Key Details: On February 21, 2023, the Internal Revenue Service (IRS) announced that starting January 1, 2024, there will be changes to the electronic-filing threshold for the filing of required returns. This change reduces the threshold for required electronically filing of tax returns from 250 to 10 and requires filings to be aggregated. The lowered threshold will affect many taxpayers and tax preparers. The new e-filing rules also require e-filing of certain returns and documents that were not previously required to be e-filed in the past and amended returns to be filed using the same manner as they were originally filed. Penalties under IRC (Internal Revenue Code) Section 6721 may apply for not filing information returns electronically when required and failure to file, late to file, or incorrect information penalties may also be assessed. Exemptions and waivers are available for limited situations. Businesses must understand these new requirements to avoid incurring penalties. Contact Ryan & Wetmore, PC for further information and expertise.
Background
The IRS receives millions of paper tax returns and forms a year. The substantial number of returns that must be processed manually creates significant delays for both the taxpayer and IRS staff. Previously, the threshold for e-filing informational returns was 250 returns of one type. Now the threshold is 10, and it is aggregate. The changes to the electronic-filing threshold are expected to decrease the number of paper returns, as it increases the number of people required to e-file these returns. Fewer paper returns will free up more time for the IRS staff, allowing them to focus more on customer service.
What is an Information Return?
An informational return is a document provided by an employer, bank, financial institution, or other payer to the IRS to report the amount of income they have paid you.
See table below for example information returns:
|
Example |
|
|
W2 |
· Reports information about an employee’s annual wages and taxes withheld · Must be filed if the employee was paid that year · Should be sent by January 31 |
|
1099-NEC |
· Report payments over $600 to nonemployees, such as independent contractors · Businesses are required to file if they withhold federal income tax from nonemployee’s compensation, regardless of amount · Previously filed as a 1099-MISC |
|
1099-MISC |
· Reports payments made that are not related to nonemployees · Must be e-filed by March 31, 2024 · Paper filed by February 28, 2024 |
It is important to know which informational returns are required to be filed to avoid any penalties.
E-file
Electronic filing or e-filing is submitting a tax return over the Internet using tax preparation software. The IRS has created a new, free online portal to help businesses file form 1099 series information returns electronically. Filing with tax preparation software reduces the amount of taxpayer calculation errors and missing entries, saving time and money. This has become increasingly popular with its noticeable convenience and efficiency. Once the data is digitalized, it becomes much easier for the IRS staff to extract that information to help answer taxpayer questions in a timelier manner. According to the IRS, e-filing has sped up tax refunds. A benefit of e-filing is that the tax filer will get notice of whether their return was accepted or rejected within 48 hours (about two days). If a return gets rejected after the due date but was e-filed before the due date, a 5-day grace period for the filer exists to make corrections and resubmit. E-filing also helps eliminate the need for postage and shipping, reducing costs.
Exemption/Waivers
E-filers with the following situations may be granted a waiver/exemption:
- Catastrophic event
- Substituted return process
- Bankruptcy
- Final or last return
- Religious reasons
Affected taxpayers may use Form 8508 to apply for a waiver. The form and instructions can be found on the IRS website.
Penalties
Penalties exist for failure to file, filing late, and incorrect information. Information return penalties are based on the number of days they are due, the number of returns affected and intentional disregard. Along with the penalty, there is interest. Interest charges start depending on the type of penalty and will continue to accrue until the balance owed is fully paid off. Penalties will vary from year to year, so make sure to check the IRS website for updates.
Conclusion
Possibilities have skyrocketed with the advancement and growth of the Internet. What used to take a week in the mail can now be done within seconds with just the click of a button. Beginning January 1, 2024, businesses that file at least ten information returns must e-file their information forms.
How can filers prepare for the new update?
- Determine if payments were made that require an informational return to be filed.
- Determine which forms are required to be filed.
- Become familiar with electronic filing / using tax preparation software.
With its accuracy and speed advantages, there is no question as to why IRS is requiring taxpayers to e-file more. Speeding up the process of these returns will help the IRS identify and investigate suspicious activity sooner, better aiding them in their battle against money laundering and tax evasion. However, the IRS only recommends taxpayers that are comfortable preparing their tax returns without the assistance of a professional or tax preparation software e-file returns. Those uncomfortable with filing their taxes on their own can reach out to a professional like Ryan & Wetmore, PC for more information and assistance.
About Traci Getz
Partner & CPA
Traci Getz is a partner with Ryan & Wetmore, P.C. Traci has over fifteen years of experience providing accounting, tax, and consulting services to small and medium-sized business owners. She works with clients to understand their accounting and tax issues while specializing in international tax, healthcare, and construction.
About Mimi Nghi
Staff Accountant
Mimi Nghi is a Staff Accountant at Ryan & Wetmore. She works alongside other staff on tax and audit engagements. Mimi graduated from University of Maryland Global Campus with a bachelor’s in accounting.