Navigating New IRS E-Filing Regulations: What Your Organization Needs to Know

The Internal Revenue Service (IRS) has taken a significant step towards modernizing its filing process by releasing final regulations on February 21, 2023. These regulations, encapsulated in Treasury Decision 9972, mandate electronic filing for a broad spectrum of returns and documents, impacting virtually every organization that files returns with the IRS. This move, aligning with Section 2301 of the Taxpayer First Act of 2019, signals a shift from paper-based to digital submissions, aiming to streamline processes and enhance efficiency.

The new e-filing requirements extend to a wide range of returns including, but not limited to, employment tax returns, information returns such as the Forms 1099-series and W-2, and Affordable Care Act Forms 1094 and 1095-C. The final regulations significantly expand upon the proposed rules from 2021, reducing the threshold for mandatory electronic filing from more than 250 returns to just 10 in a calendar year, starting in 2024.

Understanding the New Aggregation Rule

This change implies that organizations filing ten (10) or more returns of any kind in aggregate will now be required to file electronically. It’s important to note that the ten-return threshold does not apply to employment tax returns, like Forms 940 and 941, which remain exempt from this requirement.

The aggregation rule is a pivotal aspect of the new regulations, requiring filers to combine different types of returns to determine if they meet the 10-return threshold. This is a departure from previous regulations where each type of return was considered separately. For instance, an organization previously filing 200 Forms W-2 and 200 Forms 1099 would not have been required to file electronically as each type of return did not exceed the 250-return threshold. Under the new regulations, such an organization must file electronically as the total number of returns exceeds the 10-return threshold.

This new aggregation rule covers a wide array of forms, including Forms 1042-S, all 1099 series, Forms 3921, 3922, the 5498-series, 8027, W-2G, and variations for U.S. territories, among others. The IRS provides clear examples to illustrate how the aggregation rule applies, ensuring organizations understand their filing obligations.

For returns required to be filed in 2024, the electronic filing threshold is set at 10, a significant reduction from the previous 250-return threshold applicable in 2022 and 2023. This change underscores the IRS’s commitment to leveraging technology for more efficient tax administration.

It’s also important to note that corrected information returns must be filed in the same manner as the original submissions. If an organization is required to file electronically, any subsequent corrections must also be submitted electronically. Exceptions are in place for returns that the IRS does not support for electronic filing, providing some flexibility in specific scenarios.

Addressing Penalties and Embracing Resources for Smooth Transition to Electronic Filing

Organizations failing to comply with the electronic filing mandate face significant penalties under IRC Section 6721. These penalties can be substantial, emphasizing the importance of understanding and adhering to the new requirements.

To ease the transition, the IRS has introduced resources like the Information Returns Intake System (IRIS), a free electronic filing service that facilitates the submission of Form 1099 series information returns. This tool mainly benefits small businesses that traditionally filed paper returns, offering a secure and accurate filing option without requiring specialized software.

In light of these changes, small business owners and employers must be mindful of the 1099 deadlines. Timely preparation and submission of the required 1099 forms to the IRS are critical to avoid hefty penalties associated with late submissions or inaccuracies. To assist in this process, below is a table of the 1099 due dates for 2023 forms due in 2024, which outlines the deadlines for electronic submission of these forms to the IRS. Staying ahead of these deadlines is essential to ensuring compliance and avoiding potential fines.

The shift to mandatory electronic filing reflects the IRS’s broader strategy to modernize its systems and processes. With nearly four billion information returns processed annually, moving away from paper-based submissions is a logical step toward improving accuracy and efficiency. Organizations, particularly those that have relied on paper filings, must now adapt to this digital shift. Consulting with legal or tax advisors and considering software updates are prudent steps to ensure compliance with the new e-filing requirements.

As we embrace this digital transformation, it’s crucial for organizations to stay informed and proactive. The transition to electronic filing represents not only a compliance requirement but also an opportunity to refine operational efficiencies and contribute to a more sustainable and efficient tax system.