E-filing year one: looking back and planning for the future.

• Author: Castellano, Donna

September 15 marked the one-year anniversary of the Modernized e-File Initiative (MeF) for corporate income tax, when companies with assets over $50 million were required to electronically file their income tax returns. The process of preparing and filing corporate income tax returns has never been a small feat. Large companies typically have numerous subsidiaries, multiple elections and disclosure statements, and attachments that result in thousands of pages of printed return material.

E-filing was intended to modernize the process. Removing the burden of paper filing would improve data quality, automate analysis, identify trends, track commonalities, and streamline compliance efforts. While the initiative was largely successful, many companies that transitioned to e-filing endured numerous hiccups and headaches. Worse, many understaffed corporate tax departments that struggled to grapple with the effects of the Sarbanes-Oxley Act and Schedule M-3 requirements from 2004 saw MeF as yet another unfunded government mandate that diverted both time and budget dollars from other tasks.

Now, as tax year 2005 draws to a close, the industry must evaluate what went well--and what went wrong--before e-filing begins for 2006. By breaking down the challenges and opportunities of e-filing this past year, tax professionals can pinpoint solutions for navigating the same pitfalls next year, and achieving e-filing's full potential.

Jumping the Tax Hurdles

Corporate tax departments and software vendors worked diligently throughout 2006 to comply with the MeF mandate. Under the new requirements, tax departments had to aggregate data electronically. Companies then had to format, validate, attach supporting documents, review, and transmit their return in one consolidated file.

During the paper-filing era, tax departments commonly used multiple applications such as tax compliance software, Microsoft Excel, and Microsoft Word to calculate and store return data. Companies could utilize the functions and formatting within these tools to create supporting documents that could be printed and manually inserted into the paper file return. As a result of e-filing mandate, tax departments had to consolidate the information into one methodology--Extensible Markup Language (XML), a flexible text format designed to meet the challenges of large scale electronic publishing. To ease the transition to e-filing, in 2005 the IRS allowed departments to use PDF file attachments and paper filing options instead of XML for some domestic and international forms. This provided some relief to the aggregation but still required numerous forms and schedules had to be collected into one system. Additionally, even the PDF files had to be added to the XML file in a prescribed manner.

In addition to finding their way around new technology, tax departments had to learn and understand IRS modernized e-filing requirements. Just getting an inventory of all the mandated filing requirements and identifying data sources was difficult. Then tax professionals had to define new terms, which further constricted already tight timeframes. Two new terms that were important to understand were "business rule validations" and "format validations."

Business rule validations defined IRS rules that related to the tax correctness of the return. Business rules consist of 12 different categories...