Filed under: Tax Compliance & Planning
For tax-exempt organizations that are currently working on filing their annual Forms 990, new rules surrounding mandatory electronic filing (e-filing) are causing quite a headache for tax professionals.
Originally enacted on July 1, 2019, the Taxpayer First Act required all tax-exempt organizations to electronically file their annual returns. Though electronic filing for exempt organization returns was available before the passage of this Act, it was mandatory only for select organizations. And several forms and scenarios were unavailable for e-filing all together, such as the Form 990-T, Form 4720, initial filers, or organizations that had a name change or year-end change in any given year.
The rollout of mandatory electronic filing came in waves, leading to mandatory electronic filing requirements for the following forms:
- Form 990 and Form 990-PF: mandatory for tax years ending July 31, 2020 and later;
- Form 990-T: mandatory for tax years ending December 31, 2020 and later (except those postmarked on or before March 15, 2021);
- Form 990-EZ: mandatory for tax years ending July 31, 2021 and later; and
- Form 4720 filed by private foundations: mandatory for 2020 forms with a due date of July 15, 2021 and later (except those postmarked on or before June 15, 2021).
Though the IRS has long been preparing for the rollout of mandatory electronic filing, the first half of 2021 was filled with delays, confusion, and a mismatch of information between the IRS, tax professionals, and software providers regarding what and how returns are required to be e-filed.
Issues with the Form 990-T
The most significant change for this filing season is the Form 990-T.
Not only is the Form 990-T eligible for electronic filing for the first time in history, but e-filing became both available and mandatory at the same time. Furthermore, the IRS was delayed in releasing the 2020 Form 990-T e-file schema, so the rollout did not occur until March 2021, which left software providers scrambling to update their systems in the middle of a filing season.
Electronic filing of the Form 990-T would have been a challenge on its own, but organizations also regularly attach any required foreign filings to this return, such as Forms 926, 5471, 5713, 8865, and more. Such filings may be subject to hefty fines for failure to file, are not open to public disclosure, and may contain sensitive information, so it has added another level of complexity now that these forms are also required to be e-filed with the 990-T.
All of this complexity has caused practitioners across the nation to spend significant time and resources resolving e-file issues with the IRS and software providers. The IRS has confirmed there are no exceptions for electronic filing, so exempt organizations and tax professionals should be prepared for the challenges surrounding electronic filing as they work to complete their 2020 tax filings.
E-Filing: Notable Issues and Advice
Here are some issues to be aware of, and advice to keep in mind, with regard to e-filing your exempt organization returns:
File Before the Due Date
The IRS is rejecting a larger percentage of e-filed returns this year.
Though the IRS does have a 10-day grace period for re-submitting a rejected return (in order to be considered timely filed), it is not necessarily quick, easy, or intuitive to resolve e-file issues. It can take multiple calls to both a software provider and the IRS to obtain the proper diagnostic codes to allow for the e-file.
Keep in mind that the IRS is still answering phone calls in limited capacity due to COVID-19 shortages, and it can take multiple attempts and hours on hold before being able to speak with a representative.
Moreover, if your form is required to be filed in conjunction with a state return, some states have grace periods shorter than 10 days, and some have none whatsoever. File returns ahead of the deadline to allow flexibility.
If Your Entity had an Organizational Change, Prepare for an E-File Reject
The IRS e-file schema is rejecting filings for entities that are reporting a name change or year-end change, or those filing an initial return or short-year return in the current year.
Additionally, if you reported an operational change on a prior year or paper-filed return that has not yet been processed, then the IRS database will have outdated information that may also result in a rejection of your current return.
The tax preparer will need to work with their software provider and the IRS to obtain the proper override codes for filing. Preparers should also note that the phone number for the IRS E-file Help Desk is not the same as the TE/GE customer service line. If the rejection is the result of an IRS issue, the correct phone number to call will be provided when the return initially rejects.
A Qualified Electronic File is Not the Finish Line
We have seen many returns initially show a qualified electronic file, only to have the same return later rejected by the IRS. As software providers are continuing to update their systems, tax preparers should not assume that a return will be accepted by the IRS merely because the electronic file qualified upon export.
Moreover, filers should be cautious to ensure that the electronic file contains all the intended forms and attachments, and that such forms and attachments are being transmitted with the proper return. We have seen returns qualify for electronic filing but fail to include attached filings. We have also seen electronic files erroneously include attachments with the incorrect return – i.e., foreign filings attached to the Form 990 electronic file rather than the Form 990-T electronic file.
Be Aware of What Forms and Schedules are Required
As the IRS continues to improve its e-file schema and software providers strive to keep up, attachments can get missed. Preparers should ensure that all required information is included in the e-file and should not rely solely on the software to auto populate.
For example, certain foreign forms are available to be filed directly within the e-file schema, whereas others must be attached to the e-file via a PDF. Or, as is the case of the Form 5471, the core form is available for electronic filing within the schema, however, some of the required schedules are not available and must be included separately via PDF. Or, due to character limitations, the electronic file may not allow space for all required information and therefore supplemental statements will need to be attached via PDF.
These are only a few examples of what we have seen, and filers should use extra caution to ensure that they are filing complete returns.
If a Software Provider Says You Need to Paper File, Do Not Listen
The IRS has confirmed there are no exceptions for electronic filing. If your organization submits a paper filed return, you may be assessed penalties for late filing, up to $105 per day. You may have to challenge your software provider.
The Return Might Look Different
If your organization has paper-filed in the past, your return presentation may change this year.
Paper-filed returns allow for a lot of flexibility in how information is presented. Electronic filing requires a certain schema and, as such, many fields have character limitations, character rules, and only allow select attachments.
This is something to be mindful of, and your organization may want to mention it to management and the Board of Directors in advance.
Management and/or the Board of Directors May Need to Make Decisions
In some situations, the only option for qualifying a return to e-file may be to utilize a workaround.
For example, if an organization has changed its year-end, then the only option for electronic filing may be to select the “initial return” box on the face of the 990, per IRS direction. In this instance, our client elected to add an explanation to Schedule O to explain why the box was checked.
Additionally, for new entities that are not yet in the IRS database, the organization may need to choose whether they want to spend resources working with the IRS on the matter – or delay filing the return until the database is updated automatically. In such situations, each organization will need to determine what level of risk they are comfortable with.
Small Organizations Will Need to Plan Ahead
The IRS has provided transition relief for small organizations that file Form 990-EZ. As such, the IRS will continue to accept paper-filed returns for organizations with tax years ending before July 31, 2021.
For tax years ending July 31, 2021 and later, the Form 990-EZ will need to be filed electronically. Entities that have historically filed their returns on paper will need to create a plan in order to transition to filing electronically. The IRS has a list of approved software providers which can be found here.
For organizations that regularly file Form 990-N (e-Postcard), the process for filing has not changed from the previous year. The Form is still required to be submitted electronically.
In Conclusion
The transition to mandatory electronic filing has been anything but simple for preparers and filers of exempt organization returns.
Each organization should become familiar with their unique situation and be aware of the issues they may encounter when e-filing their returns for the first time. The best way to ensure returns are timely filed is to file well in advance of the deadline and leave plenty of time to resolve any potential e-file rejects.
If you have any questions regarding e-filing, please contact a Clark Nuber professional.
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