Donna Castellano

Robert Jameson

Tax Year 2006: e-Filing Roundup

Key steps show companies how to develop action plans for the e-filing mandate and ensure a successful filing season.

October 25, 2007
by Donna Castellano and Robert Jameson

September 15, 2007 marked the second anniversary of the Modernized e–File Initiative (MeF) for corporate income tax, when companies with assets over $10 million were required to file their income tax returns electronically. 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 modernizes the process — reducing the burden of paper filing to improve data quality, automate analysis, identify trends, track commonalities and streamline compliance efforts. While the initiative was largely successful in tax year 2005, many companies that transitioned to e–filing endured numerous hiccups and headaches in the first year. 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. Times have changed.

Tax year 2006 e-filing came and went very smoothly. This second year of MeF found a reduction in the learning curve. Taxpayers had a year of experience under their belts in utilizing their software applications and knew what to expect regarding IRS turnaround times for acknowledging filing acceptance or rejections due to format or validation errors.

Jumping the Tax Hurdles

Corporate tax departments and software vendors continued to work diligently throughout 2007 to ensure compliance with new changes to the MeF mandate. Under the new requirements, additional tax departments had to aggregate data electronically. In tax year 2005, companies with more than $50 million in assets and 250 returns were mandated to e-file. The change for tax year 2006 instituted that companies with more than $10 million in assets and 250 returns were now mandated to e-file. A new group of companies now 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 for tax year 2005, the IRS allowed departments to use PDF file attachments and paper filing options instead of XML for some international forms. This provided some relief to the aggregation but still required forms and schedules still had to be collected into one system. Additionally, even the PDF files had to be added to the XML file in a prescribed manner. Tax year 2006 has seen a reduction in the number of allowed forms in PDF format. The following forms where mandated to be in XML format only (PDF is no longer accepted for the following):

  • Entire Form 851 — Affiliations Schedule which lists all entities included in the consolidated return, changes in stock holdings, etc.

  • 1120 PC and 1120L when part of a mixed insurance consolidation

  • International Forms — all international forms including 5471, 5472, 8858, 8865 and their associated schedules

  • All amended and superseding returns

Developing an Action Plan

Hurdles from 2005 have translated into efficient success for 2006, with companies now able to plan accordingly for what lies ahead. The path forward for MeF remains the same, a well-devised action plan is required to help companies develop and continue to improve upon internal processes necessary for tackling e-filing challenges. These processes will also be valuable for new laws and changes the tax department will face in the future.

To learn more about the steps — assessment, education, preparation, gap analysis and implementation that can guide companies in developing their action plans for the e-filing mandate and ensure a successful filing season, please view the full article at: vertexinc.com/AICPA.

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Donna Castellano is a Senior Product Manager for Vertex Inc., which provides worldwide tax technology solutions. Robert Jameson is also a Senior Product Manager for Vertex Inc. with a concentration in income tax. With over 18 years of corporate tax and financial accounting experience, Castellano has become an expert in areas of provision to domestic income tax compliance to international tax planning and compliance. She is a regular presenter of income tax thought leadership Webcasts and has been a speaker at events held by leading tax organizations such as TEI and ACT. Jameson has over 13 years of corporate income tax experience with Vertex.