We will sponsor a conference on US Federal e-filing issues at the Harvard Club of New York on October 26th. In that conference, we have invited a representative from the IRS to provide guidance on e-filing issues. Hope you can join us.

Newsletter of Contents

1. Would you file this as your tax return?
2. E-filing conference information
3. Section 987 conference information
4. FAS 109 Training
5. Preparing Form 8858 and other International Compliance

1) Would you file this as your tax return?   ›› Return to TOC

We have seen many communications on mandated electronic filing for tax year 2005. The following are examples of electronic tax returns that are filed to six different taxing jurisdictions:

Example 1:
<IRS1120 documentId="A" documentType="Form" documentName="IRS 1120">
<ConsolidatedReturn>X</ConsolidatedReturn>
<PersonalHoldingCompany>X</PersonalHoldingCompany>
<PersonalServiceCorporation>X</PersonalServiceCorporation>
<DateIncorporated>1967-08-13</DateIncorporated>
<TotalAssets>0</TotalAssets>
<InitialReturn>X</InitialReturn>
<AddressChange>X</AddressChange>

Example 2:
#0136****STM001 PG01 520000006 LN01 OTHER
INCOME 00000001028 #0136****STM002 PG01 520000006
LN01 OTHER EXPENSES 00000006686 #0136****STM003 PG01
520000006 LN01 INTERCOMPANY RENTAL EXPENSE
00000002317 #0136****STM004 PG01 520000006

Example 3:
0880****NJ1065B22368404922368404933109520000001
20042004010120041231HELPING HANDS ORNAMENTS
200506210000001000000000001100000001424 1 ANY STREET
ANYTOWN NJ07901 GLASS
FABRICATI19970515000000000008000000000001 1
00000900000 00000100000 00000000000 00000000000 00000000000
00000000000 00000010000 00000000000 00000000000
00000010000-00000000000 00001000000 00000000000 00000000000
00000000000 00001000000 00000100000 00000000000 00000000000
00000010000 00000000000 00000000000 00000000000 00000110000
00000890000 00000500000 00000000000 00000000000 00000890000
00000000000 00000890000 00000000000 00000000000 00000000000
00000445000 00000000000 00000000000 00000445000 00000000000
00000445000 00000000000 00000002723 00000003847 #

Example 4:
<TotBusLossDeduction>0</TotBusLossDeduction><AdjTaxBas
eBeforeStatExem>298344</AdjTaxBaseBeforeStatExem><Adj
TaxBase>298344</AdjTaxBase><ReductAdjTaxBase>0</Redu
ctAdjTaxBase><CompReductFlag>X</CompReductFlag><Taxa
bleBase>298344</TaxableBase><TaxBeforeCredits>5669</Ta
xBeforeCredits><TaxAfterITC>5669</TaxAfterITC><SBorCon
tribCrd>4472</SBorContribCrd><UnicorpSCorpCrd>447</Unic
orpSCorpCrd><TaxAfterNonrefCrds>4025</TaxAfterNonrefCr
ds><EstPayments>5000</EstPayments><TotPaymentsCrds>5
000</TotPaymentsCrds><Overpayment>975</Overpayment>
<CreditForward>975</CreditForward></C8000><C8000C><A
djBusIncSubtotal>103812</AdjBusIncSubtotal><AdjBusIncome
>164615</AdjBusIncome><TaxBaseForCredit>134255</TaxB
aseForCredit><IncomePercent>1.226137</IncomePercent><A
lternateTax>3292</AlternateTax><AlternateCredit>2377</Alt
ernateCredit><SmallBusCredit>2377</SmallBusCredit><TaxAf
terSBC>3292</TaxAfterSBC><HomelessDiff>0</HomelessDiff
><TaxAfterContribCrds>0</TaxAfterContribCrds></C8000C>
;<C8000KC><ShareholdersOfficers><Name>Snowman
Frosty</Name><OfficerInd>X</OfficerInd><PercentTime>1.
000000</PercentTime>

Example 5:
<SOAP:Body>

<efile:TransmissionManifest count="1"><Reference
contentLocation="12-6542004243TTI1391"
electronicPostmark="2005-08-31T23:34:02-
04:00"/></efile:TransmissionManifest>

</SOAP:Body>

</SOAP:Envelope>
--MIMEBoundary
Content-Type: multipart/related;
boundary="Return001PartBoundary"; type="text/xml"
Content-Location: 12-6542004243TTI1391

Example 6:
D01SCH K1 565 0000003987654321123456789ILLINOIS 2004
CORPORATION FULLFIELD ADDRESS LINE 1
MMMMMMMMMMMMMM MMMMMADDRESS LINE 2
MMMMMMMMMMMMMMMMMMMMCITY NAME
MMMMMMMMMMMMLA33333
L00000000050000000000250000000013850001
015.0000015.0000015.0000015.0000020.0000028.000098765432109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 K1 565 0000004987654321223456789INDIVIDUAL PARTNER A

Can you tell if they are for the same company or for the same period? Can you tell if the file has the same data that was on the forms as you saw in the tax software you were using? If you can’t, would you think the VP of tax or CFO who is responsible for the tax return would feel comfortable filing the return?

The issue is obvious once you see the data file. The electronic filing will create tremendous benefit to the taxing jurisdictions. It will allow them to force accurate tax returns with built-in validations, process the returns with less cost than current process, process them much faster and allow them to build data analysis from the tax returns.

How about the taxpayer? What is the benefit for the taxpayer? Unfortunately, there is no immediate benefit. E-filing advocates say that it will reduce the audit cycle and help avoid transposition errors commonplace with the scanning of paper returns. While it certainly has the potential to expedite government review, tangible benefits to taxpayers are still to be proven.

a) Trend in electronic filing

So, what is going on in the world of electronic filing? As you can see in the above examples, different jurisdictions employ different electronic filing standards. Even in one jurisdiction, different electronic filing standards are applied for one type of return to another. In the examples above, one of them is a US consolidated Form 1120 filing and one of them is US Partnership Form 1065 filing. Also, the same forms (such as Form 5471) are required to be prepared in a totally different format depending on what return it is attached to. For example, the Form 5471 attached to Form 1120 filing is prepared one way versus the same form attached to Form 1065 is prepared entirely different way. The trend, however, is leaning towards XML filing format with the new IRS modernized e-file.

It is clear more and more taxing jurisdictions are requiring electronic filing. Some of the European taxing jurisdictions have started electronic filing, US Federal returns is required for electronic filing, and some of the US state returns are being required to be filed electronically. Most of them have their own electronic filing standards.

Some may say why it should be any different from having to file different forms for different jurisdictions. It is substantively different from having to file different forms. Under the new requirements, taxpayers are required to produce the data files that are very different from the technology perspective.

Up until now, companies had to produce the forms that were issued by the taxing jurisdictions. There was no technological requirement from the taxing jurisdictions. Under current standards, companies (or their software vendors) have to produce the electronic filing from vastly different technology basis. For example, some of the returns are filed in the old "flat file" format with columns and rows while others require new XML (extensible markup language) file. The production of each would require significantly different programming than producing different forms using the same technology.

As a result, it creates a state of chaos and, consequently, a significant burden to the companies. As some of the states require electronic filing and others do not, companies will have to file electronic filing for some and paper filing for the others. It creates significant administrative burden as companies will have to produce paper returns for some jurisdictions even if it may not be necessary for the filing jurisdiction. For example, some of the states require separate pro-forma federal returns be prepared and attached to the state returns. Because of the inconsistent requirements, companies are required to prepare the paper returns as well as the electronic returns.

b) Current status of electronic filing

b.1. US Federal tax return

Currently, all US corporations (filing 1120 or 1120S) with assets $50 million or more and that file at least 250 returns annually are required to file the tax returns electronically for the tax years ending on or after December 31, 2005. After the first effective year, the requirement will affect corporations with assets of $10 million or more and file at least 250 returns annually. These mandates do not apply to amended returns, bankruptcy returns, or a couple of other special cases. In general, all large companies should assume they will need to e-file.

The US Federal tax returns are required to be filed under “modernized- e-file (“MeF”) standard. This is a version of XML that is different from other XML standard based filings. There are two significant issues with the current MeF standard – single file filing and lack of review capability.

One of the most significant issue facing large companies in US Federal e-filing is that of the single file return. Based on the current e-filing standard, large corporations are required to file one electronic return for the entire return. As a significant number of large corporations are using more than one tax return software, the single file e-filing will require companies to aggregate the electronic file generated from multiple tax preparation systems before tax returns can be filed. As you have seen in the example above, it is not an easy task to put the different output files together as the content of the file is not apparent to the end users.

Further, even if a company patches together the return from multiple outputs from more than one system, what ensures that it will pass the validation standards before the filing? IRS is scheduled to issue a style sheet so that taxpayers can see the content of the file in the format the IRS will see. However, the style sheet will not show the data in the format in which the tax forms have been prepared.

In an effort to make it more practical for companies to e-file their returns during the first year, IRS has provided some relief to taxpayers for the first year. This impacts the following portions of your tax return:

• IRS will permit paper filing of some international tax forms. If you are required to file more than 25 of any of the international tax forms, the IRS will permit the forms to be filed on paper in lieu of including these forms in the XML e-file transmission. Please note the 25 quantity limitation is a per-form limitation. This ruling applies to the following forms:
  • Form 5471: Information Return of U.S. Persons With Respect to Certain Foreign Corporations
  • Form 5472: Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
  • Form 5713: International Boycott Report
  • Form 8858: Information Return of U.S. Persons With Respect to Foreign Disregarded Entities
  • Form 8865: Return of U.S. Persons With Respect to Certain Foreign Partnerships

• IRS will permit PDF filing of a number of non-financial tax forms and schedules in lieu of the XML format for these forms:
  • Form 926: Return by a US Transferor of Property to a Foreign Corporation
  • Form 970: Application to Use a LIFO Inventory Method
  • Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)
  • Form 1120-L Subsidiary Returns
  • Form 1120-PC Subsidiary Returns
  • Form 1122: Authorization and Consent of Subsidiary Corporation to be Included in a Consolidated Income Tax Return
  • Form 2439: Notice to Shareholder of Undistributed Long-Term Capital Gains
  • Form 4466: Application for Quick Refund of Overpayment of Estimated Tax
  • Form 5712-A: Election and Verification of the Cost Saving or Profit Split Method under Section 936(h)(5)
  • Form 6198: At-Risk Limitations
  • Form 8082: Notice of Inconsistent Treatment or Amended Return
  • Form 8271: Investor Reporting of Tax Shelter Registration Number
  • Form 8275: Disclosure Statement
  • Form 8275-R: Regulation Disclosure Statement
  • Form 8594: Asset Acquisition Statement
  • Form 8716: Election to Have a Tax Year Other Than a Required Tax Year
  • Form 8832: Entity Classification Election
  • Form 8833: Treaty-Based Return Position Disclosure under Section 6114 or 7701(b)
  • Form 8838: Consent to Extend the Time to Assess Tax under Section 367 - Gain Recognition Agreement
  • Form 8883: Asset Allocation Statement under Section 338

• IRS will permit summary forms to be filed in the XML e-file transmission for some forms with detail provided as a PDF attachment. This impacts the following forms:
  • Form 8283: Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition
  • Form 8611: Recapture of Low-Income Housing Credit
  • Form 8824: Like-Kind Exchanges
  • Form 8861: Welfare-to-Work Credit

• IRS will permit the filing of statements saying “Details Available on Request” for specific examples that taxpayers frequently avoid providing transactional detail. This includes:
  • Form 4562 Transaction Detail: Depreciation and Amortization
  • Form 4797 Transaction Detail: Sales of Business Property
  • Form 1120 Schedule D Transaction Detail: Capital Gains and Losses

By observing the investment IRS has made in building the Modernized e-file platform and the concessions IRS has made to make e-filing more practical, it is clear IRS is serious with its mandate for the large taxpayers to file their tax returns electronically in tax year 2005. It will not be easy for taxpayers but it is important that they begin assessing their processes now.

b.2. US partnership tax return

Partnerships with more than 100 partners have been required to file the tax returns in electronic format since Tax Year 2000. This filing is base on text format data file with form field designation. Although it is the electronic filing, this format is actually much more comprehensible to most tax people as the data file is very structured and users can easily view the data content. Further, most companies are preparing the return from one software for the partnership tax return. Thus, a single data file return requirement is less onerous for the partnership filing.

b.3 US state tax returns

There are two states that required electronic filing of state corporate tax returns for Tax Year 2004 – Michigan and Massachusetts. In addition, New Jersey requires the electronic filing of certain partnerships and California accepts partnership electronic filing submissions. A number of states are also in the process of implementing a combined Fed/State e-filing that will leverage some of the Modernized E-File built by IRS.

b.4. Non-US tax returns

Many large corporations that have outsourced non-US tax returns should expect significant increase in the local compliance cost as more non-US returns are required to be filed electronically. The issue with non-US electronic filing is similar to that of US state filing. However, most European countries are adopting single standard (XBRL – Extensible Business reporting Language). Although there may be some variations for each of the jurisdictions, it would make it easier than that of the US state return filing.

c) Potential solutions

We have examined the US Federal e-filing issues and decided to do two things – build an e-filing aggregator and build an e-file reviewer.

c.1. E-filing aggregator

As part of our software development to meet the electronic filing requirements of tax year 2005, we have decided to allow aggregation of any partial electronic filing data generated from any other software vendors. We have presented this approach as an “interoperability standard” and presented to the IRS and other vendors in the e-filing conferences. We believe this will help companies to use their current software for the best-of-the-breed software for any part of their tax returns while allowing them to meet the IRS filing requirements. There are variations of this approach adopted by other vendors. Some will allow the aggregation through underlying data import (replication of the returns for the parts produced by other software) or by aggregation of the returns produced by the same software in the case of multiple instances of the same software.

c.2. E-file reviewer

As described above, electronic returns will not allow most tax people to review the returns nor provide comfort that the data in the file is the same data that was put on the form in the software. In fact, some of the tax software vendors indicated that they are inserting or modifying the data as part of the e-file generation process. Thus, as a way to provide the assurance before the return is filed, we have decided to develop the e-file reviewer that would allow the import of existing electronic filing data file and produce PDF output on tax forms so that companies can assure the data in the file is the data they prepared. Once the PDF output is prepared, it can also be used to print or saved as “as-filed” returns.
We are developing this software as we believe it is important that companies have a mechanism by which the file they submitted to the IRS has the content they intended to file as their return.

2) E-filing conference   ›› Return to TOC

When: Wednesday, October 26, 2005

Where: Harvard Club of New York City

Who: All mandated taxpayers regardless of software vendor(s)

There are uncertainties with regard to electronic filing. Especially, US Federal return is one of the most complex tax returns in the world. It will require significant efforts to comply with the e-filing requirements.

Date	Location	Click to register
Oct 26, 2005	New York, NY	Register

The conference will be held at the Harvard Club of New York. Please check www.taxtechnologies.com for the details of the agenda and registration information. For more information please contact our office at 201-387-9451.

3) Section 987 conference   ›› Return to TOC

What is the purpose of some of the Form 8858 schedules? What does the IRS deem to be substantial compliance with IRC Section 987? What direction are the final regulations taking? So many questions. So few answers. We thought it best to bring in the experts and hear from them directly.

Please join us at the Harvard Club on October 11, when we will welcome Ronald Calewarts of the IRS for an open session on foreign currency issues and Form 8858 reporting. Ron is an IRS International Technical Adviser for Foreign Joint Ventures, Foreign Partnerships, Check-the-Box, Dual Consolidated Losses, and Foreign Transactional Gains and Losses (Sec. 987), and was involved in the drafting of Form 8858.

In addition to Ron, TTI consultants Michael Minihan and Ian Boccaccio will present a technical review of current foreign currency issues from a book and tax perspective. Michael and Ian will discuss their practical experiences in the foreign currency area, and address in additional detail many of the topics discussed above. TTI founders JD Choi and Biren Patel will discuss data issues associated with the book and tax calculations for foreign currency transactions. With a full compliance season under our belts, JD and Biren will discuss in detail many of the data issues (and solutions) that we encountered in helping taxpayers comply with the requirements of Section 987 and Form 8858.

Date	Location	Click to register
Oct 11, 2005	New York, NY	Register

The conference will be held at the Harvard Club of New York. Please check www.taxtechnologies.com for the details of the agenda and registration information. For more information please contact our office at 201-387-9451.

4) FAS 109 Training   ›› Return to TOC

Tax Technologies’ offers a two day course designed to walk you 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 time lines for meeting these reporting requirements, it is now more important than ever to have people that understand the impact of FAS109 issues and efficient processes that ensure accurate tax disclosures. This course goes beyond accounting theory and actually teaches you and your staff the “how to” part of preparing the current and deferred tax components of the global corporate income tax provision. It provides assistance with those 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 our office at 201-387-9451.

5) Preparing Form 8858 and other International Compliance   ›› Return to TOC

TTI is pleased to offer the first installment in our new “Let’s Prepare” training series: Let’s Prepare International Tax Information Reporting. This course is designed for the individuals charged with preparing or reviewing a multi-national organization’s international tax compliance, including newly required Form 8858, as well as Forms 5471 and 8865. Our “Let’s Prepare” series is designed to provide the fundamental training that an individual will need to go from financial data to filed form.

For more information please contact our office at 201-387-9451.

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Regards,

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