Indeed, most companies find navigating tax compliance a stressful task; however, it is often more complicated if companies have to consider levies on items such as insurance policies and premiums. Among the crucial documents for businesses involved in business operations that affect such items, the IRS Form 720, or Quarterly Federal Excise Tax Return, is one document that stands out especially. Not only is this important in terms of knowing how to e-file this form about insurance policies and premiums as efficiently as possible, but it is also very much necessary for keeping the processes of businesses streamlined.
In this article, we will explain what Form 720 comprises, how insurance policies and premiums fit into the excise tax landscape, and why e-filing is advisable for this form.
What is IRS Form 720?
IRS Form 720 is filed to return certain excise taxes laid on various goods and services, such as insurance policies. Generally, such taxes apply only to a few distinct types of industries and activities, including air transportation and environmental taxes, communication services, and insurance. A business or entity under such a liability pays Form 720 at the end of every quarter.
Insurance Policies and Premiums Under Form 720
Excise taxes are not imposed to all the insurance policies but to a selected ones. Excise taxes administered by the IRS, which apply to foreign insurance policies based on some specified requirements, were applied where normally a foreign insurer issues policies covering U.S. risks. According to law, the report and payment of the tax shall be made by the U.S. policyholder and not the insurer.
Section 4371 of the Internal Revenue Code outlines insurance premium taxes explaining that excise taxes apply to:
- Casualty insurance and indemnity bonds: A tax rate of 4% applies on premiums paid on casualty insurance policies covering risks within the U.S.
- Life insurance, sickness, and accident policies: 1% tax rate applies to premiums paid for life insurance, sickness, and accident policies issued by foreign insurers
- Reinsurance: A tax of 1% applies to premiums for reinsurance contracts covering U.S. risks.
This kind of tax liability arises when a policyholder, usually a business, takes out a policy from a foreign insurer who does not conduct business in the U.S. or isn’t covered by a tax treaty that will exempt the policy from excise taxes.
Advantages of Form 720 E-Filing
E-filing is fast becoming the way most businesses process their excise taxes. It reduces time and hassles for anyone who is supposed to process the excise tax. Here is why you should e-file Form 720:
- Faster Processing: If you file through the online medium, the IRS processes pretty fast compared with file submission through the paper filing medium. You get fast acknowledgment and follow up, thus keeping you on track in critical deadlines.
- Less Chances of Error: Mails are prone to errors, as the calculating may go wrong or pieces of information might be forgotten. An e-file software crosschecks many common errors, so it ensures your form is accurate and thus, you have less chance of an IRS penalty.
- Accessibility: E-filing enables individuals to submit tax forms from anywhere, without having to send those paper copies through postal mail. For organizations whose operations are complex and spread out over several locations or whose tax preparation is outsourced, this may be a real boon.
- Record Retention: Most providers of e-filing services retain access to past submissions in a secure space, which can facilitate retrieval of records when audits are conducted or internally audited.
- Cost Effectiveness: There is a minimal cost for e-filing service, but it will save businesses much time and money due to administrative burdens and fast processing of the forms.
Steps to E-File Form 720 on Insurance Premiums and Policies
E-filing for Form 720 is straightforward. However, undue care needs to be taken in regards to the taxes on the premiums from insurance policies. Steps follow:
- Gather Your Information: To file through e-filing, prepare all the documentation in advance. This includes the insurance policy details, premium payments, and tax treaties that might exempt your payment from excise taxes.
- Choose an E-Filing System: You will have to choose an e-filing system that is approved by the Internal Revenue Service or engage the services of a professional tax practitioner who will file on your behalf. The firm you choose will guide you through the process, and it usually has staff to handle problems whenever they arise.
- Completing Form: Fill out all the necessary details on Form 720, including the total premium paid to foreign reinsurance companies, the applicable rate under law that may be either 1 percent or 4 percent, and the computed tax payable. Ensure that all the entries are checked.
- Submit and Pay: After checking for errors, you are ready to submit the form online. If you have outstanding taxes to pay, you can pay directly from the IRS system or through your e-filing provider. The IRS then sends you confirmation of receiving your submission.
- Make Copies of Your Filing: As soon as you have e-filed your Form 720, along with any other supporting evidence, also make copies of the outcome in soft and hard copies respectively. You might require them to prove payments or filing, especially in case of audits.
Deadlines and Penalties
Form 720 should be filed every quarter on the last day of the month when the quarter ends. For example, during the first quarter, January through March, it falls on April 30. Being within these deadlines is important to avoid penalties.
Unless filed by the due date, failure to pay excise taxes will attract charges on interest applicable on excise taxes. Moreover, penalty notices increase the possibility of audit, which can extensively consume business’s time and money. Penalties can be avoided or will not kick in if the return is filed electronically, and hence, businesses can be in compliance.
Preparing Form 720 for insurance policies and premiums is not a very simple process, but it is still pretty clear if well prepared. Knowing which kinds of insurance policies incur excise tax, taking the benefits that are conquered through electronic filing, and ensuring timely submissions make managing the company’s excise tax obligations much easier. In this world where the usual flow of tax compliance changes daily, being active and using available technology, no matter how tough it becomes, holds the key to successful operation. Whether one files for the first time or seeks an easier way to file than it already has been, e-filing Form 720 stands as the smart business decision.