Filing Corporate Taxes Online: To E-file or Not to E-file?
September 22, 2022
Failing to e-file when required to do so may result in failure to file penalties for corporations, so it is important to keep abreast of e-file requirements and regulations.
This article details when corporate taxpayers are required to e-file tax returns, alerts taxpayers and preparers of proposed regulations which would significantly decrease the threshold number of annual information return filings that mandate e-filing, and shares best practices for both in-house and professional e-filers.
[Corporate Tax Season Watch: Form 1120 Checklist; Federal Tax Guide, Ch. 1300]
Current Corporate Tax Thresholds & Regulations
For filers of IRS Form 1120, U.S. Corporation Income Tax Return, and Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, e-filing is mandatory for corporations with assets of $10 million or more (as reported on Schedule L of Form 1120) and at least 250 annual return filings of the same type. [TD 9363, generally effective for tax years beginning after December 31, 2006].
Annual Return Filings
With respect to the current regulations, the term “annual return filings” includes income tax returns, excise tax returns, employment tax returns, and information returns, including Forms W-2, Wage and Tax Statement, and all 1099 series forms, such as 1099-MISC, Miscellaneous Income, 1099-NEC, Nonemployee Compensation, 1099-INT, Interest Income, and 1099-K, Merchant Card and Third Party Network Payments.
Form type is not aggregated for purposes of meeting the 250-return threshold; in other words, a taxpayer filing one Form 1120, 150 Forms W-2 and 100 Forms 1099-DIV would not be required to e-file. A taxpayer filing one Form 1120, 250 Forms W-2, 50 Forms 1099-DIV, and 50 Forms 1099-INT would only be required to e-file the Forms W-2. [Reg. §301.6011-2(c)(1)(iii)].
[General Instructions for Certain Information Returns]
Amended and superseding corporate returns must also be e-filed if the taxpayer was originally required to e-file their return.
Exceptions, Waivers, and Penalties
What corporations are not required to file taxes online?
Corporations not required to e-file under TD 9363 may elect to do so, as long as they are eligible. For a complete list of corporate returns ineligible to be e-filed, see E-file for LB&I: FAQ’s – Tax Year 2021. Voluntary e-filers should ensure they are using the correct filing instructions, as there are separate filing instructions for taxpayers required to e-file and those voluntarily e-filing.
Taxpayers required to file certain forms, such as Form 1120-C, Farmer’s Cooperative Association, or Form 1120-H, Homeowners Association, are excluded from the requirement to e-file, unless the forms are part of a consolidated return, as these forms cannot be e-filed as stand-alone documents. Returns covering multiple tax periods, and returns covering tax periods prior to January 1, 2018, are ineligible and therefore excluded from the requirement to e-file.
Under what circumstances can the requirement to file taxes online be waived?
Notice 2010-13 provides procedures for filers to request a waiver of the requirement to e-file due to undue hardship. Generally, a waiver can be requested if the taxpayer would experience technology constraints or incur undue financial hardship in complying with the e-filing requirement. Taxpayers should use Form 8508, Request for Waiver from Filing Information Returns Electronically, which must be filed at least 45 days before the due date of the return for which a waiver is requested. Waiver requests filed early will be processed beginning January 1st of the calendar year for which the returns are due. [Form 8508, Request for Waiver from Filing Information Returns Electronically; Instructions to Form 8508]
What happens if my corporation fails to e-file when required?
Failing to e-file a corporate income tax return when required to do so may result in an IRS determination that the taxpayer failed to file a return. Consequences for Failure to file include §6651 additions to tax, resulting in monetary penalties even if no tax is due on Form 1120. Further, any elections made on the return would be deemed invalid.
Returns are not considered filed until they have been received and acknowledged by the IRS. If the return is rejected for any reason, the preparer and/or corporation should work to correct the errors and resubmit the filings as soon as possible.
[Corporate Tax Season Watch: Form 1120 Tax Prep Guide, 18-2]
Proposed Regulations for Filing Online – Threshold Changes
Proposed regulations, which were received in the White House for review on August 16, 2022, would decrease the threshold amount mandating a return to be e-filed from at least 250 annual return filings to at least 100 annual information return filings, for returns filed during calendar year 2022. The proposed regulations would further decrease the threshold amount to at least 10 information return filings per year in all subsequent years, beginning with calendar year 2023.
These proposed regulations would remove the non-aggregation rule from Reg. §301.6011-2(c)(1)(iii) and require a taxpayer to e-file their returns if the combined number of forms of any type meets or exceeds the threshold amount. For example, a tax return filed in calendar year 2022 consisting of one Form 1120, 50 Forms 1099-DIV and 50 Forms 1099-INT would be required to be e-filed, as the aggregate number of information returns meets the 100-returns threshold. A tax return filed in calendar year 2023 consisting of one Form 1120, five Forms W-2, and five Forms 1099-MISC would be required to be e-filed. [REG-102951-16, 86 Fed. Reg. 39,910 (July 23, 2021).]
What is the start date for the new thresholds?
If proposed regulations are finalized, there is a possibility that the start date will be delayed by one year (decreasing the threshold to 100 returns filed in calendar year 2023 and 10 returns filed in all subsequent years), as we are nearing the end of 2022.
Best Practices for Filing Corporate Taxes Online
Apply to be an IRS authorized e-file provider
To e-file on behalf of clients, tax professionals must be an IRS Authorized e-file Provider and have an IRS E-Services account. First-time preparers should apply to be an authorized e-file provider and to receive an IRS E-Services account as early as possible, as the application process may take up to 45 days. Corporations hiring new tax professionals can visit the IRS website to search for Approved IRS Modernized e-File (MeF) Business Providers.
Obtain IRS approval for your filing software
Corporations preparing their own income tax returns [IRS Pub. 4163, Sec. 5] must have filing software approved by the IRS – whether purchased from a third-party vendor or developed internally. Further, corporations preparing their own returns will need an e-Services account and a completed e-file application.
[How Tax Preparation Software is Approved for Electronic Filing; Access e-file Application]
Register for ID.me
Beginning July 24, 2022, E-Services transitioned to a new sign-in system that will require new users to register and/or sign in with ID.me, the IRS’s credential verification provider. [Create an ID.me account]. Also note that the IRS MeF system discontinued use of TLS 1.0 and TLS 1.1, effective on August 1, 2022. Return preparers should upgrade to a higher version of TLS as soon as possible to avoid delay. A QuickAlert with MeF information will be issued in early December.
File before the deadline
For tax year 2021, the deadline to file federal corporate income tax returns and Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, was April 18, 2022. For corporations using a calendar year and filing on an extension for tax year 2021, the deadline to file is October 17, 2022. The IRS will announce the beginning and ending dates for the federal tax filing season for tax year 2022 in January 2023. [Corporate Tax Season Watch: State Filing Dates].
Monitor the Corporate Tax Season Watch Page and Modernized e-File (MeF) Status Page for updated instructions and alerts.
Additional IRS Resources
- E-file Provider Services
- Form 1120/1120S/1120-F e-file
- Electronic Filing Options for Business and Self-Employed Taxpayers
- Guidance on Waivers for Corporations Unable to Meet e-file Requirements
- C Corporation Requesting a Change to File as an S Corporation
- Schedule M-3 for Large Business & International
Corporate Tax Season Watch Resources:
- Form 1120 Tax Prep Guide, 18-2
- Form 1120 Checklist
- State Nexus: Corporate Income Tax Chart
- Instructions to Form 1120 (2021)
- Federal Tax Guide, Ch. 1300