Tax Data Management - Second Issue 2006

This is a newsletter from J.D. Choi of Tax Technologies, Inc. to tax professionals who are interested in improving the tax management processes.

GE Files Its Tax Returns Electronically

The IRS issued a news bulletin related to the successful execution of the nation’s largest tax return (IR 2006-084). Part of the announcement is reproduced below:

IRS e-file Moves Forward; Successfully Executes
Electronic Filing of Nation’s Largest Tax Return

WASHINGTON —The Internal Revenue Service today announced significant progress in its corporate e-file program, including the successful May 18, 2006 e-filing of the nation’s largest tax return from General Electric (GE).

On paper, GE’s e-filed return would have been approximately 24,000 pages long. After filing, GE received IRS’ acknowledgement of its filing in about an hour. The file was 237 MB.

“Having GE file electronically shows the program is working,” said IRS Commissioner Mark W. Everson. “Having the largest tax return is a major milestone for the corporate e-file program. I appreciate GE’s work to get this done.”
 

The success of GE’s e-filing of its tax return is a clear indication that the IRS is capable of processing large electronic files. Consequently, it is unlikely that the IRS will grant waivers due to technical limitations. Given the fact that IRS has made it clear that it will not grant waivers due to software limitations by taxpayers already, it is a foregone conclusion that all corporate taxpayers subject to e-filing will have to file their returns through modernized e-filing.



Newsletter Contents

1. Is your software ready to e-file your corporate return?
2. FAS 109 Training

1) Is your software ready to e-file your corporate return? ›› Return to TOC

The electronic filing of tax returns requires three additional steps to the method of filing paper returns used in the past:

• Produce e-file
• Review e-file content
• Submit e-file to and receive acknowledgement from the IRS

a) Produce e-file

There is not a standard process by which a corporation produces an XML file. Some software vendors have a separate e-file generation process through the installation of an additional server; whereas, other vendors have a more integrated process of reviewing and producing an XML file as part of the tax return process.

From the processing perspective, a company should focus on testing the generation of its e-file first. Because producing the XML file is the first critical step, it is imperative that a company test and perfect the process early in the tax season. As a matter of fact, I was informed that many companies are having difficulty installing additional software required to produce the e-file. Since most companies are still using a client server version of a tax compliance software, which requires installing the tax software in the server environment within the company, the installation of the e-filing module and operation of the e-file generation will require a significant level of coordination between the vendors and the companies’ IT teams. Installing, testing, and applying patches will require significant time and effort. Consequently, a company should test the installation and produce a draft XML file as part of its preparation process to ensure it can produce an XML file from its tax compliance software.

The IRS requires a company to file a single XML file as its return. Therefore, a company using multiple software or multiple vendors to produce its return should also test how they can aggregate the multiple XML files into a single file that it can submit to the IRS.

Even though the e-file generation process is not standardized, any software that is certified to produce the XML file will produce standardized output. Therefore, if a company is using multiple software, it can aggregate the files produced from each software into a single file so that the company can file the collective file with the IRS. Likewise, if a company employs multiple service providers, each service provider should produce its portion of the return in a standard XML file that can be aggregated into a single file so it can be submitted to the IRS.

The issue is how the aggregation can be done effectively. Although someone, who understands the XML language and IRS XML schema, can aggregate an XML file manually, it is generally inconceivable that many of the corporate IT or tax people actually can aggregate multiple XML files into a single file that they can submit to the IRS.

In response to this perceived difficulty and the underlying reality that companies have been using multiple software and multiple vendors (especially in the case of large corporations), TTI advocated, during its e-file conference with the IRS and software vendors in May of this year, an open interoperability standard by which all tax software vendors provide an aggregation mechanism to their users. Under the TTI proposal, any vendor software would be able to import an XML file produced by any other software so that it could be aggregated into a single XML file. This would have facilitated companies using multiple software and multiple service providers to aggregate partial XML files into a single XML file so it can be filed with the IRS. As it turns out, TTI is the only tax software provider that has produced the aggregation function based on the open interoperability standard.

During the e-file conference, the issue of aggregation was discussed extensively. Some vendors require the source data be imported and the returns processed in their software before an XML file can be produced. Other vendors will only aggregate the XML files produced from other service providers that are using the same software. Both of these approaches will impose significant limitations to companies that are using multiple software and multiple vendors to prepare their tax returns.

In response to the difficulties companies are having, TTI has decided to license the aggregation function to any company that will need to aggregate the XML files to produce a single XML file for submission. Although TTI has built the aggregation function as part of its software (Tax Series) so that its users can aggregate all XML files, TTI conceded that non-Tax Series users may need this function to be able to produce a single XML file and decided to license it separately to non-Tax Series users. Of course, it is available to licensed Tax Series users free of charge.

b) Review e-file content

Assume that a company has successfully produced an XML file from its software. The XML file is very difficult to review because it is a blob of text that includes data names, data structure, and data content in a single file. Thus, if the company has a large number of pages in its return, like GE did, it will be very difficult for anyone to review the content of the return in paper format.

Why should a preparer review the content of an XML file that has been produced from a tax preparation software that can produce a paper return? The answer depends on the software a company uses to produce the XML file. As stated in the beginning of this newsletter, there is not a standard process by which an e-file is generated. For example, some software can produce an XML file only through a separate process. If this is the case, the tax return preparer cannot review the content of the e-file during the return preparation process. The tax return preparer can only review the content of the XML file at the end of the process, which can cause a significant burden on the process because the return preparation will be done by many different individuals in the tax department; whereas, generating an e-file can be done by one person and thus force the review by a limited number of people in the tax department.

Also, if the e-file generation process is separate from that of the tax return preparation process, it is not unreasonable to presume that there may be discrepancies between the data on the paper return and the data in the XML file. I do not believe any of the tax software vendors guarantee that the content of XML file is exactly the same as that of the paper return. It cannot. In some cases, an e-file requires additional data that is not present on the paper returns. Thus, no software vendor can guarantee that the content of the e-file is exactly the same as that of the paper return and, consequently, it is the taxpayer’s burden to review and validate the content of the XML file before it is submitted to the IRS.

Clearly, companies are very anxious about the difficulties of reviewing the content of their XML files. In response to these valid concerns, TTI has decided to separately license the review function to non-Tax Series users. The review module is called eFileReviewer™. Using this product, companies can upload an XML file, select which portion of the XML file they want to produce in PDF format, and generate tax returns so that they can compare the content of the XML file to the tax return produced on paper from their own tax preparation software. Once a company has validated the PDF format tax return produced from eFileReviewer, it can be stored as an “as-filed” return along with the XML file so that it can be used as part of the audit in the future. TTI recommends companies frequently review the XML content as part of the return preparation process.

c) Submit e-file and receive acknowledgement from the IRS

Once a company produces and validates an XML file, it needs to submit the return to the IRS. If a software provider is also an online service provider, companies can have their software provider submit their electronic return once it is completed. However, if the software provider is not an online service provider or transmitter, the company will need to register with the IRS so the company can transmit the return.
(See http://www.irs.gov/pub/irs-schema/eservices_efile_application_process.pdf for the details of registration process.)

If a company has to register to transmit its return for submission, the company must designate a Responsible Official and a Delegated User. Both of these individuals will need to register with the IRS. Once the registration process is complete, the IRS will send the company two separate documents: Electronic Filing Identification Number (EFIN) and Electronic Transmitter Identification Number (ETIN). The company will need an EFIN and an ETIN in order to transmit the tax return to the IRS. Registering is an annual process.

As the tax return is being prepared during the tax compliance season, a company will also need to complete communication testing with the IRS to ensure that it can successfully transmit test data to the IRS. This process does not ensure that the IRS will accept the company’s XML file once it is actually submitted. Once the communication testing is done, a company is ready for e-file.

Clearly, the entire submission process is a lot simpler for a company that is using a tax software vendor that has been certified by the IRS to be an online service provider. To find out if a company’s software provider is also an online service provider, contact the software provider. Tax Series users will not have to go through registration process because TTI is an online service provider.

A company will need to spend considerable time and effort to produce, validate, and submit its electronic tax return with the IRS. It will be critical for a company to ensure that its software can produce an XML file, be able to review the content of the XML file in comparison to the paper file, and test the submission early in the process.



2) FAS 109 Training ›› Return to TOC

TTI offers a two-day course designed to walk individuals through the logical steps required for preparation of the FAS 109 income tax disclosures while meeting today’s financial statement disclosure demands. Given the increased scrutiny on creating transparency for financial numbers and the tight timelines for meeting these reporting requirements, it is now more important than ever to have people that understand the impact of FAS 109 issues and efficient processes that ensure accurate tax disclosures. This course goes beyond accounting theory and actually teaches individuals the “how to” part of preparing the current and deferred tax components of the global corporate income tax provision. It provides assistance with difficult areas of the provision reporting process including items related to Stock Based Compensation, FAS 5 Tax Reserves, Valuation Allowances, Other Comprehensive Income, Currency Translation Adjustments, Tax Rate Change Adjustments, States, Net Operating Losses, and Foreign Tax Credits. This course continues to be very well-received by attendees as the topics are right on target and timely with the current scrutiny on provision processes.

For more information please contact TTI at 201-387-9451 or visit www.taxtechnologies.com/training/FAS109.asp.

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Regards,

J.D. Choi
CEO, Tax Technologies, Inc.
201-387-9451