IRS takes bold step, mandates e-filing of corporate returns
To radically scale up its electronic filing, the IRS will make e-filing mandatory for an estimated 30,000 corporations and nonprofits during the next two years—even though it only began accepting these organizations’ tax returns electronically for the first time last year.
E-filing eliminates the IRS’ burden of sifting through mountains of paper forms, which can amount to 50,000 pages delivered by truck for a single company, agency officials said.
The Modernized e-Filing system, which the IRS unveiled last year, speeds processing, lets the agency use its resources more efficiently, and provides privacy and security, officials said. It also supports IRS efforts to strengthen compliance and enforcement of tax laws.
“Not only can we work much more quickly, it helps us identify issues of risk much more efficiently. It allows us to focus on taxpayers and issues that require audits,” said Deborah Nolan, deputy IRS commissioner for the Large and Mid-sized Business Division. “Just as important, it enables us to take resources away from those taxpayers and issues that don’t warrant examination.”
Corporate e-filing will improve compliance by accelerating into the audit stream tax returns that require greater attention, IRS commissioner Mark Everson said. Audits on average have taken five years to complete for large corporations.
“Speeding processing also will help identify emerging trends and abuses earlier, enabling the IRS to address problems before they get out of hand,” Everson said.
Corporate e-filing also eliminates the need for copies of files, Nolan said.
“It enables us to manipulate the data and conduct data mining much more quickly so we can identify issues” and taxpayers who represent a compliance risk, she said.
The IRS this month announced its plan to mandate corporate e-filing, requiring businesses with more than $50 million in assets to e-file beginning next year when they file with forms 1120 and 1120S for 2005. The e-filing requirements only apply to organizations that file at least 250 returns—including income tax, excise tax and employment tax—during a calendar year. Any tax-exempt organization with more than $100 million in assets must also file its annual information return, Form 990, electronically.
In 2007, the IRS will lower the threshold for e-filing to include returns from companies and tax-exempt organizations with at least $10 million in assets. Private foundations and charitable trusts will also have to start electronically filing their annual information returns.
The IRS expects more than 20,000 large corporate taxpayers and as many as 10,000 tax-exempt entities to be covered by the filing requirement by 2007.
The agency will also work on developing the systems that will let companies, beginning in 2006, file their state taxes when they submit their federal tax forms, CIO Todd Grams said. “That’s part of trying to streamline the business of electronic filing for the corporations and for the states. It puts us in a much better position to be able to implement the mandatory policy,” he said.
E-filing has been voluntary for individual taxpayers. “But as we built the capability, the commissioner has always been a proponent of leveraging technology to improve service and enforcement,” Nolan said.
E-filing for large corporate returns has been possible only since summer, so the tax agency continues to receive a lot of paper. The IRS has met with industry groups, such as the American Bar Association, to encourage e-filing.
A large group of corporate taxpayers had anticipated the move to e-filing, she said.
“One of the things that we’re hearing is, as long as the software vendors come to the table and they are developing products for them, it would make it much easier for the companies to electronically file,” No- lan said.
Most tax software companies have worked closely with the IRS on the design and development of the new e-file system, she said. Some of them have already made necessary changes to their tax software.
The IRS provides security and privacy for submitters to transmit data through Web ser- vices using industry standards such as Se-cure Sockets Layer en- cryption. “IRS taxpayer privacy and integrity is of utmost importance. In terms of data storage, we have the same security standards for all tax information. It is very guarded,” said Joan Barr, technical requirements manager for Modernized e-File.
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