Mandatory e-filing for large corporations and exempt organizations.

• Author: Goldstein, Benson S.

In 2004, the IRS established "the Modernized e-File" system for e-filing (1) Form 1120 for corporations, (2) Form 1120-S, U.S. Income Tax Return for an S Corporation, for S corporations, and (3) the Form 990 series used by exempt organizations. While the Service generally encourages all corporations and exempt organizations to file tax returns electronically, the agency is now requiring certain large entities to file tax returns that way, too.

Temp. and Prop. Regs.

In early 2005, the IRS issued temporary and proposed regulations (1) requiring large corporations and exempt organizations to e-file tax returns. For tax years ending after Dec. 30, 2005, these rules generally require (1) corporations with total assets of $50 million or more to e-file Forms 1120 and 1120-S and (2) exempt organizations with total assets of $100 million or more to e-file Form 990.

This item principally focuses on the mandatory e-file program's effect on large corporations, but many of the same concepts apply to large exempt organizations as well. Tax professionals should carefully review the applicable Service guidance, to understand the particular rules for the type of entity for which they are preparing a return or providing tax advice.

Many tax advisers might be lulled into believing the regulations will only affect large corporations and exempt organizations; however, in general, they will profoundly affect the mid-size versions of these entities. For tax years ending after Dec. 30, 2006, the e-filing requirement will be expanded to cover (1) returns of corporations and exempt organizations with $10 million or more in total assets and (2) fliers of Form 990-PE Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation (i.e., all private foundations and charitable trusts, regardless of asset size).

The e-filing mandate for the 2006 and 2007 filing seasons only applies to entities that file 250 or more returns during a calendar year, including income tax, excise tax, employment tax and information returns (e.g., Forms 1099 and W-2). Nevertheless, after taking this threshold into account, a simple C corporation with modest real estate holdings could quickly exceed the $10 million total asset threshold for its 2006 return and be required to e-file.

IRS Hearing

The AICPA submitted comments on the regulations on Feb. 28, 2005; its Tax Executive Committee Chair, Thomas J. Purcell III, testified before the Service on...