IRS Issues Final Regs on Electronic Filing; Lower Thresholds Don't Apply Until 2024

(Parker Tax Publishing March 2023)

The IRS issued final 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, certain information returns, registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns. The final regulations, which reflect changes made by the Taxpayer First Act (TFA), reduce the electronic filing threshold from 250 returns to 10 or more returns, and apply to returns and other documents required to be filed during calendar year 2024. T.D. 9972.

Background

The Taxpayer First Act (TFA) (Pub. L. 116-25) was signed into law on July 1, 2019. Section 2301 of the TFA amended Code Sec. 6011(e) to authorize the IRS to issue regulations that decrease, in accordance with the TFA, the number of returns a taxpayer may file without being required to file electronically. Section 3101 of the TFA amended Code Sec. 6011 to require any charitable or other organization required to file an annual return that relates to any tax imposed by Code Sec. 511 on unrelated business taxable income to file those returns in electronic form. Section 3101 of the TFA also amended Code Sec. 6033 to require any organization required to file a return under Code Sec. 6033 to file those returns in electronic form.

On July 23, 2021, the IRS published proposed regulations (REG-102951-16) providing guidance on the electronic-filing rules for partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns, certain information returns, registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns. The 2021 proposed regulations also withdrew the proposed regulations published in 2018, amending the rules for determining whether information returns must be filed electronically.

On February 23, the IRS published final regulations in T.D. 9972. The final regulations adopt the proposed regulations with certain revisions made in response to practitioners' comments.

Final Regulations

Consistent with the proposed regulations, the final regulations reduce the 250-return threshold in Reg. Sec. 301.6011-5 to generally require electronic filing by filers of 10 or more returns in a calendar year. The final regulations also amend Reg. Sec. 301.6011-2(c)(1) to require filers to aggregate all information return types covered by the regulation to determine whether the filer meets the 10-return threshold and is required to electronically file their information returns. The regulation previously applied the 250-return threshold separately to each type of information return covered by the regulations.

In addition, Reg. Sec. 301.6011-2(c)(3) of the final regulations requires partnerships with more than 100 partners to electronically file their information returns. For partnership returns, Reg. Sec. 301.611-3(a) provides that partnerships of any size must file partnership returns electronically if the partnership is required to file at least 10 returns of any type during the calendar year.

With regard to corporations, the final regulations eliminate the electronic filing exception for income tax returns of corporations that report total assets under $10 million at the end of their tax year. Thus, under the final regulations, any corporation required to file a corporate income tax return, regardless of the corporation's reported total assets at the end of its tax year, must file that return electronically if the corporation is required to file a least 10 returns of any type during the calendar year.

Applicability Date of Final Regulations

The final regulations generally provide that the new provisions for electronic filing will apply for returns and other documents required to be filed during calendar year 2024. Thus, for returns required to be filed in calendar years 2022 and 2023, the electronic filing threshold remains at 250.

Under the proposed regulations, the amended electronic-filing rules would be applicable to returns required to be filed during calendar years beginning after the date of publication of the final regulations. However, many practitioners' comments recommended delaying the applicability of the proposed changes by at least one calendar year to provide time for their customers to adjust inventories; for software companies to adjust their programming; for paper filers and the IRS to adjust their processes; and for the IRS to communicate the changes to the public. The IRS said it understood these concerns and that making the new provisions for electronic filing applicable to returns and other documents required to be filed during calendar year 2024 will give affected persons ample time to prepare.

Under Section 3101 of the TFA, organizations required to file an annual return that relates to any tax imposed by Code Sec. 511 on unrelated business taxable income, as well as any organization required to file a return under Code Sec. 6033, are required to file their returns in electronic form. The IRS noted that the provisions of Section 3101 are self-executing and generally apply to tax years beginning after July 1, 2019. The applicability date of the final regulations therefore does not affect the requirements under Section 3101 of the TFA.

Waivers and Exemptions

Practitioners also expressed concerns regarding the impact on small businesses of reducing the threshold for mandatory electronic filing to just 10 returns. For example, one comment said small businesses should be given flexibility in how they file their returns, rather than be required to file returns electronically when they have filed paper returns for years. The IRS disagreed with these comments, but said it understands that the changes to the electronic filing requirements may constitute a burden in the short term for some filers. To address any undue hardship, the IRS said that it will continue to grant hardship waivers fairly and consistently and to grant reasonable-cause relief from penalties for failure to file returns electronically in appropriate cases. The IRS added that it expects the administrative costs to electronically file returns to be further reduced for tax year 2022 and later years with the launch of the Information Returns Intake System Taxpayer Portal, an internet platform for Form 1099 filings.

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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