If your company is among the millions of businesses that still file paper versions of tax information returns such as Form W-2 and the various types of Form 1099, proposed new regulations from the IRS could soon affect you. The agency has proposed new regulations that would greatly expand the number of employers who are required to file these documents electronically rather than on paper.

The new rules are still subject to revision and the IRS has not yet officially announced when they will take effect. When they were first unveiled, however, the agency said it wanted to implement them by the end of this year. Companies that are still filing paper W-2s and 1099s should consider transitioning soon.

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.

Nevertheless, the agency’s intentions are clear. Businesses that are still providing paper W-2s and 1099s would be wise to prepare to e-file these forms as soon as possible. Companies can already e-file W-2s using the Social Security Administration’s Business Services Online page (https://www.ssa.gov/employer/), but for now, e-filing the various versions of Form 1099 still requires software that is compatible with the IRS’s Filing Information Returns Electronically (FIRE) System. That should change soon, however, as the IRS is currently developing an internet portal for electronic filing of 1099s, which it intends to have online by Jan. 1, 2023.

In the meantime, the IRS website offers a detailed table with filing requirements for the various types of information returns, including the deadlines for distributing these returns to both the IRS and the individual recipients (https://www.irs.gov/instructions/i1099gi#en_US_2022_publink1000286936).

If you have any questions on this topic or, if Holbrook & Manter can help you with any of your tax needs, please reach out. We would be happy to assist you.