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The Internal Revenue Service (IRS) and Treasury have recently released proposed regulations (REG-102951-16) that would amend the rules for determining whether a taxpayer is required to file tax information returns electronically. Any person engaged in a trade or business, including a corporation, partnership, individual, estate and trust, who makes reportable transactions during the calendar year, must file information returns to report those transactions to the IRS. Examples of information returns that can currently be filed electronically include Forms 1099, 1042-S, 1097, 1098, 3921, 3922, 5498, 8027, 8935, 8955-SSA and W-2G.
Currently, a taxpayer is generally only required to file information returns electronically if they are required to file at least 250 information returns during the calendar year. When determining the 250 return threshold, each type of information return is counted separately. That is to say, different information returns – such as Forms 1042-S, 1099, or W-2 – are not required to be aggregated in reaching the 250 threshold. Thus, under current rules, a taxpayer required to file 150 Forms 1042-S and 150 Forms 1099-MISC would not meet the 250-return threshold.
The proposed regulations, however, would generally require that all information returns, regardless of type, be taken into account in determining whether a taxpayer meets the 250-return threshold for electronic filing of information returns. Therefore, the same taxpayer described in the example above – required to file 150 Forms 1042-S and 150 Forms W-2 – would now be required to aggregate those filings (totaling 300) when determining the 250-return threshold.
This aggregate method of determining the 250-return threshold, which would become effective for information returns filed on or after Jan. 1, 2019, will likely require certain taxpayers to make several changes to their systems, policies, and procedures in order to ensure compliance. As a result, affected taxpayers only have a short window to evaluate the impact of the new rules on their operations, implement changes to their systems and procedures for filing returns, train staff on new requirements, and identify a third party service provider or in house solutions for managing any new filing requirements.
While the rules do permit taxpayers to request a waiver of the electronic filing mandate if there is an extenuating hardship, the fact remains that most organizations will ultimately need to be prepared to file all information returns electronically going forward. Further, since the IRS has not carved out any specific type of information return from the purview of these regulations, pending additional guidance that better defines returns that should be included in the 250 count threshold, it will be difficult for any company to justify manually filing returns going forward.
Of the taxpayers potentially affected by these proposed regulations, nonfinancial institutions that currently file less than 250 of the same type of information return but more than 250 information returns in aggregate, are likely to be the hardest hit since many still rely on manual processes and don’t file electronically. Although financial institutions were already required to file information returns electronically regardless of how many returns they were filing, nonfinancial institutions could generally rely on the 250-return threshold in determining whether they were required to electronically file and many opted to file returns manually. Thus, while the proposed regulations do accurately note that concerns over the cost and administrative burden associated with electronic filing have largely been mitigated over recent years, this seemingly small change will likely pose more of a cost and administrative burden for taxpayers than the IRS has anticipated.
For example, despite advances in technology, many nonfinancial institutions have historically relied on the non-aggregation rule in order to avoid filing these returns electronically. Moreover, the proposed regulations state that this change will result in only a slight burden to a limited number of small entities. However, there is no indication in the proposed regulations of how ‘small’ is defined. Many midsized nonfinancial institutions – many of whom have not historically been required to file returns electronically – are likely to now be caught in the purview of this requirement.
Accordingly, taxpayers relying on the non-aggregation rules to exempt them from the information return electronic filing mandate may find it prudent to evaluate the feasibility of purchasing software or developing in house solutions now for meeting any potentially new electronic filing obligations and to ensure that they are prepared to file returns electronically by Jan. 1, 2019. Taxpayers may also need to plan for additional training and lead time for staff that may not be familiar with requirements for preparation and transmission of returns electronically, particular with regard to the use of the IRS’ Filing Information Returns Electronically system.
For more information on RSM’s global tax information reporting services or for assistance with evaluating filing requirements, please refer to our FATCA landing page.