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On February 23, 2023, the IRS published final
regulations (the “Final Rule”) that materially
expand which reporting entities must file electronically rather
than on paper. These requirements apply to a number of tax returns,
including Forms W-2, 1099, 1094-B/C and 1095-B/C, 5330, and 5500.
Beginning with 2023 year reporting (that is due in 2024), all
entities that have to file 10 or more such returns will be required
to do so electronically, a significant change from the current
threshold or 250 returns. The Final Rule also provides aggregation
rules with certain returns to calculate the 10 return
threshold.
Background
Previously, under Code section 6011(e), the IRS was prohibited
from requiring the electronic filing of returns unless the filer
was required to file at least 250 returns during the calendar year.
The Department of Treasury (“Treasury”) and the IRS
issued regulations that required a person to file information
returns electronically if that person was required to file 250 or
more information returns in a calendar year, applied separately to
each type of information return.
The Taxpayers First Act, enacted on July 1, 2019, authorized the
IRS to issue regulations that would decrease this threshold from
250 to 10. See our previous alert
here on the Taxpayers First Act. The Final Rule was
preceded by proposed regulations issued in July 2021.
Specified Information Returns
Under the Final Rule, filers of at least 10 specified
information returns are required to file those returns
electronically. Notably, filers are now also required to aggregate
specified information returns together to determine whether they
meet the 10 return threshold.
GROOM INSIGHT: Many plan sponsors, employers,
and other filers not currently subject to mandatory electronic
filing will be ensnared by the new regulations and be required to
file returns electronically. The new aggregation rules, coupled
with the dramatically lower 10-return threshold, will make it
difficult for most filers to avoid mandatory electronic filing of
many returns.
Specified information returns subject to the Final Rule
include:
- Form W-2, Wage and Tax Statement
- Form 1094-B, Transmittal of Health Coverage
Information Returns - Form 1094-C, Transmittal of Employer-Provided Health
Insurance Offer and Coverage Information Returns - Form 1095-B, Health Coverage
- Form 1095-C, Employer-Provided Health Insurance Offer
and Coverage - Form 1099 series (including 1099-MISC, 1099-NEC, 1099-R,
1099-SA, 1099-LTC, and 1099-QA) - 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) - Form 5498 series (including Form 5498-SA and Form 5498-QA)
- Form 8027, Employer’s Annual Information Return
of Tip Income and Allocated Tips - Form 1042-S, Foreign Person’s U.S. Source Income
Subject to Withholding
The Final Rule also provides that if a filer is required to file
the original information return electronically, that filer must
file any corrected information return electronically.
GROOM INSIGHT: Many smaller employers that have
been filing Forms 1094-C and 1095-C on paper will now need to file
the Forms electronically. This is a dramatic change for these
employers because filing with the IRS’ AIR System is complex,
and typically, employers have to contract with third party services
providers to do so. This will likely increase the cost and time it
will take these employers to file their Forms. While the Preamble
notes that the IRS expects to attempt to reduce administrative
costs by releasing the Information Returns Intake System
(“IRIS”) Taxpayer Portal, it is unclear how effective
this portal will be. Because the Final Rule is effective for Forms
due in 2024 reporting 2023 information, employers should take
action now to start contracting with a service provider.
Other Returns
The Final Rule also subjects certain other returns, such as
Forms 5330, 5500-EZ, and 8955-SSA and certain tax returns (e.g.,
Forms 1120 and 1065) to the 10 return threshold. The Final Rule
provides a broader aggregation rule for these returns, and requires
electronic filing if the filer is required to file 10 or more of
certain other returns (including the information returns above,
income tax returns, employment tax returns, and excise tax
returns). The aggregation rules can be confusing. For example, if a
filer was required to file 9 Forms W-2 and 1 Form 8955-SSA, the
filer is not required to file the Forms W-2 electronically (because
the aggregation rules for specified information returns only take
into account other specified information returns), but is required
to file the Form 8955-SSA electronically (because the aggregation
rules for Form 8955-SSA take into account all returns).
Importantly, certain returns for tax-exempt entities, including
Forms 990, 990-EZ, 990-PF, 990-T, and 4270, are already required to
be electronically filed, so the Final Rule does not apply to them.
In addition, the ERISA-covered plans must file Forms 5500 and
5500-SF to satisfy reporting requirements under both ERISA and the
Code, and DOL regulations already require the Form 5500 and Form
5500-SF to be filed electronically.
The Form 5500-EZ for a deferred compensation plan that covers a
business owner (a return required to be filed under Code section
6058) is subject to an additional aggregation rule. Under that
rule, if the filer is a member of a controlled group of
corporations within the meaning of the aggregation rules under Code
sections 414(b), (m), and (o), this 10 return threshold is
calculated by aggregating the returns filed by all members of the
controlled group.
GROOM INSIGHT: In most cases, a filer can
get a waiver from electronic filing based on undue hardship. The
Preamble notes that Forms 5500 and 5500-SF are typically ineligible
for waivers for undue hardship since these forms are already
required to be filed electronically through DOL’s EFAST2
system.
Next Steps
The new rules are complex and will require a number of filers to
electronically file for the first time in calendar year 2024.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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