IRS Expands Requirements to E-file

Businesses, whether operating as a corporation, partnership, or a sole proprietorship, have been required to electronically file information returns when the aggregate number of these returns, regardless of the type of return, for a tax year was more than 250. The IRS issued regulations in February 2023 lowering the threshold to 10 or more returns, effective with the returns filed on or after January 1, 2024. For the most part, this means the electronic filing mandate will apply to 2023 information returns.

Some small businesses that previously filed paper information returns, because the number of information returns they had to issue was below the 250 threshold, will now find that they will need to file the forms electronically. Under the prior rules, the threshold number of returns for required e-filing applied separately to each type of return, while under the new regulations, all types of information returns are combined when totaling up the number of returns required to be filed.

Affected employers may need significant lead time to implement new software, policies, and procedures to comply with the new rules. Thus, even though electronic filing is not required until 2024 for the 2023 tax year, employers should evaluate what changes may be needed. Simply doing the “same as last year” will not work for many employers.

Why the e-filing mandate? The IRS believes that the electronic filing mandate is necessary due to the sheer volume – some four billion information returns – they receive each year. Although about 99% of all information returns in 2019 were e-filed, that still left nearly 40 million paper information returns for the IRS to handle. And as became all too apparent during the COVID-19 crisis, paper filings bog down the IRS’s ability to efficiently process returns. In instituting the lower threshold, the IRS also noted that electronic filing has become more common, accessible, and economical, as evidenced by the prevalence of return preparers and service providers who offer electronic-filing services; by the availability of relevant software; and by the numbers of returns already being filed electronically on a voluntary basis.

What is an Information Return? So, you might wonder what an information return is. You are probably familiar with Form W-2 that reports annual wages of an employee, Form 1099-NEC for nonemployee compensation paid to an independent contractor, Form 1099-INT that gives the year’s interest income paid by a bank or other financial institution, and Form 1098 that is issued by a lender and reports the home mortgage interest a taxpayer paid during the year. These are all information returns, but there are significantly more types of information returns. Following are the information returns affected by the new e-file mandate:

• Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding;
• Forms in the 1094 series;
• Form 1095-B, Health Coverage;
• Form 1095-C, Employer-Provided Health Insurance Offer and Coverage;
• Form 1097-BTC, Bond Tax Credit;
• Form 1098, Mortgage Interest Statement;
• Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes;
• Form 1098-E, Student Loan Interest Statement;
• Form 1098-Q, Qualifying Longevity Annuity Contract Information;
• Form 1098-T, Tuition Statement;
• Forms in the 1099 series, such as those noted above (including Form 1099-QA, Distributions from ABLE Accounts);
• Form 3921, Exercise of an Incentive Stock Option Under Section 422(b);
• Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c);
• Forms in the 5498 series (but not Form 5498-QA, ABLE Account Contribution Information, which must be filed on paper);
• Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips;
• Form W-2, Wage and Tax Statement, and the similar wage and tax statements for the U.S. possessions; and
• Form W-2G, Certain Gambling Winnings 

Other filings affected by the e-file mandate – The regulations also require e-filing of certain returns and other documents not previously required to be e-filed. Returns affected by the electronic filing mandate, and not listed above, include partnership returns, corporate income tax returns, unrelated business income tax returns, registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns, among others. However, the ten-return threshold does not make electronic filing mandatory for employment tax returns, such as Forms 940 and 941.

A partnership with more than 100 partners must file its information returns electronically regardless of the number of information returns the partnership must file during the calendar year.

If your trade or business receives more than $10,000 in cash in one transaction (or two or more related transactions), you must file Form 8300, “Report for Receipt of Over $10,000 in Cash” within 15 days of receiving the income. This is not a new requirement. But for Forms 8300 required to be filed after December 31, 2023, Form 8300 must be filed electronically if the business is required to electronically file at least 10 information returns and/or wage and tax statements during the calendar year.

Example – During calendar year 2024, XYZ Company is required to file the following forms for tax year 2023: 4 Forms 1099-NEC (non-employee compensation), 4 Forms 1099-DIV (dividends), and 2 Forms W-2 (employee wages), for a total of 10 returns. Because XYZ is required to file 10 information returns during calendar year 2024 for tax year 2023 reporting, the company must electronically file all of its tax year 2023 Forms 1099-NEC and 1099-DIV with the IRS, and electronically file its tax year 2023 Forms W-2 with the Social Security Administration. Thus, if the business meets the 10-return threshold for 2023 information returns that must be e-filed in 2024, then any 8300 filed during 2024 must also be e-filed.

Corrected information returns – If an error was made on an information return that was required to be filed electronically, the corrected information return required to be filed during calendar years beginning after December 31, 2023 also must be filed electronically. However, if an original information return was allowed to be, and was, filed on paper, any corresponding corrected information return must be filed on paper.

Penalties – Penalties under IRC Section 6721 may apply for non-electronic filing of information returns (e.g., Forms W-2, 1099-series, etc.) when electronic filing is required. Such penalties may also apply for non-filing, late filing or incorrect information. The potential penalty in 2024 is up to $310 per information return, up to an annual maximum of $3,783,000. For businesses with annual gross receipts of less than $5 million, the maximum is $1,261,000. Penalty amounts are indexed and change annually.

Waivers – A business may file a request for a waiver from having to electronically file information returns due to undue hardship. For more information businesses can refer to Form 8508, Application for a Waiver from Electronic Filing of Information Returns

IRS portal – To facilitate compliance, the IRS has an online portal to help businesses file Form 1099 series information returns electronically. Known as the Information Returns Intake System (IRIS), this free electronic-filing service is secure, accurate and requires no special software. Though available to any business of any size, IRIS may be especially helpful to small businesses that currently file Forms 1099 on paper to the IRS.

Even if filers are not required to file electronically under the new rules, they may want to consider doing so, as electronic filing has become more common, accessible, and economical. Electronic filing may reduce administrative efforts compared to paper filing, can increase accuracy, and improve record retention.

The new mandatory electronic filing rules are complicated and penalty exposure may be significant. If you have questions about the new e-file mandate for information returns or would like assistance in meeting your obligation to e-file information returns for your business, please contact this office.