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TEI expresses opposition to the e-filing of schedule E: May 31, 2006.

Letter submitted by TEI President Michael J. Boyle to Elvin T. Hedgpeth, Deputy Director of the IRS's International Large and Mid-Size Business Division.

As international president of Tax Executives Institute, I write to express the Institute's opposition to an IRS proposal to require taxpayers to electronically file (in XML format) Schedule E, Compensation of Officers, beginning in the 2006 filing period. The proposal raises substantial privacy concerns and would impose significant administrative burdens without an offsetting benefit. For the current 2005 filing season, taxpayers may file the Schedule E by noting that compensation information will be provided "upon request." We see no compelling compliance reason to alter this approach.

Schedule E requires a taxpayer to list officer names, Social Security numbers, time devoted to the business (expressed as a percentage), and the amount of corporate stock owned (expressed as a percentage), as well as the amount of compensation. For corporations with many subsidiaries, the requested information could cover several hundred personnel. Without question, this data represent some of the most sensitive information reported on the tax return. To address the privacy (as well as physical and financial safety) concerns of affected individuals, corporations currently provide the information in various ways. Some taxpayers report summary information on Schedule E and represent that "details will be provided upon request." Others complete Schedule E but omit the Social Security numbers. And still others provide Schedule E data in a sealed envelope along with the paper return but exclude Schedule E from the actual filed return.

Often, corporate officers are high-profile individuals who may be subject to various threats or identity theft. Taxpayers undertake to protect their individual privacy--especially in respect of Social Security numbers--and to help safeguard the financial and physical safety of their personnel and their families, not because of concern over disclosures by IRS employees but rather by others who might otherwise have access to the confidential information. Regrettably, requiring the disclosure of compensation and Social Security information in XML format would significantly increase the number of individuals with access to this information. Currently, commercially-available compliance software cannot password protect or otherwise mask particular areas of a return and thereby restrict access to specifically authorized individuals. Accordingly, all company personnel (tax and non-tax) involved in return preparation could view the information. Use of an outside vendor to e-file the return would compound the risk of identity theft or inadvertent public release. TEI believes that the IRS's compliance objectives can be fully met by maintaining current practice, i.e., requesting confidential information upon audit. The IRS's matching program can be used to identify individual non-filers. Alternatively, the IRS could consider the following options.

1. Modify Form W-2. Modification of Form W-2 to add an additional letter code (e.g., corporate officer designation) would enable the IRS to use its information return matching capabilities to ensure that company officers are in filing compliance and that compensation levels accord with IRC section 162(m) limitations. This approach could eliminate duplicate data receipt and thereby further a stated goal of e-filing, i.e., streamlining the return filing process.

2. Parallel the SEC's Approach. The IRS could adopt parallel the approach used by the Securities and Exchange Commission (Form 10-K) by treating a consolidated group of companies as one entity for Schedule E purposes and request compensation data (excluding social security numbers) for the top five corporate officers.

TEI appreciates the opportunity to comment on the proposed Schedule E filing requirements. We look forward to continuing to work with the IRS to make the electronic filing requirements more administrable. If you need additional information, please contact Kelly A. Nall, chair of TEI's Administrative Affairs Committee, at 972.605.1217;; or Mary Lou Fahey of TEI's legal staff at (202) 638-5601;
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Title Annotation:Tax Executives Institute
Publication:Tax Executive
Date:May 1, 2006
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