Special Interest Articles |
1040 Modernized e-File (MeF) Is Up And Running:
What Practitioners Need to Know About It
Significant
Changes
On Form 990 Tax Year 2009
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The 1040 MeF Program became available for Production returns on
February 17, 2010.
The Modernized e-File (MeF)
system is a replacement of the current IRS tax return filing
technology with a modernized, Internet-based electronic filing
platform. This transaction based system allows tax return
originators to transmit returns electronically to the IRS in
real-time, improving turnaround times. This is a major
improvement over the current 1040 e-file system which processed
returns in several batches per day, rather than in real time.
IRS plans to rollout
1040 MeF using a three-phase strategy over three years:
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The first phase of
1040 MeF occurs in February 2010 and will include Form
1040, Form 4868 and 21 1040-related forms and schedules
that can be attached to the 1040. The complete list is
found on the Forms for 1040 MeF Program webpage.
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The second phase of
1040 MeF occurs in January 2011 and will include the
same forms as the first release, additional hardware and
code optimization.
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The third phase of
1040 MeF occurs in January 2012 and will include the
remaining forms filed under the current individual
e-file program.
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Once MeF is fully
implemented, the current 1040 e-file program will be phased out.
MeF is
currently successfully processing electronically filed tax
returns for corporations, partnerships, excise tax filers and
exempt organizations. It provides real-time processing of tax
returns and extensions that improves error-detection,
standardizes business rules and makes them easier to understand,
and expedites acknowledgements. MeF also allows users to attach
PDF files. The forms that MeF supports include: Corporations
(1120, 1120S, 1120-F), Exempt Organizations (990, 990EZ, 990PF,
1120 POL, 990-N, 990 Redesign), Partnerships (1065, 1065-B),
Excise Tax (2290, 720, 8849), and Extensions (7004, 8868). The
number of tax returns filed through the Modernized e-File system
increased 49 percent in the 2008 processing year to more than 3
million accepted returns. See the
MeF Volumes of Accepted Returns webpage for more
information.
Advantages for
Practitioners
MeF will deliver
significant value and benefits to practitioners beyond the
capabilities of the legacy system.
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Faster
acknowledgements: Our goal is to provide a response time
of about five minutes to the transmitter in non-peak
periods. MeF returns are processed as they are received
instead of being delayed in a batch system, as they are
under the legacy program. This will enhance customer
service by allowing preparers to fix return issues in
“real-time.” It will be important for tax practitioners
to discuss with their transmitters the response time
they will experience.
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Specific
explanation of errors: Under the legacy program, one
error code may apply to multiple types of e-file errors.
MeF error codes use simple wording to clarify each error
that triggers a rejection.
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Improved
processing: Form 1040 and any attachments will be
submitted electronically to MeF in XML (Extensible
Markup Language) format. This will allow for more
effective use of data. MeF will also allow attachments
in PDF (Portable Document Format) to accommodate
late-legislation and form changes.
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Prior year
returns: Practitioners will need to talk with their
transmitter to determine which prior year returns will
be accepted by MeF.
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Impact on Practitioners
 Modernized
e-File will not change the way tax practitioners transmit e-file
returns. Practitioners may not even know that the return was a
MeF return, although a rapid acknowledgement will be the
giveaway. In most cases, the returns are sent to a transmitter
who then sends the return to the IRS. Practitioners should
discuss MeF with software development companies, especially when
it comes to error codes. They should find out specifically what
the provider is offering. Practitioners should learn whether or
not their provider will support MeF, how the provider will
handle acknowledgements and error codes, and if they will
support PDF files.
Next Steps
Modernized e-File will
offer clear advantages to practitioners once it becomes fully
operational. The IRS established the MeF 1040 website to keep
practitioners updated on the status and changes with 1040 MeF
including deployment dates, tax practitioner working group
minutes and other information. Practitioners can also email
1040MeF@irs.gov for
additional information and help with 1040 MeF.
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Practitioner PIN Method for Forms
1040 and 4868 Modernized e-File (MeF)
The
requirements for the Practitioner PIN are the same for both the
current e-file system and the MeF system. However, there are
slight differences in how information is transmitted or returned
between the 2 platforms. "MeF info" is noted next to any
question/answer that has MeF specific information.
The
Practitioner PIN method is an additional signature method for
taxpayers who use an Electronic Return Originator (ERO) to sign
their return by entering a five-digit PIN. The PIN can be any
five digits except all zeros.
Generally,
a PIN is needed for each taxpayer when completing a married
filing joint tax return. The Practitioner PIN method allows you
to authorize the Electronic Return Originator to enter or
generate your PIN. It is not necessary for taxpayers to provide
their date of birth, prior year adjusted gross income or prior
year PIN for authentication when using the Practitioner PIN
method.
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Self-Select
PIN Method for Forms 1040 and 4868 Modernized e-File (MeF)
The
requirements for the Self-Select PIN are the same for both the
current e-file system and the MeF system. However, there are
slight differences in how information is transmitted or returned
between the 2 platforms. "MeF info" is noted next to any
question/answer that has MeF specific information.
The
Self-Select PIN method is one option for taxpayers to use when
signing their electronic tax return. The PIN is any five numbers
(except all zeros) the taxpayer chooses to enter as their
electronic signature. A PIN is needed for each taxpayer if
filing through an Electronic Return Originator (ERO), or using
Tax Preparation Software; the taxpayer Date of Birth and Prior
Year Adjusted Gross Income (AGI) or Prior Year PIN from the
original return must also be entered for authentication.
In
processing year 2010, IRS has developed the Electronic Filing
PIN application for taxpayers to use if they are unable to
locate their prior year AGI or PIN. Taxpayers can access the
Electronic Filing PIN (Help) application on IRS.gov and receive
a 5 digit PIN to electronically file their return or extension
after providing certain information from their 2008 tax return
If the
taxpayer agrees, it is acceptable for an ERO and/or software
program to generate or assign the taxpayer PIN. The taxpayer
consents to the ERO’s choice by completing and signing an IRS
e-file signature authorization containing the intended
taxpayer PIN. The taxpayer PIN can be systemically generated or
manually assigned into the electronic format and/or the
signature authorization form. However, the ERO must receive the
signature authorization signed by taxpayer(s) before they
transmit the return or release it for transmission to the IRS. |
 Form
990, Return of Organization Exempt From Income Tax, is the
IRS's primary tool for gathering information about tax-exempt
organizations, for educating organizations about tax law requirements,
and for promoting compliance with tax law. The
2009
Form 990, schedules, and instructions have been revised to modify
and clarify certain reporting requirements. The table below summarizes
significant changes to the Form 990, schedules, and instructions for
2009.
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Form |
Change(s) Made/Issue(s) Addressed |
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Part III, Statement of Program Service Accomplishments |
| Explains that the
filer must report significant changes in program services in
Part III, rather than in a letter to the Exempt
Organizations Determinations office. |
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Part IV, Checklist of Required Schedules |
| Line 11:
Includes more detailed trigger questions to help the filer
determine whether it needs to complete Parts VI, VII, VIII,
IX, or X of Schedule D. |
| Line 12a
(new): Asks whether the filer was included in consolidated,
independent audited financial statements for the tax year. |
| Line 14:
Explains how revenues or expenses from foreign investments
affect whether the filer meets the $10,000 filing threshold
for Schedule F, Part I. |
| Line 20:
As previously announced, a filer that checks Yes to
line 20 must complete the entire Schedule H, not just Part V
as required for the 2008 tax year. |
| Line 24a:
As previously announced, a filer that checks Yes to
line 24a must complete the entire Schedule K, not just Part
I as required for the 2008 tax year. |
| Line 28:
Simplifies trigger questions for Schedule L, Part IV. |
| Line 38
(new): Asks whether the filer completed Schedule O, as
required. |
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Part V, Statements Regarding Other IRS Filings and Tax
Compliance |
| Line 1a:
Clarifies that the filer must include on this line the
number of its employees reported on Forms 1099, 1098, 5498,
and W-2G by its reporting agents. |
| Line 2a:
Clarifies that the filer must include on this line the
number of its employees reported on a Form W-3 by
its reporting agents. |
| Lines 1c,
7g, and 7h: Clarifies that the filer should leave
these blank if questions are not applicable. |
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Part VI, Governance, Management, and Disclosure
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| Line 2:
Clarifies that, if two officers, directors, trustees, or key
employees of the filer serve in similar positions with
another tax-exempt organization, that involvement does not
create a reportable business relationship between the two. |
| Line 4:
Explains that the filer must report significant changes to
its organizational documents on its Form 990, Part VI and in
Schedule O, rather than in a letter to EO Determinations. |
| Line 5:
Modifies standard for determining if diversion is material
and must be reported on line 5. |
| Line 11:
Describes the conditions the filer must meet to answer
Yes when it e-mails board members a link to its Form
990. |
| Line 15:
Defines conflict of interest for compensation
arrangements. |
| Line 18:
Explains when a filer may check the box for Another’s
website. |
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Part VII, Compensation |
| Clarifies that the
current five highest compensated employees to be reported in
the Section A table do not include officers, directors,
trustees, or key employees. |
| Clarifies that
the key employee responsibility test may be met at any time
during calendar year ending with or within the
organization's the tax year. |
| Clarifies that if a
person is a key employee for only part of the tax year, the
filer must report that person’s entire compensation for the
calendar year ending with or within the tax year. |
| Explains how
compensation to foreign persons from the filing organization
or a related organization should be reported in the Section
A table. |
| Explains when and
how compensation from unrelated organizations to the filing
organization’s officers, directors, trustees, key employees,
and highest compensated employees must be reported in Part
VII. |
| Explains when and
how compensation to leased employees must be reported in
Section A. |
| Explains how
compensation paid by common paymasters and other reporting
and payroll agents should be reported in Section A. |
| Clarifies that the
filer must report all compensation paid by a related
organization during the calendar year ending with or within
the tax year to listed persons, even if the other
organization was related for only a portion of the year. |
| Clarifies (in
compensation table) that employee deferrals to 401(k) and
403(b) plans must be reported in Part VII, columns (D) and
(E), and in Schedule J, column B(I). |
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Part VIII, Statement of Revenue |
| Lines 2 and
11: Asks the filer to report on these lines codes
from the new Appendix J, which are derived from the North
American Industry Classification System (NAICS). |
| Line 8:
Explains how to report revenue from donated goods sold at
auction. |
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Part IX, Statement of Functional Expenses |
| Line 14:
Explains the lines on which to report various
technology-related expenses. |
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Part X, Balance Sheet |
| Line 5:
Clarifies that highest compensated employees are persons
from whom receivables should be reported on this line. |
| Line 12:
Indicates that the filer should report on this line publicly
traded stock in a corporation that comprises more than 5% of
the filer’s total assets. |
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Part XI, Financial Statements and Reporting |
| Line 2d
(new): If the filer answered Yes to line 2a or 2b,
it should check the appropriate box to indicate whether the
financial statements were issued on a consolidated basis, a
separate basis, or both. |
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Form 990 Glossary |
| Includes new
definitions of audit, fair market
value, and principal officer. |
| Includes revised
definitions of--
 | Control:
Clarifies means by which the filer can control or be
controlled by another organization, for purposes of
determining the filer’s related organizations. |
| Escrow
and custodial accounts: Exempts section
4947(a)(2) split-interest trusts from reporting in
Schedule D, Part IV. |
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Fundraising events: Includes certain types of
casino nights in the definition, and clarifies which
types of activities are not fundraising events. |
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Permanent endowment: Clarifies that a
permanent endowment is established by a donor-restricted
gift. |
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Quasi-endowment: Clarifies that a
quasi-endowment is established by the filer, and that
restrictions the filer imposes on the endowment may be
temporary or permanent. |
| Related
organization: Clarifies that related
organizations may include governmental units and other
government entities. |
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Reportable compensation: Clarifies reportable
compensation of certain clergy and religious workers,
foreign persons, and other persons. |
| Term
endowment: Clarifies that a term endowment is
established by a donor-restricted gift. |
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Schedule A, Public Charity Status and Public Support |
| New example
explains how a filer that uses accrual method of accounting
should report pledges on Schedule A. |
| Explains that the
IRS does not update records on a filer’s public charity
status based on a change made on Schedule A. The filer may
submit a request for a determination letter on its new
public charity status to the EO Determinations office. |
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Schedule B, Schedule of Contributors |
| Explains that the
filer should specifically identify a donor, rather than
reporting the donor as anonymous, if the filer
knows the donor’s identity. |
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Schedule D, Supplemental Financial Statements |
| Part V:
Clarifies that the filer should report endowments held by
other organizations for the filer and/or held by other
organizations to further the filer’s exempt purposes. |
| Part VII:
Explains that the filer should report publicly-traded stock
in a corporation that comprised more than 5% of the filer's
total assets. |
| Part X:
Asks the filer to complete Part X if its financial
statements for the tax year included a footnote addressing
its liability for uncertain tax positions. |
| Parts
XI-XIII: Clarifies that if the filer was included
in consolidated financial statements (not in separate
financial statements), completing Parts XI-XIII is optional. |
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Schedule F, Statement of Activities Outside the United
States |
| Part I:
Deletes instruction (for tax year 2008) that a filer’s
interests in financial accounts reported on Part V, lines 4a
and 4b should not be reported on Schedule F, Part I. |
| Part I,
line 3: Explains how to report foreign
investments. |
| Part I,
column (d): Explains that the types of foreign
activities to be reported include investments, conducting
board meetings, and sending agents of the filer to attend
and speak at seminars or conferences outside the United
States. |
| Part I,
column (f): Explains that expenditures to be
reported include travel expenses to, from, and within the
region. Allocations of indirect expenditures for foreign
activities are not necessary if the filer does not
separately track them. |
| Part III:
Explains that the filer should report not only grants and
other assistance to foreign individuals, but also to U.S.
individuals for foreign activity. |
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Schedule G, Supplemental Information Regarding Fundraising
or Gaming Activities |
| Part I,
line 3: Eliminates option to answer all states. |
| Part II,
lines 7 and 8 (new): Asks for reporting of food
and beverage expenses and entertainment
expenses related to fundraising events. |
| Part III,
line 16: Clarifies that the filer should report
only that portion of its gaming manager’s compensation that
is allocable to gaming management. |
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Schedule H, Hospitals |
| As previously
announced, organizations required to file Schedule H must
complete all parts of the schedule for the 2009 tax year. |
| Explains how to
report indirect interests in joint ventures, such as a
physician group practice owned by staff physicians of the
filer’s hospital. |
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Schedule J, Compensation Information |
| Part I,
line 9 (new): Asks, if the filer answered Yes
to line 8 (regarding the initial contract exception under
Regs. 53.4958-4(a)(3)), did it also follow the rebuttable
presumption of reasonableness procedure described in Regs.
53.4958-6(c)? |
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Schedule K, Supplemental Information on Tax-Exempt Bonds |
| As previously
announced, organizations required to file Schedule K must
complete all parts of Schedule K for the 2009 tax year. |
| Explains how
related organizations should report bond issues on Schedule
K. |
| Part II,
line 5: Explains that, for 2009 only, the filer
should include in this line the cumulative amount of bond
proceeds used to pay fees for credit enhancement that are
taken into account in determining the yield on the issue for
purposes of Code section 148(h). |
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Schedule L, Transactions With Interested Persons |
| Part II:
Explains when tax-exempt bonds purchased from the filer and
held by an interested person are exempted from reporting in
Part II. |
| Part III:
Explains how to report grants, scholarships, and other
assistance from colleges, universities, and primary and
secondary schools to interested persons. |
| Part IV
| Explains how to
report joint ventures with interested persons as
business transactions. |
| Clarifies that
governmental units and instrumentalities are not
interested persons. |
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Schedule N, Liquidation, Termination, Dissolution, or
Significant Disposition of Assets |
| Explains that the
filer should report its liquidation, termination, or
dissolution in Part I, rather than in a letter to EO
Determinations; EO Determinations no longer issues letters
confirming that an organization’s tax-exempt status was
terminated. |
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Schedule O, Supplemental Information to Form 990 |
| Asks the filer to
use Schedule O, not separate attachments, to respond to
specific questions (e.g., Part VI, lines 11A, 19), and
supplement other responses. |
| Clarifies that the
filer should use a separate attachment—not Schedule O—to
explain late filing of the Form 990. |
| Cautions the filer
not to include social security numbers on Schedule O. |
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Schedule R, Related Organizations |
| Explains how the
filer can control or be controlled by another organization
for purposes of determining related organizations; includes
several new examples of control. |
| Part II:
Explains that governmental units and instrumentalities and
foreign governments should be treated as tax-exempt
organizations for purposes of Schedule R, Part II. |
| Part V,
line 2: Explains how to report transactions with a
section
512(b)(13) controlled entity, and with related tax-exempt
entities that are not exempt under Code section 501(c)(3). |
| Part V,
line 2, column (c): Asks the filer to describe in
Schedule O the method used to determine the value of
services, cash, and other assets reported in column (c). |
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1040
Modernized e-File (MeF) Is Up And Running: What Practitioners
Need to Know About It