The Internal Revenue Service (IRS) issued significant final regulations on February 21 requiring most businesses to begin electronically filing certain kinds of business income tax and informational returns starting in 2024 for any returns first due after January 1, 2024. The final regulations significantly reduce the threshold for the e-filing requirement and expand the list of returns that must be e-filed. These changes will likely cause implementation issues for some smaller businesses that have traditionally filed their returns with the IRS in a paper format. Some of the most common tax forms are included in the 2024 electronic filing mandate including:
The final regulations reduce the current 250-return threshold enacted in prior IRS regulations to generally require e-filing by filers of 10 or more returns in a calendar year. In addition, the final rules also require filers to aggregate across nearly all information return types covered by the regulation to determine whether a filer meets the 10-return threshold and is required to start filing their returns electronically starting in 2024. Any required corrections to information returns will also now be required to be e-filed if the original information returns were required to be e-filed.
In another change for smaller corporate businesses, the regulations also eliminate the e-filing exception for income tax returns of corporations that report total assets under $10 million at the end of their taxable year.
In addition, partnerships with more than 100 partners will be required to electronically file information returns, and partnerships that have to file at least 10 returns of any type during the calendar year will need to e-file their partnership income tax return.
Under the new aggregation rule, the number of Forms W-2 and 1099 would be combined to determine whether the 10-return threshold is met. The final regulations require filers to aggregate across return types to determine whether a filer meets the 10-return threshold and is thus required to file electronically. These return types include Forms 1042–S, 1094-series, 1095–B, 1095–C, 1097-BTC, 1098, 1098-C, 1098–E, 1098-Q, 1098–T, all 1099 series, Forms 3921, 3922, 5498-series, 8027, and W–2G, as well as Forms W–2 (Wage and Tax Statement).
Any return required to be filed electronically and not filed in that manner will be considered a failure to file timely and subject to significant penalties. Hardship waivers and reasonable cause exceptions continue to be available for relief from penalties for failure to file returns electronically in appropriate cases. The potential late filing penalty in 2022 is up to $290 per Form W-2, up to an annual maximum of $3,532,500. For businesses with annual gross receipts of less than $5 million, the maximum penalty is $1,117,500. Penalty amounts are indexed and change annually.
To aid smaller businesses in implementing this change before 2024, the IRS created a new, free online portal called Information Returns Intake System, or IRIS, last month to help businesses file Form 1099 series information returns electronically and be in compliance with the future mandate. The new IRIS portal will be secure and require no special software to be purchased by the business.
According to figures released by the IRS in their recent announcement regarding the final regulations, the IRS receives nearly 4 billion information returns per year and expects to receive nearly 5 billion by 2028. 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. The IRS hopes these new regulations for 2024 and the new IRIS portal will reduce the number of information returns being submitted via a paper filing and help them significantly reduce their ongoing backlog of unprocessed paper returns.
Businesses should review their current return threshold counts and start planning now to implement these reporting changes in advance of the January 2024 electronic filing deadlines. PBMares clients with questions about implementing these electronic filing changes for their 2023 income tax returns and informational returns can reach out to Charles Dean Smith, Jr., CPA and Partner in the firm’s New Bern, NC and Wilmington, NC offices.