Year-one corporate e-filing a success, but most companies incurred additional costs: survey at TEI annual conference highlights transitional concerns.

While the majority of large and mid-sized companies successfully e-filed their federal tax returns for the first time in 2006, the transition process did require many to invest additional resources into the tax preparation process, according to a recent survey conducted by KPMG LLP and Tax Executives Institute.

The survey, which was conducted during TEI's 61st Annual Conference, found that 88 percent of companies incurred additional costs in e-filing their tax return, measured in terms of both money and staffing. This includes 40 percent of respondents who categorized the increase as "substantial" and 48 percent who described it as "modest." Of those reporting added costs, 40 percent said the costs resulted from both tax department and technology support resources, with an additional 33 percent pinpointing tax department staff resources only.

In light of the IRS e-filing mandate, the additional resources may have been well spent, since 52 percent of companies reported that their tax return was accepted on the first try, and only 3 percent experienced a rejected return more than five times. All companies with assets of $50 million or more and which file at least 250 returns annually were required to electronically file their 2005 taxes by September 15, 2006.

"The process was not without its difficulties, but all things considered, e-filing went relatively smoothly," said TEI Executive Director Timothy McCormally. "Nevertheless, our members, who are working with the IRS to make process improvements for next year, also hope that some first-year transition rules remain in place. "In fact, according to the survey, 58 percent of respondents thought that all of the first-year transition rules should be retained for 2006 tax return filing.

"There is no question that the first year of mandated corporate e-filing was a success, but as we predicted, it did require an additional investment in staff, technology, and time to transition to the new system," said Michael Dolan, director of IRS policies and dispute resolution in the Washington National Tax practice of KPMG. Mg Dolan participated on a panel discussion about e-filing at the TEI conference.

In terms of biggest challenges faced in e-filing the corporate tax return, almost 40 percent of those surveyed said getting comfortable that the e-file included what the corporation intended to be filed, while 35 percent identified compliance software issues. And in terms of e-filing benefits, 12 percent said it forced them to examine work processes and future filings should be more efficient. That said, the large majority (77 percent) said that they feel the IRS was the only beneficiary.

"I believe as companies go through the e-file process again this year, they will realize that all of their hard work in year-one will produce greater tax filing efficiencies down the road," said TEI's McCormally.

Next year, another group must prepare to undergo the transition, as the threshold to e-file is lowered to include all companies with assets of $10 million or more and which file at least 250 returns annually. "This next tier of companies may not have access to the same staffing and technology resources as the larger companies that filed this year, so it's even more prudent that smaller companies begin preparing early and budget accordingly," KPMG's Dolan noted. "Although many will be using outside tax preparers to file their taxes, there will still be added work and costs for management to consider."

The TEI-KPMG Corporate E-file Poll was conducted in Scottsdale, Arizona, on October 23, 2006, and includes the responses of 101 corporate tax executives.