Income Limits for Free File: Preparing for Business E-file

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Individual taxpayers who enter the Internal Revenue Service (IRS) web site looking for access to free tax software on their Free File page may be surprised when they find that many companies are no longer offering that service to taxpayers with adjusted gross incomes of $50,000 or more. Although many companies had set income limits in line with the IRS goal of helping lower income people when the program began in 2003, others, including Turbo Tax, H&R Block and offered free filing to anyone regardless of income in order to gain market share, the Associated Press reports.

“It became a free-for-all,” said Denise Sposato, a spokeswoman for H&R Block, the AP reports. “It had started looking like Free File was going to destroy the industry,” said the IRS's director of electronic tax administration, Bert DuMars. The IRS arrived at the income limit guidelines after months of discussions with vendors.

The Free File page currently lists 19 alliance companies including TurboTax, which is limited to persons with an AGI of $28,500 or less; which offers free federal tax preparation and e-filing, online support and Form 4868 to all taxpayers;, which is now marketing as “free for everyone”, according go the Detroit Free Press; and H&R Block's TaxCut for filers who are age 50 and under. Twenty-one companies are expected to join the program, the AP says.

The IRS has announced that the following 13 forms will not be available for e-file until the end of January on because of late tax law changes. The form that will likely affect the largest number of tax payers is Form 8863, “Education Credits.”

Disaster Related Forms
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustments)
Form 8606, Nondeductible IRAs
Form 8863, Education Credits (Hope and Lifetime Learning Credits)
Form 8915, Qualified Hurricane Retirement Plan Distributions and Repayments
Form 3468, Investment Credit
Form 3800, General Business Credit
Form 5884-A, Credits for Employers Affected by Hurricane Katrina, Rita, or Wilma
General Tax Forms:
Form 8379, Injured Spouse Allocation
Form 8611, Recapture of Low Income Housing Credit
Form 8864, Biodiesel and Renewable Diesel Fuels Credit
Form 8896, Low Sulfur Diesel Fuel Production Credit
Form 8271, Investor Reporting of Tax Shelter Registration Number
Form 8886, Reportable Transaction Disclosure Statement

The IRS estimates that more than 400,000 businesses will e-file this year, although only 10,000 companies with assets of more than $50 million are required to do so. Many companies are already using e-file for some state and local returns, Business First of Louisville reports. CPAs interviewed for the Business First report said that the IRS requirement was mainly a technology related issue but it “will significantly affect how large companies manage their taxes.” The IRS instructions for e-filing are summarized at

“I don't think it's going to be particularly burdensome,” said Penny Gold, executive director of the Kentucky Society of CPAs. “A lot of firms already do e-filing. There will be some administrative adjustments, minor things like getting the returns in a few days earlier.”

“It's going to be all about having the (corporate taxpayers') software interface with the IRS specifications,” Greg Greenwood of Ernst & Young LLP in Louisville told business First. Supporting documentation for the corporate return, which may have been formatted in Word or Excel will have to be converted to PDF formats, for the first year only. The IRS has published instructions for PDF formats on its web site.

JoAnn Cambruzzi, federal tax partner for KPMG in Denver, writing for the Denver Business Journal recommends that a company “add several weeks to its e-file return preparation cycle during the first year.” Companies should bear in mind that supplemental schedules for 2006 should be in the e-file. “Data needs to be cleaned up – specific dates need to be provided instead of using the word “various” Cambruzzi says, and invalid zip codes or address formats must be corrected.”

Cambruzzi says that the actual filing of the return should run smoothly if companies and their preparers follow IRS guidelines.

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