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Recently, the Internal Revenue Service (IRS) finalized regulations that require the mandatory electronic filing of tax and information returns. These new rules, effective from February 23, 2023, will impact the way returns are submitted to the IRS. Starting January 1, 2024, nearly all returns, instead of paper-based submissions, must be filed electronically. The previous requirement of electronic filing for more than 250 returns of the same type annually has been replaced with a new threshold: filers of 10 or more returns of any type in a calendar year will be obligated to file electronically. While this article primarily focuses on common workplace IRS information forms like employee benefit plan filings, 1099 filings, and W-2 forms, the new regulations open up discussions on other types of returns as well.
These new rules have the potential to disrupt employers, as they will need to implement new policies, software, and procedures to comply. Although the electronic filing requirement is set for the 2024 tax year, it is advisable for employers to start making changes sooner rather than later.
Who is affected? Almost all individuals and organizations that submit 10 or more information returns to the IRS, regardless of the specific type (such as Forms W-2, Forms 1099, Affordable Care Act Forms 1094 and 1095, Form 3921 for incentive stock options, and other disclosure documents), will be impacted by these changes in the upcoming year. Specifically, this applies to tax returns filed in 2024 for the 2023 tax year. Even workplace retirement plans may be affected, as electronically filing Form 1099-Rs (related to benefit payments) and other forms with the IRS may become mandatory from 2024 for the 2023 plan or calendar year.
Which returns are affected? Along with the information returns highlighted in this article, the new regulations encompass a wide range of returns, including partnership filings, corporate income tax filings, unrelated business income tax filings, withholding tax filings for foreign individuals' U.S.-source income, registration statements, disclosure statements, notifications, actuarial reports, and specific excise tax filings.
The regulations leave no room for leniency. Therefore, the requirement for electronic filing remains in place for returns that were already mandated to be submitted electronically. This includes partnership filings with over 100 partners, annual tax-exempt organization returns in the Form 990 series, Form 4720 (specific excise taxes), and most Forms 5500 (Annual Return/Report of Employee Benefit Plan). Furthermore, under the new regulations, any taxpayer who files 10 or more returns, including income and information returns, must also electronically file their income tax return.
Counting to 10: The new regulations introduce a significant change in the threshold for mandatory electronic filing. The threshold of 10 returns is determined by considering the total number of distinct forms and returns. The rules regarding aggregation can be complex as the filings included in the count vary depending on the specific form being evaluated. Additionally, certain filers must aggregate their filings with all entities within their controlled or affiliated service group to determine if they are filing 10 or more returns for a given tax year. For example, filers of Form 5500 for employee benefit plans (excluding Form 8955-SSA filers) must include the filings of the employer designated as the "plan sponsor," as well as other entities within the employer's controlled and affiliated service group.
- Example 1: Company A needs to file a total of 10 information returns, consisting of five Forms 1099-INT (Interest Income) and five Forms 1099-DIV (Dividends and Distributions). As a result, Company A is required to electronically file all its 2023 Forms 1099-INT and 1099-DIV, along with any other return(s) subject to electronic filing requirements. This requirement arises due to the aggregation of "specified information returns" like Forms 1099 and W-2 when determining if the new electronic filing threshold of 10 or more is met.
- Example 2: Company B needs to file nine Forms W-2 and one Form 8955-SSA. The Forms W-2 do not require electronic filing according to the aggregation rules for "specified information returns," which consider only other specified information returns excluding Form 8955-SSA and income tax returns. However, Company B must electronically file Form 8955-SSA since the aggregation rules specific to that form encompass all returns.
- Example 3: Corporation X, a C corporation with a fiscal year ending on September 30, was required to file one Form 1120 (U.S. Corporation Income Tax Return) within the calendar year ending on December 31, 2023. Additionally, it had to file six Forms W-2 for employees, three Forms 1099-DIV for dividend distributions, one Form 940 (Employer's Annual FUTA Tax Return), and four Forms 941 (Employer's Quarterly Federal Tax Return). Considering the aggregation rules for Form 1120, which encompass all types of returns during the taxable year ending on or within the calendar year, Corporation X must electronically file its Form 1120 for the taxable year ending on September 30, 2024, as it is required to file more than 10 returns of any type during the calendar year 2023.
Filers who currently submit paper returns should consult their tax advisor to determine if they are subject to the new electronic filing requirements based on their projected number of returns for the 2023 tax year that will be filed in 2024. Filers need to be aware that for the first time, the total count of returns across all types determines the electronic filing threshold, rather than the number of returns per type. This may require coordination among different departments within an organization and prompt consultation with the IT department and/or software provider to ensure sufficient time for implementing technological solutions or software upgrades before the 2024 filing deadline.
For small filers who are new to electronic filing, the IRS's newly introduced online portal, Information Returns Intake System (IRIS), proves to be a valuable resource. According to the IRS, IRIS is a secure and accurate platform that does not require specialized software. This free service is available to filers of any scale.
Retirement and Employee Benefit Plans
How do the new rules apply to retirement and benefit plan filings? The existence of different aggregation rules creates complexity as they vary depending on the type of form being evaluated for electronic filing requirements.
Form 5500. Starting from plan years commencing on or after January 1, 2024, electronic filing is mandatory for individuals filing Form 5500 if, in conjunction with any member of a controlled or affiliated service group, they are required to file a minimum of 10 returns encompassing various types, including information returns (such as Forms W-2 and Forms 1099), income tax returns, employment tax returns, and excise tax returns, within the calendar year that includes the first day of the plan year. As a result, Form 5500 filers are subject to an additional aggregation rule specific to controlled groups, which does not apply to other types of filings. Therefore, depending on the number of Forms W-2, Forms 1099, and other related filings submitted by the plan sponsor and affiliated businesses, even Form 5500-EZ (pertaining to plans covering solely the owner or owner and spouse) might require electronic filing. It is worth noting that most Forms 5500 (excluding Form 5500-EZ) are already electronically filed through the U.S. Department of Labor's EFAST2 filing system.
Form 8955-SSA. Starting from plan years commencing on or after January 1, 2024, electronic filing is required for Forms 8955-SSA, which serve to identify retirement plan participants who terminated employment but retained vested benefits within the plan. This electronic filing requirement applies when the filer is required to submit 10 or more returns of any kind, encompassing information returns (such as Forms W-2 and Forms 1099), income tax returns, employment tax returns, and excise tax returns, within the calendar year that includes the first day of the plan year. However, if the Form 8955-SSA filer is part of a controlled or affiliated service group, only the number of its own returns being filed would be taken into account, excluding the returns filed by other entities within the group.
Form 5330. For tax years concluding on or after December 31, 2023, electronic filing of Forms 5330, which pertain to specific excise taxes related to employee benefit plans, is mandatory if the filer is required to submit 10 or more returns of any nature within the calendar year in which the Form 5330 is due. These returns include information returns (such as Forms W-2 and Forms 1099), income tax returns, employment tax returns, and other excise tax returns.
Forms 1094, 1095, 1099, and 5498. Starting from December 31, 2023, electronic filing is mandatory for Forms 1094 and 1095 series (related to reporting Affordable Care Act coverage), Form 1099 series (including 1099-R for payments from retirement plans), and Form 5498 series (for IRA contributions). This requirement applies if the filer is required to submit 10 or more "specified information returns" during the calendar year that includes the first day of the plan year.
Counting Rules for Each Form: When determining whether the electronic filing of retirement plan's Forms 1099-R is necessary, the filer should only consider its own "specified information returns" (such as Forms W-2, 1099 series, 1094 series, and 1095 series) for counting purposes. The requirement to include filings by entities within the sponsor's controlled or affiliated group only applies to the electronic filing of the plan's Form 5500.
- Example 1: If a filer for a retirement plan needs to submit eight Forms 1099-R, one Form 5500, and one Form 8955-SSA, electronic filing of Forms 1099-R is not required. However, electronic filing is necessary for Forms 5500 and 8955-SSA, as per the aggregation rules that consider all returns, including Forms 1099-R, to determine the electronic filing status of Forms 5500 and 8955-SSA.
- Example 2: In 2023, Company A, serving as the plan sponsor and plan administrator of Retirement Plan B, needs to file a 2023 Form 5330 for its non-deductible contribution to Plan B. Both Company A and Plan B operate on a calendar-year basis. In 2024, Company A, acting as the plan administrator, needs to file a total of 21 returns for the 2023 tax year. This includes nine 2023 Forms 1099-R (for plan benefit payments), ten 2023 Forms W-2, one 2023 Form 5500, and one 2023 Form 1120 (federal corporate income tax return). Since Company A is required to file at least 10 returns of any type during the 2024 calendar year, the 2023 Form 5330 for Plan B must be electronically filed.
- Example 3: Let's consider plan sponsor A, responsible for maintaining retirement plan B, which needs to file one Form 1099-R, one Form 5500, and one Form 8955-SSA. Plan sponsor A is not a partnership with 100 or more partners and also needs to file one Form W-2, four Forms 941, one Form 940, and one Form 1120 (federal corporate income tax return). Additionally, plan sponsor A owns 100% of entity C, which files 20 Forms W-2, four Forms 941, one Form 940, and one federal income tax return. While the Form 1099-R and Form 8955-SSA for the plan can be filed on paper (as the controlled and affiliated service group rules do not apply to those filings), the Form 5500 for the plan must be filed electronically due to the aggregation rules.
What about corrected returns? In general, if the original return is required to be filed electronically, any corresponding corrected return must also be submitted electronically. Conversely, if the original return is allowed to be filed on paper and is indeed filed on paper, any corresponding corrected return must follow the same paper filing method.
Are there any waivers or exemptions? Filers who are required to submit fewer than 10 returns during the calendar year for all types of returns may use IRS paper forms, but only if the forms are machine-readable. In cases of undue hardship, the IRS may waive the mandatory electronic filing requirement. The determination of hardship is primarily based on comparing the cost of electronic filing to the cost of paper filing. Religious waivers are also considered. Waiver requests must follow applicable IRS revenue procedures and must specify the type of filing and the applicable period. Electronic filing is generally waived if the IRS's system does not support it for a particular form or situation.
What are the penalties for noncompliance? Failure to comply with the required filing methods, such as electronically filing or using machine-readable paper forms, is considered a failure to file. The penalties vary depending on the type of return. Information returns like Forms W-2 and Form 1099 series are subject to penalties as prescribed by Internal Revenue Code Section 6721. The maximum penalty per information return for 2023 information returns due in 2024 is $310, with an annual penalty cap of $3,783,000 ($1,891,500 for small businesses with annual gross receipts not exceeding $5 million). These penalty amounts are adjusted for inflation and change annually.
When do the new rules take effect? The new requirement applies to tax year 2023 returns that are to be filed with the IRS on or after January 1, 2024.
Even if individuals are not required to file electronically under the updated regulations, it may be beneficial for them to consider this option. Electronic filing has become increasingly popular, widely available, and cost-effective. Opting for electronic filing can reduce administrative burdens compared to traditional paper filing methods, enhance accuracy, and facilitate better record-keeping.
These newly implemented mandatory electronic filing regulations are complex, and noncompliance may result in significant penalties.
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