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It's tax season: Are you up to speed one-filing?

Article

The Internal Revenue Service is trying hard to convince everyone to file income-tax returns electronically.

The Internal Revenue Service is trying hard to convince everyone to file income-tax returns electronically.

That saves the agency time and money, but can the same be said for the growing number of small practices and businesses that are being required to file electronically?

What are the pros and cons for your veterinary practice?

In January 2005, the IRS began requiring the largest corporations to file their forms 1120 and 1120-S electronically. Those are the basic returns for incorporated businesses and S corporations. Now, other large and mid-size corporations — those with assets of $10 million or more and file at least 250 returns annually — also must file those forms electronically.

Surprisingly or not, record numbers of ordinary taxpayers who are not required to do so are making the choice these days to file electronically, not only tax returns but also many other forms required by the IRS and the Social Security Administration. Even those inevitable payments can be made electronically.

Help available online

The IRS made me do it

Electronic filing means that tax returns are sent directly to an IRS Service Center over telephone lines in the format of the official IRS forms. The IRS e-file program allows taxpayers to file through an electronic return originator or by using a personal computer, modem and commercial tax-preparation software. The veterinary practice's tax adviser, CPA or bookkeeper can use the e-file program to file returns.

E-filing is not limited to incorporated veterinary practices and businesses; all professional practices and businesses, including S corporations and partnerships, can elect to file electronically, using all forms of magnetic media. Magnetic media include electronic filing as well as magnetic tape, cartridge, diskette or other media. The IRS no longer accepts 3½-inch diskettes for filing, however.

Jumping on board

Electronic payment options for veterinary practices today range far beyond income taxes to include employment taxes, information returns, partnership returns as well as returns from small corporations and S corporations.

Despite the IRS's increased emphasis on electronic filing, however, only 15 percent of eligible companies report having a plan in place to meet electronic-filing requirements. A whopping 35 percent of those surveyed in late December 2006 had not even started to prepare to meet the electronic filing deadline.

Going electronic

If your practice isn't filing electronically, why should it do so? Because it's quick, has a 99 percent accuracy rate and is smart. The IRS acknowledges receipt of an electronically filed return within 48 hours.

How popular is e-filing in the general population? More than half of all tax returns filed in 2006, some 73.3 million, were filed electronically.

The IRS recently issued final regulations governing who is required to file electronically. Although a temporary rule excusing large corporations that claim electronic filing poses a financial hardship was left out, those final rules do provide for a waiver of the requirement in the event of hardship.

The White House is pushing to expand the IRS's authority to require more businesses and exempt organizations to e-file in an effort to bring the IRS closer to its goal of having 80 percent of all returns filed electronically.

In the meantime, while not yet mandatory for most veterinary practices, electronic filing is a relatively straightforward process. Using the IRS's e-file is one option. Most commonly used business forms can be filed either directly through it, through tax professionals or by hiring a professional specializing in electronic filing.

Using the IRS e-file does not affect the chances of an audit.

In most states, a practice can file an electronic state tax return simultaneously with a federal return. Other states encourage electronic filing of required forms and reports, but few require it.

Beyond the basic return

Another electronic option for practices allows the filing of a limited number of W-2 forms. In fact, with the employee's permission, it is possible to set up a system to furnish W-2 forms electronically to employees.

Each participant must consent electronically and the veterinary practice must inform employees of all hardware and software requirements.

Soon, a veterinary practice may be required to file information returns used to report certain types of payments made during the year. Form 1099-MISC, "Miscellaneous Income," for example, is used to report payments of $600 or more to persons not treated as employees for services performed. In fact, since the 2005 tax year the SSA no longer accepts paper filing of forms W-2 and W-3.

Paying electronically

A veterinary practice (or its principals) can e-file federal tax returns and at the same time authorize payment via electronic funds withdrawal from their checking or savings accounts. Electronic payment is available for the following types of taxes: Form 1040 series (federal income tax), Form 4868, (extension for filing individual taxes), Form 940 (unemployment tax), Form 941 (quarterly employment taxes), orm 1041 (estates and trusts), Forms 1120, 1120-S and 1120 POL (corporate taxes) and form 7004 (extensions for corporate taxes).

The IRS's goal of eventually having all businesses file electronically coincides with the U.S. Treasury's push to have both individuals and businesses make tax payments using its "Electronic Federal Tax Payment System" (EFTPS).

The government's EFTPS has been available since 1996. It processed 78 million payments worth $1.8 trillion during fiscal 2006, up 7 percent from the previous year.

Besides the IRS e-file, other electronic payment options include electronic funds withdrawal, credit cards and the EFTPS.

Credit-card payments

Since 2006, veterinary practices or businesses filing Form 940 (employer's federal unemployment tax return) and Form 941 (employer's quarterly federal tax return) with a balance due can pay the amount owed by credit card via telephone or Internet.

Additionally, balance-due payments on Form 941 will be accepted for tax year 2005 — first, second, third or fourth quarter.

Electronic payments are made using either of the two third-party service providers offering credit authorization and providing a confirmation number as proof of payment. Because there is a convenience fee based on the amount of the payment, the IRS recommends that veterinarians consider this option only in emergencies. Regular federal tax deposits (FTDs), (i.e., monthly, semi-weekly deposits) cannot be paid by credit card.

Using credit cards to make payments incurs fees and interest charges, but they are an option.

Sooner rather than later

As the IRS moves toward its goal of having 80 percent of taxpayers filing 2007 returns electronically, it's closing a number of processing centers. The Philadelphia Submission Processing Center, for example, was closed last year.

But the IRS's path to electronic filing has not been without stumbling blocks. During the 2006 filing season, it experienced processing problems and was forced to offer temporary exemptions to some large companies and tax-exempt organizations that claimed hardships based on "technology constraints" or "undue financial hardship." Neither term has been defined by the IRS.

However, the IRS claims only 50 firms had taken advantage of the waiver process by the March 15 corporate filing deadline. It will assess waiver requests on a case-by-case basis, but still intends to meet its stated goals on time.

The agency clearly wants every veterinary practice and business to "go electronic," at least for filing and in some cases paying their taxes.

Whether a practice relies on a tax professional or handles its own filing, the IRS seems to be doing what it can to make going electronic easier.

Mark E. Battersby is a financial consultant in Ardmore, Pa.

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