If your company is still filing W-2s and 1099s via paper, the clock is ticking. The IRS plans to expand the number of employers required to file these forms electronically, and the agency says it would like to implement the new rules by the end of 2022.
Paper Forms vs. Electronic Filing
According to a May 2022 report by the Treasury Department’s Inspector General for Tax Administration (TIGTA), only 49 percent of employment returns in calendar year 2020 were filed electronically. In addition to W-2s and 1099s, this number includes other employment returns such as quarterly Form 941 filings. In addition to being much more expensive to process, paper returns also produce a much higher error rate, particularly if IRS employees must manually input the information into the agency’s computer systems.
The problems with paper returns drew a lot of attention—and a fair amount of criticism—when the new TIGTA report revealed that the IRS had deliberately destroyed an estimated 30 million paper-filed information returns in March 2021. The agency uses these returns to identify taxpayers who are not accurately reporting their income, but once the tax year ends it can no longer process paper forms because the agency takes the software offline for programming updates for the upcoming filing season.
In response to these findings, the inspector general recommended that the IRS “develop a service-wide strategy to prioritize and incorporate all forms for e-filing.” It also said the agency should develop procedures to “identify and address potentially noncompliant corporate filers,” and “ensure that penalties are consistently assessed against business filers that are noncompliant with e-filing requirements.”
Even before the inspector general’s report, the IRS was under congressional pressure to increase the use of electronic information returns. The Taxpayer First Act of 2019 (TFA) made statutory changes that allow the agency to substantially expand the number of businesses that will be required to file W-2s and 1099s electronically. The proposed new regulations are a direct reflection of that law.
New Thresholds for Mandatory E-filing
Under current rules, businesses that file 250 or more information returns in a calendar year are required to e-file. The proposed new regulation would reduce that threshold to 100 returns in the first year and eventually cut it down to only 10 returns per year in the future.
What’s more, while current regulations apply the 250-return threshold separately to each type of information return filed, the new threshold would apply to the aggregate total of all specified information returns. In other words, once the suggested revisions take full effect, businesses that files more than 10 W-2s and 1099s combined will need to file electronically.
The IRS originally proposed implementing the 100-return threshold for 2022 tax returns (to be filed in 2023) and the 10-return threshold for 2023 returns. But it has not yet published the final version of the new rules or officially announced the implementation dates, so it is still possible the deadlines might slip.
If your business is still using paper W-2s and 1099s, now is the time to make the preparations to switch to e-file. Your organization can file W-2s through the Social Security Administration Business Services Online page (https://www.ssa.gov/employer/), but e-filing Form 1099 still requires special software that works with the IRS systems. However, the IRS is working on a new system for electronic filing of 1099s it hopes to unveil in 2023.
Check out the IRS website for details and deadlines on various types of returns: (https://www.irs.gov/instructions/i1099gi#en_US_2022_publink1000286936).
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