This is a newsletter from
J.D. Choi of
Tax Technologies, Inc. to tax
professionals whose interests are improving the tax management processes.
Table of Contents
- Form 8865 released by the IRS today (February 13, 2001)
- E-filing anyone?
- Product Announcement
- Notices
1. Form 8865 released by the IRS today (February 13, 2001)
The final form 8865 for tax year 2000 was released by the IRS today. It is an 11 page long form with
complex underlying calculations. As previously reported, the reporting of the Form 8865 is required for
foreign partnerships with its year ending on or after December 31, 2000. Therefore, most of the calendar
year foreign partnerships will have to file the form 8865 this year. Further, contributions made to the
foreign partnerships since August 5, 1997, need to be filed with the first Form 8865 filed with the IRS
if they had not been reported previously.
I am pleased to announce that Tax Technologies, Inc. has completed and released the first version of
Form 8865 compliance software with the final form released today. Please read the product announcement
section below for details.
We are currently discussing potential licensing of our products to a number of accounting firms and
other tax software companies. If you are interested in licensing our software to prepare Form 8865, please
contact us at (866) 239-4884, or send me an e-mail at
Choi@TaxTechnologies.com.
2. E-filing anyone? »
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Electronic filing has been with us for sometime. Starting with tax year 2000, electronic filing is gaining
significant attention because any partnership having over 100 partners is required to file the entire return
electronically. According to recent statistics by the IRS, there are over 6,000 such partnerships subject to
the electronic filing requirements. Also, since the partnership structures have grown very complex over the
years, it will require complex software to meet the demands for the electronic filing requirements. Further,
there are significant activities regarding the standards for the electronic filing in various taxing
jurisdictions.
Since it appears that the electronic filing is here to stay and likely to expand into corporate tax returns,
I have decide to discuss the issues relating to the electronic tax return filing in this issue.
Currently, the most significant electronic filing requirement is that for the large partnerships. While
most other electronic filing is voluntary, the filing of large partnership's Form 1065 is mandatory with a
significant penalty provision. The filing of Form 1065 also requires electronic filing of Forms 5471 and
8865 among other forms. This electronic filing requirement created a significant market demand for software
that computes tax attributes and produces the electronic filing output for the large partnerships.
In response to such demands, we have developed Form 1065 electronic filing software that will produce
large partnership electronic returns. (See our press release.) In doing so, we have learned a few things
on electronic filing and would like to share our thoughts on the future of electronic filing on corporate
returns.
There are several major reasons why the government would like to have the returns filed electronically.
First, it would reduce cost of administration significantly. There are over seven million corporate and
partnership returns filed for 1999. Electronic filing has various validation criteria by which the content
of the returns are verified. Thus, even before the returns are filed, internal consistencies must be checked.
Otherwise, the IRS does not accept the return at all. It is this validation that would make it so attractive
for the government to require electronic filing. Since the returns are validated before it is filed, it
would significantly reduce government's burden to process the returns. Also by requiring the return to be
filed electronically, it can elimination the need for reproducing the returns by having the return typed-in
by government employees.
Second, it would enhance government's ability to analyze the returns. Since the electronically filed
returns are standardized and very structured, it would allow the IRS to quickly analyze the massive number
of returns for the same issues. Third, it would enhance the government's ability to derive statistical and
other population analysis. For example, IRS may be able to derive gross profit percentages of a specific
industry and therefore draw conclusive inference on transfer pricing. It would also allow effective tax
rate analysis on foreign earnings repatriation. Such level of analysis would allow the IRS to target the
companies for audit. Fourth, electronic filing allows the government to retain the returns much more
effectively that hard copy returns. Since electronically filed returns can be stored on digital medium,
it will cost much less for the government to retain the returns. It will also make it whole lot easier
to retrieve the returns and perform historical analysis on the targeted returns. Lastly, I believe the
IRS is almost ready (if not ready already) to process electronically filed corporate returns.
Given the tremendous benefits to the government, I would not be surprised at all if the IRS would soon
require some sector of corporations, such as large corporations with more than 100 member consolidated
returns or more than 100 Form 5471s to file their entire return electronically. For instance, the current
data definition for Form 1065 filing has over 7,000 data fields defined. In order for the IRS to require
the entire corporate return, it would need to define less than 1,000 additional data fields. Do a little
bit of math; it is obvious that IRS is almost ready to process the corporate returns and, thus, require
some form of electronic filing for corporate returns in the very near future.
From the taxpayers side, in order to file the returns electronically, the output from the compliance
application must conform with the format specified by the IRS. The IRS has published various publications
that specify the parameters for each of the forms to be filed electronically. The output data defined in
those publications is very complete and precise. Since the data is currently defined for the Form 1065
filing, it did not include the data definition for Forms 1120 and 1118. However, the publications have
almost all the corporate income tax forms defined already.
Some of the difficulties in producing the electronic returns is that the electronic filing requires much
more precise data reporting than that of the paper filing. I suppose that the higher level of precision in
electronic filing would enhance the IRS's ability to analyze the return data much more easily and precisely.
Since the IRS will be able to generate much more substantive analysis in the future, I would not at all be
surprised if the IRS started to raise the audit issues that were never raised before. Thus, it will become
more important that corporate tax department maintain tax reporting data that can support the consistency
within the return. Also, it will be increasingly important to maintain the tax data that is consistent from
year to year to avoid unnecessary burden of explaining inconsistencies of reporting between the years.
What does it all mean?
There are number of corporations that were developing a tax data warehouse. So far, tax data warehousing
had focused on building a tax data depository for the purposes of increasing efficiencies for tax compliance
processes and other tax functions. In my view, the tax data depository will become more important than ever
before. It will become a necessary part of the tax departments in order to meet the increased demands of
the future. It should be noted, however, that the successful implementation of a tax data depository must
take into account the growing demands for the future.
As stated above, there are over 7,000 data fields defined for partnership compliance. If we take into
account the entire federal tax compliance and planning, it is not difficult to imagine that the total
number of data fields that needs to be defined will exceed 10,000. We have already developed our own data
definition for all the tax forms that are currently required to be included with Form 1065. As the IRS
defines more electronic output definitions, we will reflect the additions accordingly. Given the magnitude
and the complexities of data definition, developing the data definition for the tax data warehouse is,
anyway you look at it, a very significant undertaking. However, I am afraid that most of the companies will
be required to have some form of tax data warehouse in the near future to meet growing demands.
The electronic filing will also significantly change the tax process in the future due to the mechanical
requirements. In my view, a larger portion of tax process will have to be centralized to enable the electronic
filing of large returns. Although the use of the Internet technologies allows distributed processing, there
are not many tax software products that fully employ the technology. Thus, if a company uses conventional
tax software, it would be very difficult to piece together returns prepared by various sections of the
company and produce an electronic return. Accordingly, the companies will need to centralize the tax
compliance function. Alternatively, it will need to use an Internet-technology based product to maintain
distributed processes.
3. Product Announcement »
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e8865 (See our press release.)
Tax Technologies "e8865" is the product of choice to help you file your hard copy or electronic version of
the Form 8865 for foreign partnerships. It simplifies the complexities associated with this filing and automates
partnership allocations, foreign income sourcing, and related expense allocation.
Released with full support for the Tax Year 2000 form, it can help you and your staff learn the steps
needed to file the form accurately. An easy to use menu structure walks you through tasks step-by-step and
allows you to divide work across team members while enabling tax process improvement. In addition, detailed
reporting shows the information needed to understand and verify calculations.
In conversations and demonstrations with a variety of companies, one message is clear – the software is
very easy to use. In one example, we introduced the software to a potential client for one hour. After
that hour, the person used the software to produce a substantial portion of their prior year return in
less than 45 minutes. Only one question was asked during the entire preparation session. With the inherent
complexities associated with the Form 8865, this is not only amazing but also a tribute to the product’s
ease of use.
e8865 is a cutting-edge product that takes advantage of the latest Internet technologies to simplify
deployment and usage. It can be installed to a single computer, a corporate intranet, or on the Internet.
Because the product runs within the browser, the tax preparation team can continue to use their existing
computers or laptops and work anywhere, anytime.
e1065 (See our press release.)
Tax Technologies "e1065" is the product of choice to help you file your hard copy or electronic version
of Form 1065 and related forms, schedules, and statements.
Starting in tax year 2000, all partnerships having over 100 partners are required to file their 1065
returns electronically. This product is specifically designed to help large partnerships reduce the cost
in meeting these electronic filing requirements. The flexibility of the partnership allocation calculations
also allows companies that need to file a large number of Form 1065s to gain efficiencies using the
software.
“The ease of use and adaptability of our e1065 application places it in a class by itself. With the
simplicity of our e-filing component, I would be surprised if any company could legitimately request a
waiver from the 1065 e-filing process this year”, says Biren Patel, Chief Information Officer for Tax
Technologies, Inc.
e1065 is also built on the same platform as e8865 and e5471. This yields seamless integration between
products and offers the same deployment and usage advantages of a true Internet-based application: the tax
preparation team can continue to use their existing computers or laptops and work anywhere, anytime.
Please note that IRS acceptance of Tax Technologies e1065 for e-filing does not constitute IRS endorsement
or approval of the quality of tax preparation services provided.
e5471
Tax Technologies "e5471" is the product of choice to gain efficiency during the preparation and filing
of hard copy or electronic versions of Form 5471 for controlled foreign corporations. It simplifies the
complexities associated with filing of Form 5471.
To reduce the amount of time spent on compliance, the application employs a radically different approach
from existing international tax software products. Historically, one of the most significant burdens in the
5471 compliance process is data collection. Tax Technologies leverages the Internet to eliminate this burden
with e5471. You will no longer need to send out tax data collection packages to collect the data you need
to prepare the return – e5471 virtually eliminates the data collection process.
Built on the same platform as e1065 and e8865, implementing the software in your environment takes very
little time and your tax compliance staff can complete their returns on schedule, under budget. e5471 can
greatly enhance the efficiencies of the tax compliance function and opens the door to a new era in
international tax compliance and planning.
If you are interested in our compliance products, please send me an e-mail at
Choi@TaxTechnologies.com or call us at (866) 239-4884 for a product demo.
4. Notices »
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FDTA-CITE International Tax Seminars, Dallas, Atlanta, and Los Angeles
I was invited to the International Tax Planning and Compliance - Ninth Annual International Tax Seminar
Series sponsored by the Council for International Tax Education (CITE). The seminars are scheduled on
March 26 through March 28 in Dallas, April 2 through April 4 in Atlanta, and June 11 through June 13 in
Los Angeles.
I will be presenting on the subject of International Tax Compliance. In particular, I will discuss the
issues with respect to "Preparing Form 8865 for Controlled Foreign Partnership." Since year 2001 is the
first year of full compliance for Form 8865, it would be a good idea to consider the large implications of
the Form 8865 compliance. I will discuss such implications of filing Form 8865 among other compliance
issues. Hope to see you there.
See you all in Salt Lake City, Utah - ACT Conference
I was invited to the ACT annual conference to speak on the subject of International Tax Compliance and
Planning via the Internet. The conference will be in Salt Lake City on February 13th through 15th. Please
check out
http://www.taxact.org/conferences/200102-brochure.pdf for the details of the conference schedule and other information
regarding the conference.
As most of you already know, the Association for Computers & Taxation ("ACT") is a nonprofit, national
organization designed to assist its members in identifying and solving the problems involved in automating
the corporate tax function. Over the years, it has grown as one of the most influential entities among tax
professionals. I am very excited about being invited to the conference as a speaker on the subject of
international taxation. I hope to see many of you there.
Check out our bulletin
Check out our bulletin to see if you would like to list a job or would like to find a job. Since most
of our visitors are from big four accounting firms and international tax people from corporate tax departments,
it would be a good forum to recruit employees for international tax jobs. So, if you have an opening, send
us an e-mail. We also have number of jobs posted on our bulletin.
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Regards,
J.D. Choi
CEO, Tax Technologies, Inc.
201-387-9451
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