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Ask FERF about ... tax return e-filing for corporations.

Corporations with assets of $50 million or more that file at least 250 returns annually are required to electronically file 1120/1120S income tax returns with the Internal Revenue Service (IRS) for tax years ending on or after Dec. 31, 2005. The determination of whether a corporation files 250 returns is made by aggregating all types of returns--income tax, information, excise tax and employment tax--that the entity is required to file over the calendar year.

Under the IRS e-file program, a corporation would send its income tax return data to the IRS electronically, instead of on paper forms. Actions differ, depending on whether a corporation uses a tax professional or prepares its own return. The trend, however, appears to be that many companies are working with vendors for their expertise and inside track with the IRS.

Corporations that plan to use a tax professional to prepare their electronic income tax returns should ensure the professionals are IRS-authorized e-file providers. The IRS website (www.irs.gov) lists 17 companies that have passed its Assurance Testing System (ATS) and/or Business Acceptance Testing (BATS) requirements for Software Developers, Reporting Agents, and Transmitters for Forms 1120/1120S.

Regardless of the preparer, companies should discuss and clarify vendor responsibilities to originate their electronic returns. Jo Ann Cummings, product manager of ProSystem fx TaxFirst, a CCH product, describes the process: "The vendor should verify that all entries required by the states and the federal government are present; we then create the electronic file, transmit the return and assure that acknowledgments (showing the return was received) are received back in a timely manner. If the return is rejected for any reason, we try and correct the issue ourselves, including calling the client, if we need to. We then resubmit until successful. At all times, the client can check the status of the return in our system."

In turn, the corporation is responsible for reading the e-filing requirements and understanding that they are different. "They may have to enter additional data, or refine their data to match IRS requirements," explains Cummings. "The corporation should also ensure that the return is accurate, transmit the information to the vendor in a timely fashion and confirm that it has been received."

Additionally, Molly Delafield, senior manager of InSource Income Tax at Thomson Tax & Accounting, encourages corporations to look at their 2004 returns and evaluate every piece of information in that return. "They need to understand that information that may have already been included in their vendor's software in the past may now need to be changed for the 2005 return," she says.

The IRS website notes that for corporations that use a tax professional to prepare only a portion of the income tax return, the internal process may change. Some companies may use other formats (Word, Excel, etc.) to add additional information (elections, other forms) before the paper return is mailed to IRS; this can no longer occur since the entire electronic return must be sent in one electronic file.

Cummings notes an additional change to the information-gathering and compilation process: gathering the necessary signature information prior to submitting the return to IRS. Corporate officers must sign the electronic return using 2005 Form 8453-C U.S. Corporation Income Tax Declaration for an IRS e-file Return or 2005 Form 8879 (PDF) IRS e-file Signature Authorization.

When seeking a vendor to assist with e-filing, Cummings suggests companies look at volume of returns filed, years of experience and a real-time status system. In addition, some vendors may offer related services, such as working with the IRS on rejections that are not the norm.

Since most corporations file or have already filed an extension, Cummings says entities with smaller returns should allow for four to five days in their processes to ensure that the e-file is successful, just in case there is a rejection that might need to be fixed. Larger returns should allow for additional time. For example, if there is a rejection for a large S-Corporation with many shareholders, it may take some time to correct issues that occur. According to Cummings, some companies are completing tax work early to provide time for this.

Corporate taxpayers that fail to e-file become subject to monetary penalties on the amount of underpayment. Additionally, any return not in compliance with the electronic filing requirements will be considered to not have been filed on time, rendering any elections invalid.

IRS notice 2005-88 provides that taxpayers can request waivers from the electronic filing requirement where the taxpayer cannot meet electronic filing requirements due to technology constraints, or where compliance with the requirements would result in undue financial burden on the taxpayer. The notice also outlines the specific steps taxpayers should follow when requesting waivers from the IRS.

Cheryl de Mesa Graziano, CPA (cgraziano@fei.org), is Vice President, Research and Operations at Financial Executives Research Foundation (FERF).

contributed by FERF
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Title Annotation:Internal Revenue Service; Financial Executives Research Foundation
Author:de Mesa Graziano, Cheryl
Publication:Financial Executive
Geographic Code:1USA
Date:Apr 1, 2006
Words:813
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