e-filing Now Required for Many Mid-Size Corporations
In anticipation of filing 2006 federal tax year returns, many “mid-size” corporations and their tax advisors should now be positioning themselves for making the transition to filing electronic tax returns. Although e-filing is optional for most corporations, it is required for many.
Most mid-size corporations use the services of third party tax professionals. An important first step for these corporations and their tax professionals in preparing for e-filing is to ensure that e-filing capability is in place. The tax preparer will need to be able to generate an electronic return in the proper format and acquire authorization from IRS to transmit the electronic tax return files.
Corporations that prepare their taxes in-house will need to configure their tax preparation systems to include electronic filing capability and take steps to become an authorized e-file transmitter.
Mandatory e-filing is determined by tax return type, asset size and total return filing.
The requirement to e-file, phased in for certain large and mid-size corporations over a two-year period, was effected by Treasury Regulations implemented in January 2005. First, certain large corporations with assets of $50 million or more were required to start e-filing with their 2005 Forms 1120 or 1120S. Now, certain mid-sized corporations, those with assets between $10 million and $50 million, are required to e-file their Forms 1120 or 1120S for tax years ending on or after December 31, 2006. Corporations required to e-file are those that meet the asset threshold and that file 250 or more federal returns a year, including excise tax, employment tax and information returns such as Forms W-2 and 1099.
Corporate e-filing is performed using the internet based Modernized e-File (MeF) system, which was launched in 2004. Through October 2006, over 500,000 corporations of all sizes electronically filed their Forms 1120 or 1120S for 2005, of which over 18,000 were corporations with assets exceeding $10 million.
Making the transition from paper to e-file
The challenges of designing and implementing an e-file system for corporations were formidable, primarily due to complexity and size of the returns, and the need to develop and integrate e-file software into existing tax preparation systems. Over the past two years IRS has extensively engaged tax professional and corporate stakeholder groups, and the tax preparation software industry, to develop e-filing procedures and options that enable corporations to meet e-file requirements.
In response to issues raised by stakeholders, IRS developed filing format options for corporations required to e-file. Although MeF is designed to accept returns formatted in “xml”, corporations required to e-file may elect to file certain forms in their tax year 2006 returns in PDF format.
Waivers from required e-filing are also available for corporations where a specific situation precludes them from meeting the e-file requirement due to technology constraints, or where compliance with the requirements would result in undue financial burden. To supplement the waiver guidance contained in Notice 2005-88, IRS has identified and published information about several situations that would, or would not, result in a waiver being granted. For example, certain catastrophic events, bankruptcy and final return situations generally will result in a waiver. On the other hand, the use of software that does not fully support the taxpayer’s filing situation will not (since there are over twenty supportive products currently on the market).
Comprehensive information regarding all aspects of corporate e-file, including points of contact for practitioners and taxpayers needing more information, is available on e-file for Large and Mid-Size Corporations. Interested parties are invited to subscribe to an e-mail service, e-file News for Large and Mid-Size Corporations.