For the past few years, the Internal Revenue Services (IRS) has actively prepared for the rollout of mandatory electronic filing for exempt organizations. In a world where technology is rapidly advancing, moving away from paper tax filing may seem natural; however, as with any new process, electronic filing (e-filing) creates limitations and serious issues to consider.
The Taxpayer First Act (TFA) was signed into law July 1, 2019, and requires certain exempt organizations to file information and tax returns electronically, beginning with the tax years after the law was signed. This year, in its exempt organization’s updates, the IRS announced that organizations filing the Form 990 Series must e-file their returns, starting with the tax year ending July 31, 2020. To help taxpayers with the new processes, members of AICPA’s Exempt Organizations Taxation Technical Resource Panel (TRP) identified some potential taxpayer challenges and shared their experiences.
Although the IRS provided a series of prerecorded online workshops to assist officers, software providers and taxpayers in the transition to the new e-filing process, some cases still require the IRS and software developers to find workarounds to successfully e-file their returns. For instance, in 2019, Publication 4163, Modernized e-File (MeF) Information for Authorized IRS e-File Providers for Business Tax Returns contained a list of e-filing exceptions. But in 2020, all exceptions were eliminated for the Form 990 Series.
Challenges and tips to consider
Although software providers have worked hard to accommodate the 2020 e-filings changes, systems diagnostics may have stated to practitioners that the return was not eligible for e-filing, which was incorrect. Many issues were resolved in June and July of 2021, but we still recommend filing the returns previously eligible for the exception early, as it may take a few days to resolve the issue.
Taxpayers who filed their 2019 Form 990-T via paper may have received a notice from the IRS that the filing should have been done electronically. The IRS confirmed that these notices are erroneous and should be ignored. There should be no penalties for paper-filing 2019 Form 990-T since the electronic version was not available at the time.
Private foundations and other trusts who must file Form 990-PF may encounter an issue with any short-year form being rejected because of the pro-ration of the minimum investment return calculation. Attachments could be an issue for this filing category as well since the current e-file schema does not allow for a specific attachment for investments or grants. The administrative burden for some filers to input in tax software all securities held at year-end, as required under the Teas Regs, can be enormous. In addition, some tax software has restrictive character limitations on grants presentation that could result in a less-complete grants list for electronically filed returns. A private foundation in its 60-month termination period must attach the signed consent form to extend the statute of limitation (Form 872-B) in order not to pay the section 4940 excise tax. But the current e-file schema does not allow for this attachment, which may result in taxpayers receiving notices for tax due.
There is some relief for the taxpayers who must file Form 990-EZ, but many small taxpayers were self-preparing their paper-filed Form 990-EZ in the past. They will now need assistance from a software provider to transmit the filings. The IRS has provided information on companies that have passed the IRS Assurance Testing System (ATS) requirements for software developers of electronic exempt organizations returns.
Other issues that can be challenging with e-filing include when:
• A taxpayer needs to file a short-year return that’s not an initial-year return.
• A taxpayer needs to change the address.
• There is erroneous information in the IRS Business Master File for the organization, including an incorrect tax year-end.
If the return has an e-file diagnostic, the first step is to work with the tax software provider to determine if it is an IRS schema issue or if there is a software workaround. If all the e-file diagnostics have been cleared and the return is rejected, you will receive a phone number to contact the IRS. Based on some feedback from tax practitioners, the IRS agents are really helpful. It usually takes three working days for the IRS to investigate and resolve the issue, after which the return can be resubmitted. Generally, the grace period for retransmission of rejected e-filed returns is 10 calendar days for the tax returns and five calendar days for the extensions. Therefore, we recommend addressing the issue immediately if your return was rejected and then re-filing.
In the era of technology, rapidly enforced electronic filing is a key to the improved and expedited filing process for exempt organizations’ returns. However, there are still questions and challenges to be considered. We recommend that taxpayers and tax practitioners e-file any returns several days before the final deadline to provide time to resolve any issues. We also suggest the IRS, software providers and the taxpayers work together to share resources and discuss challenges to polish and streamline the electronic filing process.