The IRS has imposed or tightened the e-filing requirement for many tax returns. In final regulations published on Feb. 21, 2023, the IRS listed rules impacting the filing of partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns, information returns, registration statements, disclosure statements, notifications, actuarial reports and excise tax returns. In general, most taxpayers who file at least 10 forms with the IRS will be required to file those forms electronically.
These final regulations reflect changes made by the Taxpayer First Act (TFA) and are effective Feb. 23, 2023, however; the tightened e-filing requirement for most impacted returns will apply to filings required in 2024. The final regulations require e-filing of many returns and other documents not previously required to be e-filed. According to the IRS, the regulations required only 13-16 percent of the largest paper information return filers to file electronically, but the actual e-file percentage is much larger.
E-filing requirements have been newly imposed or tightened for:
- Form 990 Series (Exempt Organizations)
- Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons)
- Form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding) (for non-financial institutions)
- Form 1065 (U.S. Return of Partnership Income)
- Form 1094 Series and Forms 1095-B and 1095-C (Health Insurance related)
- Form 1097-BTC (Bond Tax Credit)
- Form 1098 (Mortgage Interest), C (Contributions), E (Student Loan Interest), Q (Qualifying Annuity), T (Tuition)
- Form 1099 Series
- Form 1120/1120-S (Corporate Income Tax Returns)
- Form 1120-POL (Certain Political Organizations)
- Form 4720 (Certain Excise Taxes Related to Exempt Organizations)
- Form 5227 (Split-Interest Trusts)
- Form 5330 (Excise Taxes Related to Employee Benefit Plans)
- Form 5500 Series (Employee Benefit Plans)
- Form 8038-CP (Return for Credit Payments to Issuers of Qualified Bonds)
- Form 8300 (Report of Cash Payments over $10,000 Received in a Trade or Business)
- Form 8596 (Information Return for Federal Contractors), A (Quarterly Transmittal)
- Form 8918 (Material Advisor Disclosure Statement)
- Form 8955-SSA (Annual Registration Statement)
- Form 8966 (FATCA Report)
- Schedule SB (Single-Employer Defined Benefit Plan Actuarial Information)
IRS expands e-filing with new penalties for more paper forms
E-filing is required for any filer of 10 or more information returns required to be filed on or after Jan. 1, 2024. The previous threshold for required e-filing was 250 returns. Instead of counting each type of return separately, under the final regulations, filers will be required to aggregate across information return types to determine whether the 10-return threshold is met. Forms 1042-S, 1094 series, 1095-B, 1095-C, 1097-BTC, 1098, 1098-C, 1098-E, 1098 Q, 1098-T, 1099 series, 3921, 3922, 5498, 8027, W-2 and W-2G are the specific returns counted in determining whether the 10-return threshold is met for information returns. Form 8300 is not required to be counted in determining if the 10-return threshold is met, but if a taxpayer meets the threshold based on other returns, Forms 8300 must also be filed electronically. Corrections to information returns are also required to be e-filed if the original information returns were required to be e-filed.
Corporations (and S-corporations) are required to file Forms 1120 or 1120-S electronically if they are required to file at least 10 returns. All members of a controlled group of corporations must file their corporate income tax returns electronically if the aggregate number of returns required to be filed by the group is at least 10. Returns counted for purposes of the 10-return threshold include information returns, income tax returns, employment tax returns and excise tax returns (but not schedules required to be attached to an S corporation return). Prior to the rule change, corporations with $10 million or more in total assets and that file 250 or more returns a year were required to electronically file Forms 1120, 1120-S and 1120 F. The final regulations eliminate the exception for corporations with total assets under $10 million. Therefore, all corporate tax returns required to be filed during calendar years beginning after Dec. 31, 2023, must be filed electronically, if the corporation is required to file 10 or more returns.
Partnerships with more than 100 partners must file their Forms 1065 and corresponding forms and schedules electronically. When calculating the number of partners, all partners over the course of the taxable year are counted, regardless of whether any partner was a partner for the entire taxable year. Only those persons having a direct interest in the partnership must be considered partners for purposes of determining the number of partners during the taxable year. In other words, if a partnership return contains greater than 100 Schedule K-1s, e-filing is required.
Alternatively, any partnership required to file at least 10 returns of any type during the calendar year must electronically file their Form 1065, along with the information returns the partnership is required to file. For purposes of calculating the number of returns a partnership must file, the returns counted include income tax returns, excise tax returns and information returns (for example, Forms W-2 and Forms 1099, but not including schedules required to be included with a partnership return). Therefore, Schedules K-1, K-2 and K-3 are not counted in determining whether a partnership has met the 10-return threshold. However, the final regulations make clear that these Schedules are counted as separate information returns for the purposes of the failure to file penalty under section 6721. In other words, if a partnership is required to file electronically, it will be subject to a separate penalty for failing to electronically file each individual Schedule K-1, K-2 or K-3.
Effective for taxable years ending on or after Dec. 31, 2023, any taxpayer that files Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, is required to file it electronically if it files at least 10 information returns of any type (including the Form 5330) during the year. If the plan sponsor (i.e., the company) is the party that files Form 5330, then the 10-return threshold is met if the company cumulatively files at least 10 of the following: Forms W-2, Forms 1099, income tax returns, employment tax returns and any other excise tax returns filed by the plan sponsor during the taxable year. In the case of a Form 5330 filed by a disqualified person (i.e., an individual or entity that engages in a prohibited transaction with the plan), e-filing of Form 5330 would only be required if the disqualified person incurs 10 or more information return filings during the year. For disqualified persons that are entities, the 10-return threshold is likely to be exceeded. However, for disqualified persons who are individuals, the 10-return threshold may or may not be reached and e-filing may not be required.
As Form 5330 is not an annual filing and is instead filed as necessary under special circumstances (e.g., to report late deposits, prohibited transactions, etc.), employers should carefully review the number of information returns filed during the year to determine if they need to electronically file this form and obtain access to the appropriate e-filing software. Forms 5330 can be filed through the IRS Modernized e-File (MeF) System, which can be accessed through any IRS Authorized e-File Provider. There are multiple due dates for filing Form 5330, depending on the applicable excise tax. For more information, see the Form 5330 instructions.
Form 5500 series
The final regulations also require that Forms 5500, Annual Return/Report of Employee Benefit Plan, 5500-SF Annual Return/Report of Small Employee Benefit Plan and 5500-EZ, Annual Return of a One-Participant, be filed electronically if the plan sponsor files at least 10 information returns during the calendar year that includes the first day of the plan year (effective for plan years beginning on or after Jan. 1, 2024). Currently, the U.S. Department of Labor requires plan sponsors to e-file Forms 5500, 5500-SF and some Form 5500-EZ filings, so for most plan sponsors, the IRS change does not make a difference.
The change from a 250-return to a 10-return e-filing threshold beginning in 2024 may impact small employers that are currently paper filing Forms 5500-EZ, as they may now be subject to e-filing as a result of the reduced threshold. These employers should take particular care to determine whether they are subject to e-filing Forms 5500-EZ prospectively beginning in 2024.
The final regulations require certain split interest trusts to file Form 5227, Split-Interest Trust Information Return, electronically beginning in 2024. Split interest trusts include charitable lead trusts (CLTs), charitable remainder trusts (CRTs) and pooled income funds. The e-filing requirement applies to a split interest trust if the trust files at least 10 returns during the calendar year. Any type of return, including information returns, count toward the 10-return threshold. Examples of returns that a split interest trust may need to file include an income tax return on Form 1041, Forms 1099, Forms W-2, and Form 4720 (Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code). The Form 5227 itself counts as a return when calculating the number of returns the trust must file.
Simple split interest trusts that hold liquid assets and do not need to file many information returns may not need to file their Forms 5227 electronically. However, if the trust invests or engages in an activity that requires several information returns, then the trust may trigger the e- filing requirement. For example, if the trust has several payees requiring a Form 1099 or employees requiring a Form W-2, the trust could easily meet the 10-return threshold.
If a split-interest trust files a paper Form 5227 when it was required to file electronically, the trust will be treated as failing to file the return altogether. This treatment will trigger the failure to file penalties for split interest trusts (section 6652), resulting in penalties of $20 for each day the failure continues up to $12,000 for any one return. For larger split-interest trusts, the penalty is $120 per day up to $60,000 for any one return.
Exempt organization returns
The final regulations require exempt organizations to file all 990-series returns (including Forms 990, 990-EZ and 990-PF), Form 990-T and Form 4720 electronically for tax years beginning after Feb. 23, 2023. However, the preamble to the regulations specifically acknowledges that section 3101 of the TFA amended sections 6011 and 6033 to require e-filing of these forms and the statutory provisions are self-executing and generally apply to taxable years beginning after July 1, 2019. The publication of final regulations does not affect the previously imposed statutory e-filing requirements for exempt organization returns.
The final regulations do expand the e-filing requirement for Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, to filers other than private foundations for tax years ending on or after Dec. 31, 2023. While private foundations are required to electronically file all Forms 4720, the final regulations impose the Form 4720 e-filing requirement on other filers that are required to file at least 10 returns during the calendar year. For this purpose, the taxpayer must aggregate returns of any type, including information returns (e.g., Forms W-2 and Forms 1099), income tax returns, employment tax returns and excise tax returns in determining whether the 10-return threshold is met.
In addition, the final regulations require any organization required to file an income tax return on Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations, to do so electronically if the taxpayer meets the 10-return threshold discussed above. The e-filing requirement for Form 1120-POL is effective for tax years ending on or after Dec. 31, 2023.
Effective for tax years ending on or after Dec. 31, 2023 a withholding agent that is required to file a Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, must file its return electronically if it is required to file at least 10 returns. However, a withholding agent that is an individual, estate or trust is not required to file Form 1042 electronically. Like all other affected returns, any failure to e-file Form 1042 if required to do so is considered a failure to file the return for purposes of section 6651 penalties.
Penalties and exceptions to e-filing
Any return required to be filed electronically and not filed in that manner is considered a failure to file timely and subject to penalties. (For additional information regarding this topic refer to our previous alert.) Hardship waivers and reasonable cause continue to be available for relief from penalties for failure to file returns electronically in appropriate cases. Further, in any circumstance where the IRS’s technology cannot accommodate an e-filing, taxpayers are relieved of the e-file requirement for that return. One circumstance may be when a return requires attaching supporting documents, but the IRS filing system does not yet support the attachments, and there is no separate transmittal procedure for the paper attachments.
Filing systems considerations
With the new rules, the IRS anticipates an influx in e-filing in 2024 for the current FIRE system. To help ease any increased traffic on the FIRE system, the IRS created a new e-filing online portal to help businesses file Form 1099 series information returns electronically. This new portal is referred to as the Information Returns Intake System (IRIS); it is free and available to any business of any size. IRIS allows users to do the following:
- Electronically prepare (create, edit and view) and file Forms 1099 series without software or a service provider
- Download and print the recipient copy of Forms 1099 for distribution to payees
- Maintain a record of completed, filed and distributed Forms 1099
- Perform basic validation of 1099 data before submission
- File up to 100 forms per submission
- Participate in the Combined Federal/State Filing Program (CF/SF)
- Request automatic extensions; and
- File certain corrected information returns
While the IRIS and FIRE systems have many similarities, a FIRE TCC cannot be used in the IRIS system. As such, responsible officers of filers wishing to use the IRIS portal must apply for a new IRIS TCC in order to submit forms or request extensions in IRIS. The IRIS TCC is separate from the FIRE IR-TCC and requires a separate application.
With the increase in electronic filers through the IRS FIRE portal, an increase in FIRE Transmitter Control Code applications is also expected. Filers are required to apply for and receive an IR-TCC code to electronically file information returns through FIRE. The IR-TCC application is also required to be submitted electronically. Please refer to our previous alert covering the new online application.