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Proposed Regulations Implement New Rules for Electronic Return Filing
(Parker Tax Publishing August 2021)
The IRS issued proposed regulations amending the rules for filing electronically that affect persons required to file partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns, and certain information returns, registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns. The proposed amendments, which reflect changes made by the Taxpayer First Act of 2019, also withdraw the proposed regulations published in May 2018 which had provided rules for determining whether information returns must be filed electronically. REG-102951-16.
Background
The Tax Equity and Fiscal Responsibility Act of 1982 enacted Code Sec. 6011(e), which required the IRS to issue regulations providing standards for determining which tax returns should be filed electronically. In 1989, Code Sec. 6011(e) was amended to prohibit the IRS from requiring any person to file returns electronically unless that person was required to file at least 250 returns during the calendar year. In 1997, a special rule for partnerships was added to Code Sec. 6011(e)(2) that required the IRS to issue regulations requiring partnerships with over 100 partners to file returns electronically. In 2018, this special rule was amended and the e-filing threshold was lowered to 200 returns and statements for all partnerships filing returns and statements relating to calendar year 2018, and that threshold was reduced by 50 each year until 2023, when partnerships filing more than 20 returns and statements relating to 2022 or any subsequent calendar year could be required to file electronically.
In 2019, the Taxpayer First Act of 2019 (TFA) (Pub. L. 116-25) was signed into law. Section 2301 of the TFA amended Code Sec. 6011(e) to authorize regulations that decrease the number of returns a taxpayer may file without being required to file electronically. These amendments, discussed in more detail below, included changes to the special rule requiring partnerships with over 100 partners to file returns electronically.
Proposed Regulations
The IRS has now issued proposed regulations (REG-102951-16) which impose e-filing requirements on persons required to file certain returns as authorized by the TFA. The proposed regulations affect persons required to file partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns, and certain information returns, registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns.
Lower E-Filing Threshold
Prior to being amended by the TFA, Code Sec. 6011(e)(2)(A) prevented the IRS from requiring any person to file returns electronically unless the person was required to file at least 250 returns during the calendar year. Section 2301 of the TFA changed the statutory 250-return threshold to a decreasing number over several years, as set forth in new Code Sec. 6011(e)(5). In accordance with Section 2301 of the TFA, the proposed regulations amend Reg. Sec. 301.6011-2(c)(1)(i) to remove references to the 250-return threshold and add a new paragraph that, in accordance with the TFA, reduces the e-filing threshold for information returns covered under Reg. Sec. 301.6011-2(b) from 250 to 100, for returns required to be filed during calendar year 2021, and from 100 to 10, for returns required to be filed during calendar years after 2021.
Under current Reg. Sec. 301.6011-2(c)(1)(iii), each type of information return covered under Reg. Sec. 301.6011-2(b) is considered separately for purposes of determining whether a person meets the 250-return electronic-filing threshold. Therefore, different types of information returns are currently not counted in the aggregate for purposes of determining whether a person is required to file a number of returns that equals or exceeds the 250-return electronic-filing threshold during the calendar year (non-aggregation rule). The proposed regulations remove the non-aggregation rule from Reg. Sec. 301.6011 - 2(c)(1)(iii). According to the IRS, in light of the prevalence of e-filing and the enactment of the TFA, which significantly expanded the IRS's authority to require persons to file returns electronically, the non-aggregation rule is no longer necessary. Thus, the proposed regulations amend Reg. Sec. 301.6011-2 to provide that a person required to file original information returns of any type covered by Reg. Sec. 301.6011 - 2(b)(1) and (b)(2) must count all those returns together to determine whether the person meets or exceeds the e-filing threshold for the relevant calendar year.
E-Filing Rules for Partnerships
Code Sec. 6011(e)(6), as amended by the TFA, requires the IRS to provide rules requiring partnerships having more than 100 partners to file returns electronically (100-partner rule). The proposed regulations amend Reg. Sec. 301.6011-2 to require partnerships with more than 100 partners to file their information returns covered by Reg. Sec. 301.6011 - 2(b) electronically, regardless of the number of information returns being filed.
As noted above, Code Sec. 6011(e) was amended in 2018 to authorize the IRS to incrementally reduce the e-filing threshold for partnerships. When Section 2301 of the TFA amended that particular statute again in 2019 to further reduce the e-filing threshold for partnerships, the IRS had not yet published regulations to implement the reduced threshold rule for partnerships. According to the IRS, the proposed regulations do not include a special e-filing threshold for partnerships because the final regulations are not expected to apply before the 2022 filing season, at which point the special rule for partnerships will be phased out. For returns required to be filed during calendar years after 2021, Section 2301 of the TFA authorizes the IRS to reduce the e-filing threshold to 10 for all persons, including partnerships. Thus, the proposed regulations amend Reg. Sec. 301.6011-3(a) to reduce the e-filing threshold to 10 returns for any partnership, in accordance with Code Sec. 6011(e), as amended by the TFA. In addition, the proposed regulations add a new paragraph to Reg. Sec. 301.6011-3 that provides that all returns of any type, including partnership returns, excise tax returns, employment tax returns, and information returns (but not including schedules required to be attached to or included with a partnership return), are counted in the aggregate for purposes of determining whether a partnership of any size meets the e-filing threshold of 10 returns in a calendar year, and thus must file its partnership return electronically.
E-Filing Rules for Corporations
Reg. Sec. 301.6011-5 prescribes standards for determining whether a corporation must file its income tax returns electronically and requires large corporations to file the corporate income tax return electronically if the corporation is required to file during the calendar year at least 250 returns of any type. The regulation, however, applies only to those corporations that report total assets at the end of the year of $10 million or more. The proposed regulations remove references to the 250-return threshold and reduce the e-filing threshold for corporate income tax returns to 10, for returns required to be filed during calendar years after 2021, in accordance with Code Sec. 6011(e), as amended by the TFA.
In addition, the IRS proposes to remove the $10 million rule, making the regulation applicable to all corporations regardless of reportable assets. The IRS stated that the $10 million rule was never required by the Code; rather, the rule was added in 2007 to help ensure that e-filing burdens and costs were appropriate, given the existing limits and accessibility to e-filing technology at that time. With the current prevalence and accessibility of e-filing, the IRS said the $10-million rule is no longer needed. Accordingly, the proposed regulations require that any corporation required to file a corporate income tax return under Reg. Sec. 1.6012-2, regardless of the corporation's reported total assets at the end of its tax year, file that return electronically if the corporation is required to file at least 10 returns of any type during calendar years after 2021. The proposed regulations do not change the existing rule in Reg. Sec. 301.6011-5 that all returns of any type are counted in determining whether a corporation is required to file its income tax return electronically.
Reg. Sec. 301.6037-2 prescribes standards for determining whether an S corporation must file electronically. Reg. Sec. 301.6037-2 requires S corporations to file their corporate income tax return electronically if the corporation is required to file during the calendar year at least 250 returns of any type, but the regulation applies only to those S corporations that report total assets at the end of the corporation's tax year that equal or exceed $10 million. The proposed regulations remove references to the 250-return threshold and reduce the e-filing threshold for S corporations to 10 in accordance with Code Sec. 6011(e), as amended by the TFA. In addition, the IRS proposes to remove the $10 million rule for the same reasons that it is eliminating the rule for corporations. Accordingly, the proposed regulations would require that any S corporation required to file an S-corporation return under Reg. Sec. 1.6037-1, regardless of the corporation's reported total assets at the end of its tax year, must file electronically if the corporation is required to file at least 10 returns of any type during the calendar year.
For a discussion of the rules for filing information returns, see Parker Tax ¶252,501.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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