INTERNAL REVENUE SERVICE MANDATORY CORPORATE EFILE PROGRAM

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INTERNAL REVENUE SERVICEMANDATORY
CORPORATEE-FILE PROGRAM

• AMERICAN INSTITUTE OF
• CERTIFIED PUBLIC ACCOUNTANTS
• November 13, 2006

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BACKGROUND

• On, January 11, 2005, IRS issued temporary
  regulations that require corporations to
  electronically file (e-file) Forms 1120 and Form
  1120S for tax periods ending on or after December
  31, 2005, using the new IRS Modernized e-File
  system if they
• Have total assets of 50 million or more for tax
  year 2005 returns
• File at least 250 returns during the calendar
  year, such as Forms W-2 and other employment tax
  returns
• Were required to file the same type of corporate
  income tax return for the preceding taxable year
  and
• Have been in existence for at least one year (one
  calendar year for 1120S) prior to the due date
  (excluding extensions) of its corporate income
  tax return.
• Tax exempt organizations with total assets of
  100 million or more and file at least 250
  returns per year are required to file Form 990
  electronically for tax years ending on or after
  December 31, 2005.

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BACKGROUND

• For tax year 2006, the electronic filing
  requirement will be expanded to include
• Corporations and tax-exempt organizations with
  10 million or more in total assets that file 250
  or more returns during the calendar year.
• Private foundations and charitable trusts will be
  required to electronically file Form 990-PF
  regardless of asset size for tax years ending on
  or after December 31, 2006, if they file at least
  250 returns.

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BACKGROUND

• Partnership Mandate
• For tax year 2006 returns due in 2007,
  partnerships with over 100 partners are required
  to e-file.
• The previous IRS 1065 (legacy) e-file program
  will be converted to an XML-based format.
• For the 2006 tax year only, the IRS will accept
  partnership e-file returns based on the older
  legacy e-file program or on the new XML-based
  format (however, most e-file software vendors are
  expected to only support the new XML format for
  purposes of 2006 returns).

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POWERPOINT OBJECTIVE

• While the electronic filing mandate applies to
  certain exempt organizations and partnerships,
  this PowerPoint will focus on the IRS e-file
  requirements relating to corporations.

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REASONS FOR E-FILE MANDATE

• The administrative benefits of e-filing include
• - Faster tax processing at the IRS
• - Fewer return errors
• - Reduced cycle time
• - Quicker identification of emerging audit
  trends and
• - The potential for more current resolution of
  taxpayer
• uncertainties.
• Succinctly, the e-filing of Forms 1120 and 1120S
  (including the Schedule M-3 where required) will
  allow the Service to more quickly and efficiently
  assess returns for compliance risk.

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INITIAL ISSUES FOR CONSIDERATION

• Form 7004 Application for Automatic Extension
  of Time to File Corporate Income Tax Return
• - Corporations may consider electronically
  filing their extensions
• to (1) proactively identify potential
  e-filing issues and (2) help
• preparers get accustomed to the new
  process.
• - If the Service rejects the electronic
  extension for processing, it
• must be paper filed by the later of the
  due date of the return or 5
• calendar days after the date the IRS
  gives notification the return is
• rejected.
• Corporations and preparers should review state
  e-file requirements carefully (if any). The
  corporation might be required to e-file its
  federal return, but still find that it is
  necessary to file a paper return with the state.

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GENERAL REQUIREMENTS

• The mandated e-file threshold for corporations is
  determined based on total assets at the end of
  the tax year as reported on Schedule L of Form
  1120/1120S.
• The 250 federal return minimum includes income
  tax returns, employment and excise tax returns
  and information returns, such as Forms W-2, 1099,
  940, and 941.
• - Example A corporation that has 245 employees
  must e-file its Form 1120 or 1120S, assuming the
  entity also meets the asset threshold test. This
  corporation will be filing (i) 245 Forms W-2,
  (ii) each quarterly Forms 941, and (iii) an
  annual Form 940, for a total of 250 returns.

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GENERAL REQUIREMENTS

• Entity level at which the mandate criteria
  thresholds are applied

Please see the controlled group example
scenarios provided by the IRS on their
Frequently Asked Questions web site.
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GENERAL REQUIREMENTS

• Consolidated returns
• - 250 return count threshold applied at top
  consolidation level or controlled group level,
  whichever applies, and asset threshold is applied
  on a consolidated basis.
• - Subsidiary data is required to be included in
  the e-return in stacked return format.
• - The consolidated return can not be e-filed if
  the parent/top consolidation return is a Form
  1120-L or 1120-PC.

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GENERAL REQUIREMENTS

• IRS issued specific XML formats taxpayers are
  generally required to use for
• - All forms
• - Most supporting data unless specified as PDF
• by IRS rules.
• - Elections
• IRS requires entire return in one transmission
  file
• - If multiple software packages or other formats
  (Word, Excel, etc.) are used for return
  preparation, all information must be merged into
  one IRS transmission file.
• Certain transition rules may apply. Refer to the
  Tax Year 200X Directions for Corporations
  Required to e-File on the irs.gov website.
• Tax Year 2005 Directions
• Tax Year 2006 Directions

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E-FILED RETURN RESPONSIBILITIES

• Taxpayer (corporation) has overall
  responsibility for accuracy of return.
• Paid preparer prepares/reviews the return.
  Signs e-signature form (8879-C/S or 8453-C/S) as
  paid preparer.
• ERO (Electronic Return Originator) (1)
  Electronically sends the return to a transmitter
  who transmits the return to the IRS, or (2)
  directly transmits the return to the IRS.
• An accounting firm may sign the e-signature form
  as both the paid preparer and ERO.
  Alternatively, if the accounting firm is not
  performing the responsibilities of the ERO, it
  may sign the e-signature form solely as the paid
  preparer.
• If the client prepares and e-files the return,
  the client acts as the ERO but does not sign Form
  8453-C/S as such (only signs the taxpayer
  signature section).
• Transmitter The company that receives the
  return from the ERO, and transmits the return to
  the IRS. The transmitter will usually be the
  software provider, but may also be the tax
  practitioner or large taxpayer corporation if
  their transmitter software has been certified by
  the IRS.

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E-FILE KEY DEFINITIONS
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E-FILE PROCESS

• Upon clearing all the diagnostics generated by
  the softwares internal review, the ERO submits
  the electronic file via Internet to the
  transmitter. Or, if the ERO uses remote server
  software, then the ERO indicates to the
  transmitter that the return is ready for
  transmission to the IRS.
• The transmitter date stamps the file received
  from the ERO. IRS will honor this date, which is
  conceptually similar to a U.S. postmark. If
  software does not support electronic postmarking,
  the transmittal date applies.
• Transmitter transmits the return to the IRS. IRS
  notifies transmitter whether the return was
  accepted or rejected.

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E-FILE PROCESS

• If the return has been rejected, IRS notifies the
  transmitter of the rejection errors.
• Through the transmitter, the ERO generally checks
  the status of the return whether accepted or
  rejected for errors.
• The ERO clears any reject errors, re-creates the
  electronic return, and submits the corrected
  e-return to the transmitter for transmission to
  the IRS.

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E-FILE PROCESS

• Due date considerations
• - All prescribed due dates for filing paper tax
  returns apply to electronic returns.
• - The electronic portion of the return must be
  e-postmarked on or before the due date, including
  extensions, to be considered timely.
• - A return transmitted on or shortly before the
  due date that is rejected must be re-transmitted
  and accepted within 20 (5 for Form 7004) calendar
  days after the original transmission date. The
  clock does not restart if rejected again after
  the extended due date and during this 20 day
  period. (Corporations and preparers should be
  aware that some states may have established a
  shorter time frame for correcting a return.) The
  20 day perfection period is to cure reject
  errorsnot to correct/change numbers on the
  return. If the return numbers are incorrect, an
  amended return should be filed.
• The electronic return is not considered filed
  until it has been acknowledged by the Service as
  accepted.
• Recommendation e-file early to allow time to
  work through any potential rejection issues.

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WAIVER OF ELECTRONIC FILING REQUIREMENTS

• Review IRS Notice 2005-88, released November
  2005.
• Waiver criteria Technology constraints or undue
  financial hardship.
• Waiver request must be in writing, stating
• - Steps taken and reasons why unsuccessful
• - Declaration of undue hardships
• - Steps to be taken to ensure future ability to
  e-file.
• - Other details outlined in Notice.
• File request with Ogden Campus 45 days before
  return due date. Have a plan B for case where
  the waiver request is denied.
• Situations where waivers are generally granted
  for tax year 2005 (1) catastrophic events, (2)
  NOL/substituted returns, (3) Chapter 7
  bankruptcy, (4) final or last return filed.
• IRS has not and does not anticipate granting many
  waivers.
• See the IRS waiver guidance page on IRS.gov.

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ENGAGEMENT PLANNING FOR 2006 E-FILING

• Become familiar with the process for preparing
  returns under the e-filing mandate including any
  transition rules.
• Analyze all forms, statements, and elections
  required for tax year 2005 return.
• Consider change in facts and circumstances that
  would impact the tax return forms, statements,
  etc. required for tax
• year 2006.
• 4. Determine required format (XML, PDF, paper)
  for each form, statement, and election based on
  e-filing rules.
• 5. Gain an understanding of how your primary tax
  software is going to support the e-file process.
• Determine the additional time that will be
  necessary to prepare each engagement including
  scheduling/staffing.
• Consider outlining return preparation/review
  timeline with the objective of accelerating the
  actual filing date.

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FUTURE TRENDS

• Expansion of electronic filing requirement.
• Amended tax returns accepted for 2006 tax year
  and forward.
• Form 1120 Federal/State program expansion.
• Inclusion of Form 1065 in the MeF platform. Form
  1040 expected for 2009 tax year.
• Modification or elimination of transition rules.
• IRS goal is to collect all data prescribed by
  form instructions and regulations in electronic
  XML format.

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RESOURCES

• Access the IRS e-file website at www.irs.gov
• E-File for Large and Mid-Size Corporations
  website can be found at http//www.irs.gov/busine
  sses/corporations/article/0,,id146959,00.html
• IRS Publication 4163, Modernized e-File Handbook
  (for all 1120 e-file returns).
• Taxpayers IRS e-File for Large Taxpayers Filing
  their Own Corporate Income Tax Return.
• - e-Services Registration how to instructions
  can be found at
• http//www.irs.gov/pub/irs-schema/eservices_regis
  tration_process.pdf
• - Taxpayer online application how-to
  instructions can be found at http//www.irs.gov/
  pub/irs-schema/eservices_efile_application_process
  .pdf
• Tax Practitioners Publication 3112, IRS E-File
  application instructions (not for taxpayers).
• List serve e-mail distribution process created to
  keep interested parties informed. Sign up at
• http//www.irs.gov/businesses/content/0,,id15484
  2,00.html