The Focus - Our Tax E-Newsletter
Compliance with the New Electronic Filing Requirements
The Internal Revenue Service (IRS) processes billions of returns each year, with the amount consistently rising. The sheer volume of returns requires efficiency, and to that end, the IRS had previously implemented an electronic filing (E-file) threshold of 250 returns per type of return filed. In February 2023, the Department of the Treasury and the IRS issued regulations that lowered the 250 return E-file threshold to a combined 10 returns per taxpayer for returns filed after January 1, 2024. In those same regulations, it was established that partnerships with more than 100 partners were also required to electronically file, regardless of the amount of returns they file in a year.
The previously established 250 return E-file threshold was applied to each different type of return filed by a taxpayer. For example, a taxpayer filing 200 Form W-2s and 200 Form 1099s in one calendar year would not be required to electronically file those returns. In contrast, the new 10 return threshold is applied to the combined number of returns filed by a taxpayer in a calendar year. To continue with the previous example, the taxpayer with 200 Form W-2s and 200 Form 1099s would now be required to electronically file all of their returns for that calendar year. Furthermore, a taxpayer with 5 Form W-2s and 5 Form 1099s would also be required to electronically file all of their returns for that calendar year.
The regulations have provided two methods by which a taxpayer may continue to paper file their returns even if they surpass the threshold. One method is by applying for, and being granted, a hardship waiver. When applying for such a waiver, taxpayers must provide two estimates of what costs they would incur in order to switch over to electronically filing their returns. One main aspect of the decision to grant a hardship waiver is if the cost of filing the return electronically is more than the cost of filing a paper return. The determination of whether or not the cost of the change is reasonable, and the ultimate granting of the hardship waiver is up to the IRS.
The other method by which the E-file requirement can be alleviated is through an administrative exemption. One such exemption included in the regulations was established for taxpayers that have religious beliefs prohibiting the use of the technology that is necessary to electronically file a return. In these cases, the taxpayers are permitted to file paper returns, regardless of whether or not they meet the threshold.
This new threshold is applicable to returns filed after January 1, 2024, including 2023 Form W-2s as they are required to be filed by January 31, 2024. This does not, however, mandate electronic filing for all amended or corrected returns filed after the implementation date of January 1, 2024. The procedure established by the regulations for these situations is to file every corrected return in the same manner that the original return was filed. This applies to amended or corrected returns filed for original returns filed both before and after January 1, 2024. One example of this after the implementation of the 10 return E-file threshold would be a taxpayer filing a Form 1099 in January 2024 that applied for and was granted a hardship waiver at the original time of filing, and correctly paper filed the return. Even if the circumstances changed and the taxpayer now has the ability to electronically file the amended returns, or has filed other returns electronically since the original paper filing, the amended return is to be filed as a paper return. This rule allows for efficiency in the processing of the return on the part of the IRS.
The following returns filed by one taxpayer are required to be aggregated when determining if the threshold is met: Form 1042-S, the Form 1094 series, Form 1095-B, Form 1095-C, Form 1097-BTC, Form 1098, Form 1098-C, Form 1098-E, Form 1098-Q, Form 1098-T, the Form 1099 series, Form 3921, Form 3922, the Form 5498 series, Form 8027, and Form W-2G. One type of return excluded from this threshold is Form W-2CM.
This new E-file threshold will affect many small taxpayers that fell below the previous 250 limit per return type. It is important to note the number and type of returns a taxpayer files each year in order to guarantee compliance with the new threshold. Any returns paper filed that should be electronically filed will be considered not filed by the IRS, and therefore will be subject to any penalties and interest that would be assessed on a return not filed at all. Please contact your tax professional at Dermody, Burke & Brown so we can help you navigate the complexities of these new filing requirements.
The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.