Lose the Paper - E-Filing Requirements Increase

Elaine Sommerville, CPA

Sandra Fowler, CPA, CPP

The IRS, helped by Congress, has been on a continual path of increasing mandated electronic filing of various returns.  Despite their best efforts, in 2019, the IRS still received nearly 40 million paper information returns, even though approximately 99% of all information returns for that year were e-filed.   In 2019 the IRS received another boost to their goal of reducing paper with the Taxpayer First Act (the Act).  The Act changed the electronic filing requirements for an array of information returns filed by businesses by lowering the threshold for required electronic filing of certain forms. Before the Act, electronic filing was required for a return, if the taxpayer filed as least 250 returns in that series. The Act reduces this requirement to 10 returns. Immediate implementation of the law was suspended awaiting the issuance of final regulations by the IRS.

The final regulations issued on February 21, 2023 are effective for tax years ending on or after December 31, 2023.  All taxpayers filing 10 returns or more in a tax year are now required to file those returns electronically. Returns include information returns (including Forms 1099-NEC, 1099-Misc and W-2), corporate income tax returns, withholding tax returns, and excise tax returns and others. The 10-return filing threshold is an aggregate calculation across all returns covered by the regulations. For example, a small nonprofit files eight Forms W-2 for its employees and 2 Forms 1099-NEC for its independent contractors.  Under the new law, all 10 forms must be filed electronically.  The regulation generally applies to returns required to be filed for taxable years ending on or after December 31, 2023. Therefore, for 2023 forms filed in 2024, electronic filing will be required for all taxpayers filing 10 or more returns. For many nonprofit organizations, the most affected filings will be filing Forms W-2 and Forms 1099-NEC/MISC. The Form 990 series of returns filed by nonprofit organizations is already under mandated e-filing although the new regulations clearly state that a Form 990 filed via a paper form when e-filing is required is considered to have not been filed.

While many organizations already utilize software facilitating e-filing of returns, smaller organizations may still file paper returns. Looking forward to facilitating this new requirement, Congress mandated the IRS create an e-filing system.  Meeting this mandate, the IRS rolled out the Information Return Intake System (IRIS) in January of 2023.  Through IRIS, taxpayers can electronically file any of the Forms 1099 series for tax year 2022 and future years. Taxpayers will need to apply for a Transmitter Control Code to use this system to electronically file forms. All this information is available on the IRS website at https://www.irs.gov/filing/e-file-forms-1099-with-iris. The Social Security Administration already maintains a method of e-filing Forms W-2 and information is available at https://www.ssa.gov/employer/.

If the taxpayer believes filing returns electronically creates an undue hardship to the taxpayer, a waiver can be requested by filing Form 8508, Request for Waiver from Electronical Filing of Information Returns at least 45 days before the due date of the return(s) for which you are requesting a waiver. The instructions require substantiation be provided for a taxpayer’s justification for the waiver request and acceptance is not automatic. A waiver should only be requested when necessary.

Practically, it is best to avoid filing any return or report with the IRS or the Social security Administration using paper.  Both entities are struggling to timely process paper filings, so practitioners encourage clients to utilize electronic filing and payment avenues. The shutdowns experienced during the pandemic created a severe backlog for the IRS, and it is just now catching up on processing manually filed returns. By filing electronically, the taxpayer can ensure filings are received and processed by the IRS timely and avoid errors made during the manual input of information received by the IRS. Electronic filing platforms provide confirmation information allowing for a tracking of the filing if technical issues occur. Not to mention the time saved in preparing the mailing of paper returns requiring certified return receipt cards and trips to the post office.  The new IRIS system is not the only e-filing option available to taxpayers for the Form 1099 series of information returns. And the Social Security Administration is not the only avenue for e-filing Forms W2. Many accounting software platforms include e-filing options, all tax practitioners maintain e-filing options and there are independent companies easily available to taxpayers offering these services through browser-based platforms. The key to meeting this new mandate is preparing for the January 2024 filing season by selecting the e-file options best available to the taxpayer before the filing season begins.