We’ve been waiting for the IRS to release final regulations on mandatory e-filing of information returns for quite some time. Once it missed this year’s W-2/1099-NEC Jan. 31 e-filing deadline, we made an educated guess and said it wouldn’t make the same mistake again.
Well, we were right, and then some. The IRS has finally released these regs, and they contain a couple of surprises. The regs will be published in tomorrow’s Federal Register and apply to information returns you’re required to file beginning in 2024.
To begin with, the mandatory e-filing threshold is 10 or more information returns, not 100 or more returns, as contemplated by the proposed regulations.
Options for small employers: Small employers may never have thought about e-filing. They can use the Social Security Administration’s W-2 Online portal and the IRS’ IRIS portal to file 1099s. Both portals allow you to complete, file and provide employees and payees with their copies without having to buy software. Small employers e-filing Forms 1095-B/1094-C will need to use the IRS’ AIR system.
Also new is an exemption from e-filing for employers with religious objections. The IRS says it will evaluate these objections on a form-by-form basis and not on an employer-by-employer basis.
Following the proposed regs, you must add together all of your information returns—your W-2s, 1099s, 1095s, 3921s and 3922s—to determine if you’re a mandatory e-filer. If the total comes to at least 10, you are.
The regs also keep separate the requirement to e-file corrected returns, but if you must e-file your original returns, you must e-file your corrected returns.
The regs maintain your ability to request a hardship waiver if e-filing is too burdensome. But they also maintain the rule that a principal factor in determining hardship will be the amount by which the cost of e-filing exceeds the cost of filing on paper.
What about other returns?
Partnerships with at least 100 partners and all S corps and C corps will be required to e-file their income tax returns if, during the calendar year ending with or within the entity’s taxable year, they’re required to file at least 10 returns of any type, including income tax returns, Forms 941 and 940 and information returns.
Back in 2016, the IRS had trouble figuring out how to assess the failure-to-file penalty when the e-filing threshold was 250 or more information returns and an employer filed 300 returns on paper, instead of electronically. It came up with four possibilities:
- The penalty could be based on the 50 returns with the highest amount reported
- The penalty could be based on the 50 returns with the lowest amount reported
- The penalty could be based on 50 randomly selected returns
- The penalty could be based on the average amount reported on all 300 returns, multiplied by 50.
These regs give you a bit of a break and require the failure-to-file penalty to be assessed on only the excess number of returns, instead of the total returns.
Example: In 2024, Sparky files 12 Forms 1099-NEC on paper, but it should have e-filed all of those returns. Sparky’s failure-to-file penalty is based on the two returns it should have e-filed, not on the 12 returns.