Filing electronically may become a tax-time reality

The Internal Revenue Service is trying very, very hard to convince everyone to file income tax returns electronically. While the IRS is pushing electronic filing because of the time and money they save, can the same be said for the increasingly smaller-sized businesses that are required to file electronically? Most importantly, what are the pros and cons for your nursery business?

In January 2005, the IRS began requiring large corporations to electronically file their Forms 1120 and 1120S, the basic tax returns for incorporated businesses and those operating as S corporations. Certain large- and mid-size corporations, those that have assets of $10 million or more and file at least 250 returns annually, are currently required to electronically file their Forms 1120 and 1120-S.

Surprisingly, record numbers of taxpayers, not only the very largest that are required to file electronically, are choosing to electronically file not only tax returns, but other forms required by the IRS and the Social Security Administration -- whether required to or not. Those inevitable payments can also be made electronically.

The IRS made me do it

Electronic filing is a method by which qualified filers transmit tax return information directly to an IRS Service Center over telephone lines in the format of the official IRS forms. The IRS e-file program allows taxpayers to file tax returns through an electronic return originator or by using a personal computer, modem and commercial tax preparation software. The nursery operation’s tax adviser, CPA or bookkeeper can also use the e-file program and electronically file tax returns.

E-file is not limited to incorporated nurseries; all businesses including S corporations and partnerships may also elect to electronically file, employing virtually all forms of magnetic media. The term magnetic media includes electronic filing as well as filing on magnetic tape, cartridge, diskette or other media. Unfortunately, after Jan. 1, 2007, the IRS will no longer accept 3 1/2-inch diskettes for filing information returns.

Jumping on board

Just as electronic filing is not only for large corporations, it is not just for taxes. Electronic filing and payment options for nursery operations and businesses include employment taxes, information returns, partnership returns as well as returns from small corporations and S corporations.

Despite the IRS’s increased emphasis on electronic filing of returns; however, only 15 percent of eligible companies report having a plan in place to meet the IRS’s electronic filing requirements. A whopping 35 percent of those surveyed by the accounting firm KPMG LLP in late December 2006 had not even started to prepare to meet the electronic filing deadline.

Going electronic

Although many businesses and exempt organizations prepare their returns electronically, many continue to submit them in paper form to the IRS. So, why file electronically? It’s quick, there is a 99 percent accuracy rate and it is smart -- the IRS acknowledges receipt of an electronically filed return within 48 hours.

The popularity of e-filing cannot be underestimated. The IRS’s figures show more than one-half of all tax returns filed in 2006, a whopping 73.3 million, were filed electronically.

The IRS recently issued final regulations governing who is required to file electronically. Although a temporary rule excusing those large corporations claiming electronic filing posed a financial hardship has been left out, those final rules do provide for a waiver of the requirement in the event of hardship.

The White House is pushing to expand the IRS’s authority to require more businesses and exempt organizations to file their returns electronically, in an effort to bring the IRS closer to achieving its goal of having 80 percent of all returns filed electronically.

A look at e-filing

In the meantime, although not yet mandatory for the majority of nurseries and businesses, filing tax returns electronically is relatively straightforward. Using the IRS’s e-file is one option, and most commonly used business forms can be filed either directly under the IRS’s e-file program, through tax professionals or by using the services of third-parties specializing in electronic filing. What’s more, according to the IRS, using e-file doesn’t affect the chances of an IRS examination of the return.

In most states, a nursery business can file an electronic state tax return simultaneously with their federal return. Other state tax authorities actively encourage electronic filing of required state forms and reports although few require electronic filing.

Beyond the basic tax return

Another electronic filing option for every business allows the filing of a limited number of W-2 forms electronically. In fact, with the employee’s permission, it is also possible to set up a system to furnish W-2 forms electronically to employees.

Each employee participating must consent electronically and the business must inform the employees of all hardware and software requirements necessary to receive the forms.

Soon, a nursery may be required to file information returns used to report certain types of payments made during the year. Form 1099-MISC, “Miscellaneous Income” is for example, used to report payments of $600 or more to persons not treated as employees for services performed for the nursery business.

Credit card payments

Nursery businesses filing Form 940 (Employer’s Federal Unemployment (FUTA) Tax Return) and Form 941 (Employer’s Quarterly Federal Tax Return) with a balance due can pay the amount owed on the return by credit card over the phone or via the Internet. Credit card payments can be made for the balance on the current return due.

Additionally, Form 941, balance due payments will be accepted for tax year 2005, first, second, third or fourth quarter.

Electronic payments are made using either of the two third-party service providers offering credit authorization and providing a confirmation number as proof of payment. Since there is a convenience fee based on the amount of the payment, the IRS recommends that every nursery operator and taxpayer consider this option only in emergencies. Regular Federal Tax Deposits (FTDs), (i.e., monthly, semiweekly deposits) cannot be paid by credit card.

Naturally, using credit cards to make payments of taxes, any taxes, incurs fees and interest costs. Credit cards do, however offer an option, albeit an expensive option for payment of taxes.

Sooner rather than later

As the IRS moves closer to its goal of having 80 percent of taxpayers filing electronically for 2007, it continues to close the doors of processing centers. The growing popularity of electronic filing reportedly forced the IRS to announce the closure of its Philadelphia Submission Processing Center in 2007.

The IRS’s path to electronic filing has not been without its fair share of stumbling blocks. During the 2006 filing season, the IRS experienced processing problems and was forced to offer temporary exemptions to large companies and tax-exempt organizations for whom e-filing was mandatory. Of course, every large corporation can request a waiver from the mandatory filing requirements based on “technology constraints” or “undue financial hardship.” Unfortunately, neither term has been defined by the IRS.

Look to the IRS

Although many nursery businesses will purchase software or rely on the services of a tax professional, a list of e-file software and service providers is available at the IRS’s Web site. Don’t forget about the Electronic Federal Tax Payment System (EFTPS).

Some forms you can pay electronically

A nursery business (or its owner) can e-file their federal tax returns and, at the same time, authorize payment via electronic funds withdrawal from their checking or savings account. Electronic payment is available for these types of taxes: Form 1040 series (Federal Income tax), Form 4868, (Extension for filing individual taxes), Form 940, Unemployment Tax, Form 941, (quarterly employment taxes); Form 1041 (estates and trusts); Form 1120, 1120S and 1120 POL, (corporate taxes); and Form 7004 (extensions for corporate taxes).

The IRS’s goal of eventually having all businesses file electronically coincides with the U.S. Treasury’s push to have both individuals and businesses make tax payments using their Electronic Federal Tax Payment System (EFTPS).

The U.S. Government’s EFTPS has been available since 1996, and it processed 78 million payments worth $1.8 trillion during fiscal 2005. The number of payments processed represented a 7-percent increase from the previous year. The electronic filing program, IRS e-file includes electronic payment options. Other electronic payment options include: (1) electronic funds withdrawal; (2) credit cards; and (3) the Electronic Federal Tax Payment System (EFTPS).

For more: www.irs.gov. EFTPS, (800) 555-4477; www.eftps.gov.

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- Mark E. Battersby

Mark E. Battersby is a freelance writer in Ardmore, Pa.

March 2008