Q1. Which partnerships are required to file returns electronically?
A1. Section 1224, of the Taxpayer Relief Act of 1997, requires partnerships with more than 100 partners (Schedules K-1) to file their return on magnetic media (electronically as prescribed by the IRS Commissioner). This law became effective for partnership returns with taxable years ending on or after December 31, 2000.
Partnerships with 100 or less partners (Schedules K-1) may voluntarily file their return using the MeF Platform.
Q2. If the partnership is required to e-file their Form 1065 or 1065-B, are they also required to e-file their extension and employment tax returns?
A2. No, the requirement to e-file applies only to the Form 1065 or 1065-B. Forms 7004, and the 94X family are not required to be e-filed.
Q3. What is the IRS’s definition of a “Large Taxpayer”?
A3. For purposes of electronic filing, the IRS defines a “Large Taxpayer” as a business or other entity with assets of $10 million or more, or a partnership with more than 100 partners, which originates the electronic submission of its own return(s).
Q4. Does a partnership need special software to file an electronic income tax return?
A4. The answer depends on if the partnership uses a tax professional to prepare their income tax return or if the partnership prepares their own income tax return.
If the partnership uses a tax professional to prepare the income tax return, it does not need special software to file electronically. The partnership’s tax professional will need to use software approved for electronic filing and also be an IRS Authorized e-file Provider. Taxpayers should check with their tax preparer early to ensure they are ready to file your electronic income tax return.
Partnerships that purchase tax preparation software and prepare their own income tax return should discuss the various electronic filing options with their software vendor as soon as possible.
Q5. What if a partnership prepares the income tax return “in-house” but does not use tax preparation software?
A5. You will be required to purchase software approved for electronic filing, develop your own software or use an IRS Authorized e-file Provider to prepare your electronic return. If you choose to develop your own software, it must be approved by the IRS before it can be used to file an electronic return.
Q6. Partnerships that choose to develop their own tax preparation software must have the software approved by IRS. Does this requirement apply to partnerships that use software approved for electronic filing for a portion of their return but develop their own software to prepare other portions of the income tax return?
A6. Yes, this requirement also applies to partnerships that choose to develop their own software for portions of the return.
Q7. My partnership prepares our income tax return using separate tax preparation software, one for the domestic portion of the return and another for International forms (i.e. Form 5471). Assuming both have been approved for electronic filing, am I still required to transmit the entire electronic income tax return to IRS in one file?
A7. Yes, MeF can only process electronic income tax returns if the entire return is transmitted to IRS in one file. Software vendors are working on tools to “aggregate or merge” files as outlined in your example. You should discuss your situation with both of your software vendors. If they are not able to “aggregate/merge” the files, you should follow the directions in " Directions for Partnerships Required to e-file" on the Modernized e-file (MeF) for Partnerships page.
Q8. How does a partnership submit the attachments, explanations, etc. required by the Form 1065/1065-B instructions and the additional information required by IRS regulations?
A8. In all situations where you are asked to provide supporting data, explanation or a description, the software should prompt you for the necessary information and automatically create the proper “supporting data." This is referred to as a “structured” attachment. In situations where the data cannot be entered into the software (such as an appraiser statement), you will be allowed to scan the documents and send a PDF file attached to the electronic return. In addition, the Form 1065/1065-B software includes a General Explanation that may be used to send other information.
Q9. How does a Large Taxpayer “originate” the electronic submission of its own returns(s)?
A9. After a Large Taxpayer completes the preparation and signs their corporate income tax return, tax preparation software approved for electronic filing will provide the necessary instructions to “originate” the electronic submission of the return and authorize the filing of the return via IRS e-file. During this process the electronic return data is converted into the format defined by IRS for electronic filing.
According to Publication 3112 (pdf), Application and Participation in IRS e-file, the taxpayer originates the electronic submission of a return by:
- Electronically sending the return to a transmitter who will transmit the return to the IRS;
- Directly transmitting the return to the IRS; or
- Providing a return to an Intermediate Service Provider for processing prior to transmission to the IRS.
Q10. IRS does not review tax preparation software used strictly for preparing paper tax returns, so why does IRS review and approve all tax preparation software used for preparing electronic returns?
A10. IRS established a rigorous approval process that tax preparation software used for preparing electronic returns must pass before software vendors are allowed to market their products as “approved for e-file”. This process ensures that software approved for electronic filing can accurately format income tax return data into XML format and transmit the return data to IRS. An overview of IRS software testing process contains more information on the testing and approval process.
Q11. What testing does IRS perform on MeF systems before they are used to process electronic income tax return?
A11. IRS systems must also be approved before they can be used to process electronic returns. Software vendors, third party transmitters and IRS all have processes in place to ensure the accuracy of data that is passed electronically between systems. An overview of IRS system testing process contains more information on this system testing process.
Q12. What precautions has IRS taken to ensure a partnership’s tax return data is secure during transmission to IRS?
A12. The Internal Revenue Service is bound by law to protect the confidentiality of tax return information and meeting that responsibility takes the highest priority at the agency. All information transmitted through IRS e-file is secured through use of multiple security mechanisms and personnel, operating under strict federal guidelines, carefully protect the information. IRS e-file systems employ a variety of security features, which are closely monitored to prevent unauthorized or inappropriate access. IRS cannot discuss specifics about MeF processing because freely disseminating that information could jeopardize the security we intend to provide. IRS has also developed a more detailed technical overview outlining certain MeF security standards.
Q13. How will my partnership know IRS received and processed my electronic income tax return?
A13. A general overview of how IRS communicates with transmitters during the electronic filing process is available to assist partnerships. Specific information will vary depending on if your partnership uses a third party transmitter or chooses to transmit their own electronic income tax return.
Partnerships that use a third party transmitter to transmit their electronic income tax return to IRS will receive information from the third party transmitter instead of IRS, so you should discuss types of communication and timeframes with them.
IRS will communicate directly with partnerships that choose to transmit their own electronic income tax return. If your partnership is considering transmitting their own return, you should discuss options with your software vendor as soon as possible.
Q14. Regarding rejected electronic returns, if a timely filed electronic return is rejected and after contact with the IRS e-Help desk it is ultimately determined that the return must be submitted in paper, how long does the taxpayer have to submit the paper to the appropriate submission processing center to have the return still be considered timely?
A14. If a timely filed electronic return is rejected and the reason(s) for the rejection cannot be corrected to comply with electronic filing requirements, then the taxpayer must file a paper return. To be considered timely filed, this paper return must be postmarked by the later of the due date of the return (including extensions) or 10 calendar days after the date the Service last gives notification that the return was rejected. The paper return should include an explanation of why the paper return is being filed after the due date, and include a copy of the reject notification and a brief history of actions taken to correct the electronic return.
The information published in Notice 2005 - 88 indicates that in order for the paper return to be considered timely, it must be filed by the later of the due date, or 5 calendar days after the date the Service last gives notification to the taxpayer that the return has been rejected, as long as the first transmission was made on or before the due date of the return (including extensions). Five calendar days is incorrect – the correct number is 10 calendar days.
Q15. How will IRS communicate more information about the new e-file requirements with external audiences and stakeholder groups?
A15. Since the e-file requirements were issued, IRS officials have been holding regular meetings with representatives from key external stakeholder groups (TEI, ACT and AICPA) to discuss e-file requirements and administrative processes. These meetings will continue.
Interested parties may also subscribe to e-file News for Partnerships to receive email alerts to new e-file developments affecting partnerships.
Q16. My partnership recently changed partnership interest by more than 50% within a 12-month period and is required to electronically file our returns. How do I meet my requirement to electronically file?
A16. Section 708(b)(1)(B) provides that a termination occurs where “within a 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits.” This is known as a type B termination or technical termination. You should prepare your returns for the appropriate tax period reflecting the respective partnership interests during that time. The ‘final’ return for the period prior to the change in partner interest should have the “Technical Termination” checkbox marked and the checkbox also marked “final”. A second return will also be filed to reflect the “initial” return of the new partner(s)’ interest(s) and should have the “Technical Termination” checkbox marked and the checkbox also marked “initial”. For further information, please see Item G on front page of the Form 1065 and the Form 1065 instructions.