Survey Says: E-Filing Not Without New Costs

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With the first year of mandatory tax return filing complete, a survey shows what the accounting industry suspected – affected companies had to make some investments to comply with the new IRS mandate.

“There is no question that the first year of mandated corporate e-filing was a success, but as we predicted, it did require an additional investment in staff, technology, and time to transition to the new system,” said Michael Dolan, director of IRS policies and dispute resolution in the Washington National Tax practice of KPMG.

The survey was conducted by the Tax Executives Institute and KPMG LLP to gather data on the first year of the new requirements for electronic filing. Companies with assets of $50 million or more and those that file at least 250 returns annually, were required to file their 2005 taxes online by September 15, 2006.

The survey, conducted at a TEI conference in October, covered 101 corporate tax executives. Of the companies represented, 88 percent expended additional staff time and capital outlay to e-file their tax returns. Within that group, 40 percent categorized the increase as “substantial,” while 48 percent described it as “modest.”

Expenses were not solely associated with technology. Among those reporting added costs, 40 percent said the costs resulted from both tax department and technology support; 33 percent fingered tax department staff resources only, according to KPMG's report on the results.

KPMG and the Institute said that the results also indicate that companies invested their resources efficiently. Fifty-two percent of companies said their returns were accepted on the first try, and only 3 percent were more than five times.

“The process was not without its difficulties, but all things considered, e-filing went relatively smoothly,” said Timothy McCormally, executive director of TEI. “Nevertheless, our members, who are working with the IRS to make process improvements for next year, also hope that some first-year transition rules remain in place.”

In fact, according to the survey, 58 percent of respondents thought that all of the first-year transition rules should be retained for 2006 tax return filing.

And in terms of e-filing benefits, 12 percent said e-filing forced them to examine work processes and future filings should be more efficient. Conversely, 77 percent said that they felt the IRS was the only beneficiary.

It is expected to get easier the second time around. “I believe as companies go through the e-file process again this year, they will realize that all of their hard work in year-one will produce greater tax filing efficiencies down the road,” McCormally said.

Next year, the transition may not be as smooth for the lower tier of companies that must comply, as the threshold requirement drops to companies with assets of $10 million.

“This next tier of companies may not have access to the same staffing and technology resources as the larger companies that filed this year, so it's even more prudent that smaller companies begin preparing early and budget accordingly,” KPMG's Dolan noted. “Although many will be using outside tax preparers to file their taxes, there will still be added work and costs for management to consider.”

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