What You Need to Know About the IRS eFiling Threshold Changes
The IRS recently released new requirements around electronic filing of all information returns including Forms 1099, 1098, W-2 and more. The new requirements also include employment tax returns such as Forms 941, 945 and Form 1042. The changes impact 2023 returns filed in 2024 and reflect new regulations made by the Taxpayer First Act of 2019 (TFA). The IRS explained that the electronic filing mandate is necessary because the agency receives nearly 4 billion information returns per year and still receives nearly 40 million of those returns on paper.
Here is a brief rundown of the most significant changes and how they may impact your organization for the coming tax season.
The threshold for electronic filing
Let’s start with the most significant: the form volume threshold for electronic filing has been reduced from 250 forms to 10 forms. What exactly does this mean? For tax year 2023, with a few exceptions, if you have 10 or more W-2, 1099, 1095 forms or other information returns to issue, you will need to file them electronically. If you meet this form threshold and continue to file on paper, you may incur a penalty for each form submitted.
How the threshold number is calculated
Not only has the form filing changed, but so has the method in determining how the threshold is calculated. Currently, the electronic filing threshold applies individually to each type of information return. Under the new IRS guidance, the threshold number for determining electronic filing is determined as an aggregate across all information returns and employment tax returns that your organization is required to issue. If the sum of all the forms you need to file (W-2, 1099, 1095, 1042-S) is 10 or more, you will need to file electronically with the IRS.
A hypothetical example might look like this: if you have five 1099-MISC forms to file in addition to three 1099-NEC forms and two 1042-S forms, you will need to electronically file as you would meet the 10-form threshold. One exception to the rule is that corrected information returns are not counted in determining whether the 10-return threshold has been met.
The way you file corrections
Mistakes can easily happen when filling out your tax forms and filing a correction may be necessary. To increase the IRS’ timeliness and accuracy in processing information returns, it is now required that any corrections be filed in the same manner as the originals. For example, if you need to make a correction to a 1099-NEC form that was filed electronically, you will also need to electronically file the correction. Likewise, if you are able to file returns on paper, any corrections would also need to be filed on paper.
This may create issues for some filers if their current back-office system supports the electronic filing of originals but does not support eFile for corrections. Typically in this scenario, these organizations will file the correction on paper, which will no longer be allowed. This is a common issue for many back-office accounting systems. Make sure you review the capabilities of your current system so you are prepared heading into the 2024 filing season.
Increased penalties for tax year 2023
Another important topic to keep in mind with this new IRS guidance is penalties. The penalties for late or incorrect filing have increased for tax year 2023. To minimize, or avoid these penalties, it is important to understand what forms you are required to file and the deadlines to file them. Penalties under code Section 6721 may apply for non-electronic filing of information returns (e.g., Forms W-2, 1099-series, etc.) when electronic filing is required. Such penalties may also apply for non-filing, late filing or filing incorrect information. For businesses with annual gross receipts of less than $5 million, the potential penalty for 2023 returns is up to $310 per form, up to an annual maximum of $1,261,000. For businesses with annual gross receipts of more than $5 million, the annual maximum is $3,783,000.
There are two ways to electronically file information returns
When it comes to filing your returns, there are two different methods: one is to utilize a filing solution, like eFileMyForms, and the other is to file on your own directly with the IRS. While filing on your own with the IRS is a valid option, it does come with a few challenges. First, you will need to apply for a Transmitter Control Code (TCC) with the new IRIS system. If you are approved, a TCC will be granted that will allow you to file using the new IRIS system. An existing TCC for the old FIRE system will not work with the new IRIS system. After completing the application process for a new TCC, you will need to allow up to 45 days for processing of your application. And before beginning your application, you’ll need to set up an ID.me account, which requires you to undergo a background check so that the IRS can verify your identity. All these steps are required before you can file your returns.
eFileMyForms can help you navigate and manage these new requirements for tax year 2023. For more information, visit our 1099 Services page to see how we can help. If you have additional questions or concerns about how this may directly impact your business, be sure to consult with your tax advisor.