IRS e-filing requirements sparking concerns.

• Author: Prysock, Mark
• Position: WashingtonINSIGHTS - Internal Revenue Service

Get ready for electronic filing, in a big way. The Internal Revenue Service (IRS) has enacted temporary regulations that will require corporations with gross assets of $50 million or more--and which also file at least 250 returns a year--to electronically file their returns starting in 2006 (for tax year 2005). After the first effective year, the requirements will affect more corporations, those with gross assets above $10 million.

The IRS claims that the electronic filing will benefit taxpayers and the agency by eliminating manual processing of returns and reducing errors, which are more likely during manual preparation and processing. The error rate for corporate income tax returns filed on Form 1120 on paper is approximately 20 percent, the agency claims. This is due in roughly equal parts to IRS processing errors and taxpayer return mistakes. In contrast, the IRS claims that electronically filed returns have error rates under 1 percent.

Nevertheless, the business community has identified several potential problems with the new electronic filing requirements, and FEI's Committee on Taxation (COT) has met with IRS representatives to discuss these matters. To begin with, even the largest companies don't currently have the technology to fully implement electronic filing. It will be difficult for very large corporations to comply with the requirement to submit a single file that includes all information generally filed with a tax return. The software utilized to prepare returns doesn't include all the information filed with the return, which typically comes from many different systems that cannot be merged together.

Companies are also skeptical of claims by software vendors about their ability to implement electronic filing under the current timeline. The recent experience with Schedule M-3 is instructive. As companies use the new Schedule M-3 software, they are reporting problem after problem to the vendors, requiring new versions of the software to be released continuously.

Since this process is ongoing, it requires significantly more time than initially expected, and problems are likely to continue well into next year. Based on this experience, FEI's Committee on Taxation anticipates that companies will need additional time to review and test their electronic filings and to address any unforeseen software problems.

Companies have also expressed concerns related to privacy and security, such as fears about sensitive tax return information...