Gearing up for 'e-file': for 2006 tax returns, the IRS has broadened the scope of corporations required to electronically file their returns. Financial Executives Research Foundation (FERF) asked several financial executives how they expect to respond.

• Author: de Mesa Graziano, Cheryl
• Position: TAX - Internal Revenue Service

U.S. corporate taxpayers may be filing their tax returns more efficiently--thanks to technological advances--but it's not without additional costs to their tax departments. Conversely, the recipient Internal Revenue Service (IRS) is pleased, since "e-file" is speeding the process and easing tax audits.

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Indeed, after receiving electronic tax filings from more than 12,500 of the largest U.S. corporations last fall, Deborah Nolan, commissioner of the Large and Mid-Size Business Division (LMSB), heralded the transition from paper returns as a "significant milestone in the Service's modernization efforts that will pay dividends for years to come." Nolan credited the success to the collaboration with taxpayers, practitioners and software developers who developed the system to process volumes of complex returns, as well as rules to facilitate taxpayer compliance.

Of those who e-filed, nearly all used commercial software to prepare returns, with about 400 companies self-transmitting. Currently, 18 vendors have passed IRS requirements for e-filing corporate returns forms 1120 and 1120S. Meeting the requirements means that software can provide correct data in the proper format for processing.

Almost 40 percent of 101 corporate tax executives surveyed last October by KPMG and the Tax Executives Institute (TEI) said the biggest e-file challenge they faced was getting comfortable that the e-file included what the corporation intended to be filed. Compliance software issues were cited by 35 percent of the respondents.

Most companies surveyed, 88 percent, incurred additional e-file costs in terms of both money and staffing, with 40 percent categorizing increases as "substantial" and 48 percent, "modest." Of those reporting added costs, 40 percent said the expenses resulted from both tax department and technology support resources, with an additional 33 percent pinpointing tax department staff resources only. Of those that were required to electronically file their 2005 taxes by Sept. 15, 2006, 52 percent reported that their tax return was accepted on the first try; only 3 percent experienced a rejected return more than five times.

Changes for 2006 Tax Returns

Though the 2005 e-file was considered a success, a Thomson Tax & Accounting survey revealed that 712 tax professionals said e-file is still their greatest challenge--particularly with regard to international, federal and state returns, as well as handling of consolidated returns, partnerships and paperless processing.

Part of their concern likely stems from the next tier of companies required to e-file in 2007. Starting with tax periods ending on or after Dec. 31, 2006, corporations with assets of $10 million or more that file U.S. Corporation Income Tax Return Forms 1120 or 1120S and that file over 250 returns per year, must electronically submit their 2006 tax returns through the IRS e-file program.

"This next tier of companies may not have access to the same staffing and technology resources as the larger companies that filed this year, so it's even more prudent that smaller companies...