IRS Expands Electronic Filing Requirement for 2023 Tax and Information Returns filed on or after January 1, 2024

The IRS finalized regulations in 2023 significantly expanding mandatory electronic filing of tax and information returns. It will require almost all returns filed on or after January 1, 2024 to be e-filed with the IRS rather than on paper. Filers of 10 or more information returns of any type for a calendar year generally will need to e-file those returns with the IRS. Previously, e-filing was required if the filing was more than 250 returns of the same type for a calendar year. Now, it is an aggregate test of information returns to determine 10 or more for e-filing purposes. Such information returns include Forms W-2 and 1099, among others.

General Rules:

Who is affected? Essentially all filers of 10 or more information returns to the IRS when counting any type, such as Forms 1099, Forms W-2, Affordable Care Act Forms 1094 and 1095 and Form 3921 (for incentive stock options) and other disclosure documents. Workplace retirement plans may need to file Form 1099-Rs (for benefit payments) and other forms electronically.

Which returns are affected? In addition to the information returns previously discussed, the new rules cover a broad variety of returns, including corporate income tax returns, partnership returns, unrelated business income tax returns, withholding tax returns for U.S.-source income of foreign persons, registration statements, disclosure statements, notifications, actuarial reports and certain excise tax returns. 

The rules are not relaxed under the new requirements, meaning returns that are already required to be filed electronically, including partnership returns with more than 100 partners, tax-exempt organization annual returns in the Form 990 series, Form 4720 (for certain excise taxes) and most Forms 5500 (Annual Return/Report of Employee Benefit Plan) continue to be subject to the e-filing requirement. Under the new regulations, any taxpayer with 10 or more returns, including income and information returns, must also e-file income tax returns. 

How to count 10? The 10 return aggregation rules are confusing because the filings included in the count change depending on which form the determination is made for. Also, some filers must be aggregated with all entities within a controlled or affiliated service group to determine if 10 or more returns are being filed for the tax year. For example, Form 5500 filers (but not Form 8955-SSA employee benefit plan filers) must count the filings of the employer who is the “plan sponsor” and other entities in the employer’s controlled and affiliated service group.

Example 1: Company A is required to file five Forms 1099-INT (Interest Income) and five Forms 1099-DIV (Dividends and Distributions), for a total of 10 information returns. Because Company A is required to file a total of 10 information returns, Company A must file all of its 2023 Forms 1099-INT and 1099-DIV electronically, as well as any other return(s) that are subject to an electronic filing requirement.

Example 2: Corporation X, a C corporation with a fiscal year end of September 30, was required to file one Form 1120 (U.S. Corporation Income Tax Return) during the calendar year ending December 31, 2023, six Forms W-2 (for employees), three Forms 1099-DIV (for dividend distributions), one Form 940 (Employer’s Annual FUTA Tax Return) and four Forms 941 (Employer’s Quarterly Federal Tax Return). Because the Form 1120 aggregation rules include returns of any type during the calendar year that ends with or in the taxable year and Corporation X is required to file more than 10 returns of any type during calendar year 2023, Corporation X is required to file its Form 1120 electronically for its taxable year ending September 30, 2024. 

KDK Insights:

Any entity that currently files returns on paper should consult with us to determine if the new e-filing requirements apply to them based on the number of returns that they anticipate filing in January 2024 for tax year 2023.

Entities must pay particular attention to the total number of returns across all return types because the new e-filing threshold is determined based on the aggregate total, not by return type.

The IRS’s new -- and free -- online portal for filing these returns electronically, Information Returns Intake System (IRIS), is especially helpful for small filers dealing with electronic filing for the first time. According to the IRS, IRIS is secure, accurate and does not require any special software. This free service is available to filers of any size. Massachusetts allows e-filing of information returns through the MA Tax Connect website. We can also assist in preparing and e-filing 1099s in order to meet the new requirements.

Even if filers are not required to file electronically under the new rules, they may want to consider doing so, as electronic filing has become more common, accessible and economical. Electronic filing may reduce administrative efforts, can increase accuracy and improve record retention. Given the penalties for non-compliance, it may make sense to just e-file all information returns whether the threshold is met or not.

The new mandatory electronic filing rules are complicated and KDK can help entities understand and comply with the new rules, including the facilitation of preparation and e-filing of information returns.