revision of forms in a manner that eases the compliance burden for taxpayers and the government alike.

Timing of Information

Releases Regarding Forms

The preparation of corporate tax returns is a time-consuming and complicated process. Large corporations must develop formal schedules and procedures to accumulate the data needed to prepare the federal tax return. These "tax packages," which may have to be translated into several different foreign languages, are sent to subsidiaries, divisions, and branches before the end of the taxable year so that the local personnel will know what data is needed before the year-end closing process.(1) It normally takes local personnel up to four months after the year-end closing to compile the necessary tax data.

Once collected from outlying locations, the information is first reviewed, analyzed, and, if necessary, returned to the field for clarification. Once finalized, the information is then entered into databases at corporate headquarters where the federal tax return is prepared and assembled. The analysis of that data will affect not only calculations, but also the elections to be made on the corporate tax return. The more complicated the substantive law (e.g., the Code's foreign tax credit and sourcing rules), the more onerous and time consuming the task. In short, the filing of a corporate tax return is a year-round process requiring thousands of hours of preparation and processing.

Because of the lead time required for obtaining information from subsidiaries, virtually intolerable administrative burdens are placed on corporations when regulations, notices, and forms are issued after the end of the year. Indeed, notices issued within a few days (or even a few months) of the filing deadline simply cannot be taken into account in filing the return.

Sufficient time is also required to develop substitute forms. Such forms generally take many months to create and cannot be generated by merely pushing a button. Adequate lead time is essential if the compliance system is to operate in a rational and efficient manner.

When notices are issued late in the filing season, taxpayers may find themselves confronted with an obligation to file amended federal - as well as state and local - returns. To avoid this costly burden, changes to the forms should be released well in advance of the beginning of this corporate tax cycle.

IRS Response: Adopt. We make every effort to issue tax forms and related announcements and notices as early as possible. We also make special efforts to provide advance information on anticipated changes through our summer early release program, which provides draft copies of our major tax forms to the public. Through the Tax Practitioner Forms Distribution Program, it is possible to receive copies of most tax forms, schedules, instructions, and publications in advance of normal distribution.

Because of late legislation, delays in receipt of OMB clearances, or printing scheduling problems, it is not always possible to have all tax forms available at the beginning of the tax year. When forms have been delayed in the past, they were released through the Public Affairs Office so that tax services (BNA, CCH, RIA, etc.) could publish them and insure their delivery to practitioners sooner than they would otherwise be available.

Computer-Generated Forms

There should be no doubt that corporations must use automated processes in order to cope with the changes that the myriad requirements of the tax laws, as well as business necessity, impose. Most corporate taxpayers (particularly those with extensive foreign operations) use computers to develop, analyze, and maintain the data to satisfy the information requirements of the various IRS forms. The use of such computer-generated forms avoids transpositional errors and enables the taxpayer to file the most accurate information. Many large corporations, however, are experiencing problems in obtaining IRS approval to file substitute computer-generated forms.

We recognize that the IRS's data analysis function too is highly automated and that substitute forms must meet certain criteria to interface with the IRS's computer network. We believe, however, that greater effort should be made to mesh the formatting requirements of the IRS (as evidenced on its forms) with "real world" practicalities. For example, the line spacing on IRS forms should be the same as that of a typewriter or printer. In addition, the IRS should be attentive to the size of fields in terms of reporting certain numeric information; often, the fields are not large enough. Moreover, substitute forms are frequently required to have vertical lines that are difficult to achieve with standard automated systems.

Finally, we suggest that consideration be given to the IRS's working with TEI and other groups in a cooperative effort to develop programs to produce acceptable computer-generated forms.

IRS Response: Adopt. The IRS makes every effort to design the official IRS forms so that they meet the needs of the public. In considering the graphics on the forms, we pay special attention to the line spacing for forms and we try to ensure that the entry spaces are large enough to accomodate the information requested. Although space limitations on the forms sometimes limits the amount of room that we can provide for the entry spaces, we will continue to take the necessary steps to ensure that the forms meet the needs of our customers. Our Substitute Forms program does allow deviations based on guidelines contained in Rev. Proc. 90-8, [1990-1 C.B. 434], as long as the substitute forms are processable.

Concerning the use of computer-generated and other substitute forms, the Tax Forms Coordinating Committee and the Returns Processing function are interested in working with TEI and other practitioner organizations on mutual forms development and processing requirements. Close cooperation will be extremely important with the impending implementation of the Document Processing System (DPS). This system will require standardized forms and layouts; therefore, any computer-generated forms would need to meet those requirements.

Form W-2

Problem: The size of the boxes into which numbers are inserted on the proposed 1990 Form W-2 (Wage and Tax Statement) remains a concern.

Recommendation: Make the federal, state, and local wage boxes equal in size. For most employees, the dollar amounts will be the same for federal, state, and local purposes. The boxes for the federal, state, and local income tax withheld should also be the same size. Such changes would increase the use of standard forms by employers, thereby reducing the costs associated with the use of specially modified forms for the IRS and the taxpayer.

IRS Response: Will consider. Although the boxes for the state and local wages are smaller than the Federal wage box, they are still large enough to report up to $9,999,999.00 of wages. Because the size of the boxes is sufficient for most filers, and because any change to the size of the boxes would require reprogramming for many filers, we do not plan to change their size for 1991. However, the next time that we make any major change to the form, we will consider increasing the size of the state and local wage boxes so they more closely conform to the size of the Federal wage box.

Form W-2: Sick Pay Withholding

Problem: Insurance companies often withhold and remit federal income tax (FIT) deposits in respect of third-party payments of sick pay. Insurance companies providing such benefits make FIT deposits under their own employer identification number (EIN), rather than the EIN of the employer on whose behalf the sick pay is paid. The result can be a computer mismatch between withholding deposits and an insurance company's Form 941 (Employer's Quarterly Federal Tax Return), as well as Form W-2 data an employer deposits.

Recommendation: permit employers to file a reconciliation statement (perhaps on an expanded Form W-3) with the employee's Form W-2 showing the FIT witheld on sick pay by third parties.

IRS Response: Will consider. We are aware of the problem of reconciling third-party sick pay amounts reported on Forms 941 with wages reported on W-2s and W-3s. IRS and the Social Security Administration are currently trying to resolve this issue. We will take this suggestion into consideration while trying to resolve this issue.

Form 966

Problem: Form 966 (Corporate Dissolution or Liquidation) must be filed with the IRS Service Center as well as with the taxpayer's final tax return. In addition, taxpayers must attach a certified copy of the resolution or plan, together with all amendments or supplements not previously filed. Because the Form 966 must be signed under penalties of perjury, the requirement for certified copies of documents seems unnecessary.

Recommendation: Require Form 966 to be filed only with the final tax return of the corporation being dissolved or whose stock is being liquidated.(2) At a minimum, certified copies of resolutions or plans should not be required to be filed with the return, but could be provided upon audit, if necessary.

IRS Response: Will consider. The Service is conducting a study of this recommendation. If the results of the study show there is no longer a need for this form, we will forward the recommendation to Legislative Affairs for consideration by Congress.

Forms 5300, 5302, 5307, and 6404

Problem: Forms 5300 (Application for Determination for Employee Benefit Plan), 5302 (Employee Census), 5307 (Application for Determination for Adopters of Master or Prototype, Regional Prottotype or Volume Submitter Plans), and 6404 (Short Form Application for Determination for Amendment of Employee Benefit Plan) have all been revised to reflect changes made by the Tax Reform Act of 1986.

Under IRS Announcement 90-53, 1990-16 I.R.B. 21 (April 16, 1990), the first page of the revised forms must be submitted in duplicate. One copy of page one is printed in special red ink for reading by Optical Character Reading equipment. Page one must be either an original or a computer-generated copy approved by the IRS. A reproduction of page one is unacceptable.

As we pointed out in our general comments, many large corporations are experiencing difficulty in obtaining IRS approval to file substitute computer-generated forms. Most administrators rely on the convenience of using such forms; indeed, many employers have invested in software programs for generating such forms. A delay in approving computer-generated forms will require the transfer of information from the computer to the original form - a practice that increases the opportunity for inaccuracies and decreases the efficiency of using computer software.

Recommendation: Adopt a procedure for the speedy approval of computer-generated forms. In addition, while the taxpayer's request for approval of such a form is pending, the IRS should accept photocopies of the Forms 5300, 5302, 5307, and 6404. If there is critical information on the forms that must be scanned by the Optical Character Reading equipment, a summary of only that information could be attached to the face of the form.

IRS Response: Adopt. IRS has recently developed a procedure specifically designed to expedite approval and use of computer-generated EP applications.

In Notice 90-38, [1990-1 C.B. 345], May 29, 1990, EP/EO Division assumed responsibility for approval of certain computer-generated EP application forms. After August 1, 1990, taxpayers may request approval for EP computer-generated application Forms 5300 and 5307 from their local EP/ sample of the format is read by the OCR and the computer performs the necessary validity checks in a matter of seconds. After the format is approved, photocopies of the application forms along with critical information in the approved format may be submitted.

IRS also announced in a News Release (IR-90-78) dated May 10, 1990, that IRS software is available at no charge that will computer-generate Form 5307 and a special version of Form 8717, User Fee for Employee Plan Determination Letter Request. Practitioners who use Form 5307 to request determination letters for pans that have been preapproved by IRS may get a copy of the software. The notice tells how to order the software.

A procedure similar to the procedure in Notice 90-38 is in the process for Form 6406, Short Form Application for Determination for Amendment of Employee Benefit Plan. This new procedure will expedite approval of Form 6406 and provide for the use of a computer-generated Form 6406. We expect the procedure to be published within the next few months.

Forms 5302, Employee Census, is a form that must be submitted with Forms 5300, 5307, and 6406. This is not a computer-generated form and may be photocopied.

Form 5452

Problem: group must file Form 5452 (Corporate Report of Nondividend Distributions) if a nondividend distribution under section 301 or 1368(c)(3) of the Code is made to shareholders. These distributions are considered fully or partially non-taxable because the paying corporation's current and accumulated earnings and profits are less than the distributions. The form must be filed by February 28 following the close of the calendar year in which the distribution is made (without regard to the paying corporation's fiscal year). Presumably, the February 28 filing deadline was selected so that information concerning the receipt of non-taxable distributions by individual shareholders would be provided to the IRS in the same time frame as information reported on information returns (Forms 1099 or W-2). The form must be filed with the Associate Chief Counsel (Income and Tax Accounting).

Members of a consolidated group generally elect the 100 percent dividends-received deduction under section 243(a)(3) of the Code for qualifying distributions. Thus, both dividend and non-dividend distributions received from affiliated corporations are nontaxable. For such taxpayers, the filing of Form 5452 by a member of a consolidated group is burdensome, especially where it operates on a fiscal-year basis, and seems superfluous.

Recommendation: Permit taxpayers electing the 100 percent dividends-received deduction under section 243(a)(3) to attach a statement to its consolidated return reporting the distribution of a nontaxable dividend and to supply additional information upon audit, if necessary. The IRS will thus be placed on notice of the transaction, but the administrative burden on taxpayers will be decreased. At a minimum, members of a consolidated group should be permitted to file Forms 5452 with the group's consolidated tax return rather than separately.

IRS Response: Will consider. If a corporation is a member of a consolidated group and pays nondividend distributions to its parent, Form 5452 is required because of the various bases adjustments under Regulations sections 1.1502-32, 1.1502-33, and the tax allocations under section 1552. IRS needs to determine the correct adjustments for earnings and profits purposes so that if the corporation is disposed of the correct bases for purposes of gain or loss can be determined. In addition, if the distributing corporation has any minority shareholders, the form has to be filed to determine if the shareholder has reported the proper amounts as taxable/nontaxable.

We are aware of the burden this form has placed on taxpayers. The office of Income Tax and Accounting in Chief Counsel has instituted an earnings and profits study group that will make recommendations for the next revision of Form 5452, which we expect to be in 1991. We have sent TEI's recommendations to the study group.

Form 5500

Problem: In 1988, the IRS substantially revised Form 5500 (Annual Report/Report of Employee Benefit Plan) and initiated a new review system. Beginning with the 1988 filing season, Form 5500 is reviewed by a computer scanning system that issues deficiency notices (apparently without review by an IRS employee) based on any "inaccuracy" in the form.

As a result of the new scanning system, taxpayers are being inundated with rejected Forms 5500 and deficiency notices. Because some questions on the form cannot be answered simply "Yes" or "No," a line explanation may be necessary. In these situations, however, the line explanation may be ignored and the form returned or a deficiency notice issued. A deficiency notice may also be issued when a question is (correctly) answered "Not Applicable" or "N/A."

Not only are deficiency notices issued for relatively trivial items, but plan administrators are often required to respond to second notices (even when the initial notice is answered in a timely fashion). The system seemingly lacks an efficient method of receiving and reviewing the information requested by the IRS.

Recommendation: Adopt a system whereby the Form 5500 is reviewed by an IRS employee before a deficiency notice is issued.(3)

IRS Response: Not adopt. Form 5500 is used by both the IRS and the Department of Labor (DOL). DOL instituted a new automated edit system which checks for all validity and consistency errors on Form 5500 and generates the required notice.

In 1988 we did have a problem with deficiency notices being issued when an N/A response was entered on certain lines. The computer was programmed to reject the form if a response other than yes or no was entered. In 1989 we attempted to rectify this by identifying the lines where an N/A response was unacceptable. This cut down the number of deficiency notices generated for 1989. In 1990 we are going to add instructions to the Form 5500 series that will tell the taxpayer to enter "no" whenever they think they should enter N/A. We hope that this will completely eliminate the generation of unnecessary notices.

We have also referred this recommendation to DOL for its consideration.

Form 8302

Problem: Form 8302 (Application for Electronic Funds Transfer of Tax Refund of $1 Million or More) permits taxpayers to obtain a tax refund by electronic funds transfer (EFT). Instructions require the form and a blank check or deposit slip from the financial institution to which the funds are to be wired to be attached to the back of the tax return. It is our understanding, however, that some companies correctly filing Form 8302 continue to receive their refunds through the issuance of a check, rather than electronic funds transfers - resulting in a delay in receipt of the funds. In addition, we understand that the blank check or deposit slip is required in order to apprise the IRS not only of the taxpayer's bank account number but also of the bank control number of the financial institution to which the funds are to be wired; some institutions, however, do not put this number on their checks or deposit slips.

Recommendation: Enhance the procedure for processing requests for electronic funds transfers. Attaching Form 8302 to the back of a lengthy tax return is not the most efficacious manner of notifying the IRS of a request for EFT. Perhaps a box could be provided on the face of the return to be checked if Form 8302 is attached to the tax return or the form could be designed to be attached to the face of the return. In addition, the instructions to the form should state that the bank control number of the financial institution must be included with the material submitted; if the number is not on the check or deposit slip, the IRS should provide a mechanism by which it can be submitted.

IRS Response: Adopt in part. We will revise the instructions to Form 8302 to include information on the importance of complete account numbers and bank information to facilitate electronic funds transfer (EFT). We will also explore ways to improve processing of tax returns to ensure that the Form 8302 is identified and processed. We do not believe it is necessary to add a box to the tax returns to indicate an EFT request.

Use of Expiration Dates 

Problem: An expiration date is printed in the upper right-hand corner of many tax forms. As we understand it, the Office of Management and Budget establishes the date to trigger IRS review and revision of the form. It is unclear, however, whether taxpayers should use the form after the expiration date.

Recommendation: Provide an explanation of the expiration date in the instructions to the form or in a parenthetical next to the expiration date.

IRS Response: Not adopt. In most cases, the forms are revised well in advance of the OMB expiration date. When the form is sent to print with the revised expiration date, the outdated form is taken out of the distribution cycle and replaced with the new form. In the few instances that the revised form does not go to print before the expiration date, we make every effort to let the public know whether the old form can still be used. If the old form cannot be used because of new legislation, we would institute procedures to accommodate the new legislation.

CONCLUSION

Tax Executives Institute appreciates this opportunity to present our views on the matters relating to IRS forms, schedules, and instructions. If you have any questions, please do not hesitate to call Linda B. Burke, chair of TEI's IRS Administrative Affairs Committee, at [phone] or the Institute's professional staff (Timothy J. McCormally or Mary L. Fahey) at [phone].

(1) Translation into different computer "languages" may also be required.

(2) We recognize that adoption of this proposal would require an amendment to section 6043 of the Code (which requires the filing of an information return within 30 days after the dissolution or liquidation plan is adopted). We believe, however, that the proposed change would justifiably ease taxpayers' administrative burdens without affecting IRS enforcement activities and ask that the IRS join us in supporting a statutory amendment.

(3) The forms in the 5500 series have become more complex and time-consuming for plan administrators. The IRS estimates the time for completion of the 1989 Form 5500 to be 13 hours, 40 minutes (in addition to the time needed to complete the schedules). This represents a major time commitment, especially for large corporations.