Many Happy Returns

The IRS wants to usher in the era of E-filing, but going paperless won't be easy.

This past January, when officials at the Internal Revenue Service announced they wanted many corporations to begin filing their returns electronically for the 2005 tax year, critics howled. After all, few companies appeared ready to go smokeless. In 2004 — when businesses were allowed to voluntarily file their tax returns electronically — only 332 companies (with assets of $10 million or more) did. Even Deborah Nolan, IRS commissioner for the Large and Mid Size Business Division, says the prospect of electronic filing has caused “a lot of angst.”

Filers will just have to get over it. The IRS appears committed to a paperless system — and with good reason. The dark, mysterious labyrinth known as the U.S. tax code generates enough paperwork each year to bury entire civilizations. In some cases, the forms from just one corporation fill an entire tractor trailer. Given the avalanche of paper, it’s not surprising that it takes the understaffed agency anywhere from 14 months to two years to sift through all incoming corporate tax returns and make them available to field agents for auditing. Nolan says E-filing will help the IRS to reduce the time frame to 90–120 days.

That’s a heck of a time-saver. What’s more, paperless filing should make it easier for IRS agents to conduct risk assessments and better allocate enforcement resources. It will also likely help the agency quickly identify corporate taxpayers that warrant an audit — not exactly swell news for the 11,000 businesses that will be affected by the new rule in 2006.

Most of those companies (outfits with assets of $50 million or more that also file at least 250 returns a year) have until September 15 to make the switch to Internet filing. Experts say the looming deadline places a great deal of pressure on corporate tax departments — and the IT workers who support them. Typically, a return is prepared using multiple programs and platforms. The new regulation requires that an entire return be created on a single platform. IT departments must now figure out how to make this happen. The worry? According to Stephen R. Buschel, tax partner with BDO Seidman LLP, a rejected E-file transmission could cause a company to miss a filing deadline and therefore be at risk for penalties. Although guidance for this issue may yet be forthcoming from the agency, Buschel says: “I think the IRS is still struggling with that.”

Filers will no doubt be glad to know they’re not the only ones struggling with the mandate. One early problem: large companies often use one kind of tax-preparation software for the financial portion of their tax returns and other programs such as Microsoft Word or Excel to add information for elections, contracts, or appraisals. Initially, the IRS indicated it would only accept electronic returns using the same extensible markup language (XML) format that the agency uses in its internal E-file system.

After holding discussions with various groups (including Tax Executives International), the agency eventually softened its stance on file formats. While an entire tax-year return must be submitted as one file, businesses will be allowed to attach some supporting data as PDF documents. Officials at the IRS also decided to permit companies that file at least 25 agency-specified international forms to use paper — as long as the company also submits a summary in XML. Likewise, the IRS agreed that in the first year of compliance it would accept summary totals for transactional data such as depreciation.

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