Overview
The IRS has revised its regulations regarding the electronic-filing rules for most returns, including partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns, certain information returns (such as 1099s), registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns. These revisions have reduced the current 250-return threshold down to 10 returns. In addition, under current regulations, the 250-return threshold applies separately to each type of information return covered while the new regulations require filers to aggregate across return types to determine whether the 10-return threshold is met. Noncompliance penalties will be imposed on a per-form basis, so the totals can add up quickly. However, electronic-filing options continue to expand, with free filing options now available to most filers.
IRS Motivation
When returns are filed on paper, the IRS typically needs to transcribe much of the input data to electronic format. In some cases, IRS employees must manually input this data, which can affect the timeliness and accuracy of processing these forms. This can lead to delays for taxpayers or other filing issues. The increased accuracy of the data received from electronic filing helps reduce transcription errors and the subsequent cost for the IRS and taxpayers to resolve these errors. The estimated net savings of taxpayer dollars in the first year when the electronic-filing threshold is reduced to 10 returns is 107 full-time equivalents (FTEs), or $6 million. For each subsequent year, the IRS estimated that the savings is 147 FTEs, or $8.3 million.
Timeline for Compliance
The IRS believes that making these new provisions applicable to returns required to be filed during calendar year 2024 will give everyone ample time to prepare. These provisions apply to returns that are required to be filed for taxable years ending on or after December 31, 2023. So, if a return from a year prior to 2023 is extended, and the extended due date now falls in 2024, it is not covered under these provisions.
Most Common Returns
Some of the most common returns that will be impacted are:
- Forms 1094, 1095-B, and 1095-C for ACA compliance
- Forms 1098, 1099, and 5498 series, for information reporting
- Form W-2, Wage and Tax Statement
- Forms 1120 and 1120-S, corporate income tax return
- Form 1065, partnership income tax return
The following returns will be included when determining if a company meets the 10-return threshold, but companies can still choose to file them on paper even if they exceed that limit:
- Form 941, Employer’s Quarterly Federal Tax Return
- Form 940, Employer’s Annual Federal Unemployment
Other Returns
Some other less common returns covered under the new electronic-filing rules are:
- Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
- Form 990-N, Electronic Notice (e-Postcard)
- Form 8871, Political Organization Notice of Section 527 Status
- Forms 5500 and 5500-SF, Report of Employee Benefit Plan
- Form 8300, Report of Cash Payments Over $10,000 in a Trade or Business
For a full list of provisions covered and forms affected, you can see the regulation on the Federal Register.
Special Situations
- A partnership with more than 100 partners is required to file its information returns electronically, even if it does not exceed the 10-return threshold.
- Corrected returns should be filed in the same manner as the original returns were filed. So, if the original returns were filed on paper, the corrected returns also should be filed on paper.
- Religious exemptions will be allowed if the use of the technology required to file in electronic form creates a conflict with the filer’s religious beliefs. A submission claiming an exemption must be made in accordance with applicable IRS revenue procedures.
- It would be challenging for foreign filers to comply because the new procedures require users to have U.S.-based information (such as a U.S. Taxpayer Identification Number, telephone number, or financial account) to authenticate their identity. This would require them to engage a third party to file returns on their behalf. The IRS is aware of this issue for non-U.S. filers, but the final regulations do not provide a blanket electronic-filing exemption for them. Its approach is to develop alternative authentication requirements for identity proofing in accordance with standards set forth by the U.S. Department of Commerce, National Institute of Standards and Technology (NIST). Thus, the IRS is actively working to develop updated authentication procedures for non-U.S. filers that comply with the NIST standards, and it will inform the public in subsequent guidance when these procedures become available.
Hardship Exceptions
Many of the regulations that impose these requirements provide a waiver from electronic filing to any person who establishes undue hardship. In general, exemptions will be made available on a form-by-form basis rather than on a per-filer basis to allow the IRS to appropriately address differences in filing requirements and filer populations. The taxpayer’s ability to comply with the requirements of such regulations at a reasonable cost must be considered, but financial cost is not the only factor. A waiver also may be granted if a fire, casualty, or natural disaster affected the operation of the business. For rural and older taxpayers, the IRS has determined that the current hardship-waiver procedures provide appropriate relief to them for any undue burdens arising from these changes to the electronic-filing rules. Reasonable cause relief from penalties also may be available for these filers. However, it is important to remember that acceptance is not automatic, and any requested hardship exemption is subject to an assessment of the facts as part of an acceptance process by the IRS.
Resources
Fortunately, electronic-filing options have become more accessible and economical, as evidenced by the prevalence of tax-return preparers and third-party service providers whose services typically include electronic-filing services. There are additional options with the widespread availability of “off the shelf” tax-return preparation software and the ability to file some returns directly with the IRS for free. The Information Returns Intake System (IRIS) portal was recently opened, which will allow organizations and individuals to file 1099 information returns free of charge. Note that the use of this portal will require you to apply for a Transmitter Control Code (TCC). You can learn more about the IRIS program, including how to apply for a TCC, in our FORsights™ article, “What to Know About IRIS – The Free 1099 Filing Portal.” If you are already using a third-party service provider and/or a tax-return preparer, check your recent filings or contact them directly to confirm you are in compliance with the new filing thresholds.
Conclusion
These regulations will impact most taxpayers who are not currently filing all their returns electronically. Even a small company with just a few employees will quickly exceed the 10-return threshold when considering that quarterly Form 941 payroll returns, W-2 forms, and 1099 forms each count as one return. It should be a priority for all taxpayers to have a means to file their returns electronically prior to the 2023 calendar year-end. Since some options require the taxpayer to secure a TCC code, and that application process can take up to 45 days, ample time should be allowed for registration acceptance and conversion of existing processes where required. If you need additional assistance, please reach out to a professional at FORVIS.