While practitioners are still scrambling to make sense out of the recent tax reconciliation legislation, significant changes in tax legislation are already in effect for 2006 - changes that may have a huge impact on the tax pro's 2007 tax filing season. And since it's an election year, tax pros will have to keep a close watch on any additional legislation that makes it into law impacting 2007 filings.How the practitioner community prepares for those changes now will make a big difference in the success of that filing season, which is really just a few months away.
Over the last few months, Internal Revenue Service officials and tax experts have provided information on the ways in which tax legislation is changing and what tax practitioners need to do now in preparation for the 2007 season. Some of the major changes and potential changes to look for when preparing 2006 federal returns were highlighted in a recent Tax Talk Today, the monthly Webcast sponsored by the IRS.
Perhaps the biggest change affecting business clients' 2006 returns is the e-filing mandate. Effective Jan. 1, 2006, the threshold has changed again! Any corporation or tax-exempt organization that has assets of $10 million or more, and files over 250 returns, will be required to electronically file Forms 1120 and 1120S.
In addition, private foundations and charitable trusts will be required to electronically file Form 990-PF, regardless of their asset size, if they file 250 or more returns a year. Corporations and tax-exempt organizations not required to e-file may do so voluntarily. But this mandate impacts more businesses than you might think.
"A lot of tax practitioners and taxpayers might be thinking, 'Well, 250 returns - I don't file 250 returns,'" said Tom Olenski, principal at Big Four firm Ernst & Young. "But you need to take into account W-2s and 1099s. Those forms generally are going to put most companies over that limit, and therefore they will fall under the mandate."
For those clients that will be required to file their 2006 returns electronically, the IRS recommends that practitioners take these key steps to prepare:
* Review all of the information available now. Go to the IRS site at www.irs.gov and review the e-filing information currently available under "Large Business." Also, plan now to attend one of this year's IRS Tax Forums. The locations and remaining dates are: Chicago, July 11-13; Atlanta, July 25-27; Orlando, Fla., Aug. 1-3; Las Vegas, Aug. 22-24; and New York, Aug. 29-31.
* Find the right software. Review business clients' 2005 returns relative to the new thresholds, and prepare now for the software applications that will help meet specific e-filing requirements. Many corporations currently use multiple software packages to prepare returns, and may use other formats like Word and Excel to handle supporting data or elections. Now, all of that data has to be included in one transmission file to the IRS.
"That is going to be the challenge," said Dayna Sefcik, IRS manager of electronic tax administration. On its Web site, the IRS lists those software vendors that have been approved, and this is the best place to start the software search. Tax practitioners will need to review the forms typically filed for corporate clients, and then examine the software vendors to find the one that best supports those forms.
IRS officials and tax experts agree on one thing: The e-filing mandate will affect tax practitioner processes in a big way. Instead of centuries-old paper-based systems, more and more tax practitioners will need to develop a completely different system in which the ultimate product is an electronic file.
"It's a huge cultural shift," said Rick Campbell, manager of tax analysis at Deloitte & Touche Tax Technologies LLC. "It's going to be a pretty big effort on all sides."
Changes beyond e-filing
There are a whole host of business and individual "index" changes that involve increases or decreases in amounts affecting deductions, credits and exclusions - for example, the maximum net self-employment earnings subject to the Social Security part of the self-employment tax increased to $94,200, not to mention the changes that will affect 2006 filings and 2007 planning from the provisions that expired for 2005.
Another important business change that will affect the 2007 tax filing season is the employers' annual federal tax return. The new Form 944 will not be filed until January 2007, and covers the 2006 filing period. This form is filed annually instead of quarterly, and applies to businesses with a tax liability of $1,000 or less for the year. This will reduce the burden on eligible small business employers, most of whom will now be able to make a single payment with their annual 944 return.
The expanded e-filing mandate doesn't impact individual returns yet, but there are plenty of changes already in place for individual returns in the 2007 tax filing season.
* Elective deferral plans: For the 2006 tax year, a new 401(k)-Roth elective deferral is available, but it must be in the employer's plan. In addition, the maximum contribution for 401(k)s, 403(b)s, 457s and Simple plans will also increase via statute.
* Energy efficiency: Beginning in 2006, some tax credits will come into effect for home improvements that make the home more energy-efficient. Additional information on these credits (and other pertinent 2006 tax law changes) can be found in the current IRS Highlights of Tax Law Changes, Publication 553.
* Hybrid cars: The 2005 alternative motor vehicle deduction becomes a credit in 2006. Depending upon the vehicle, this credit can range from $650 to $3,400.
While it's too soon to know every change that will affect 2006 federal tax returns, the scope of the changes or potential changes we do know about is significant enough to warrant early preparation.
This year, more than ever before, it is never too early to start preparing for a successful filing season in the months ahead.
Tax Talk Today moderator Les Witmer served with the IRS for 23 years and is currently a communications consultant in Atlanta.
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