Recent Legislation Will Increase Electronic Filing

| 7/18/2019
Sections 2301 and 3101 of the Taxpayer First Act (TFA) should increase the number of taxpayers required to file electronically. Section 2301 of the act allows the IRS to publish regulations requiring taxpayers that file fewer than 250 returns to file electronically. Section 3101 requires Form 990 and Form 990-T to be electronically filed for tax years beginning after July 1, 2019, but allows the IRS to delay this requirement for up to two years in certain cases. Section 3102 of the TFA requires the IRS to provide notice before automatic revocation of tax-exempt status for failure to meet the filing requirements.

Background

The IRS must prescribe rules for electronic filing by regulation. In most cases, the IRS cannot require taxpayers that file fewer than 250 returns to file electronically. In addition, the IRS cannot require individuals, estates, and trusts to electronically file their returns. However, tax return preparers generally must electronically file income tax returns of these taxpayers if the preparer expects to file at least 10 such returns for the calendar year. The general electronic filing requirements are as follows:
  • Information returns. Taxpayers that file at least 250 information returns (such as Form 1099, “Miscellaneous Income,” and Form W-2, “Wage and Tax Statement”) must file these returns electronically. The 250-return threshold is determined for each type of information return separately, such that a taxpayer that files 100 Form 1099s and 500 Form W-2s is required to file only the Form W-2s electronically. The U.S. Department of the Treasury and the IRS published proposed regulations on May 31, 2018, that would aggregate all returns when determining whether the 250-return threshold is satisfied in the case of information returns. These proposed regulations have yet to be finalized.
  • Form 1120. Corporations must electronically file their income tax returns if they file at least 250 returns, taking into account all returns they file, including income tax, employment tax, excise tax, and information returns.
  • Form 1065 (including attached Schedule K-1s). Partnerships with more than 100 partners are required to file Form 1065, “U.S. Return of Partnership Income,” electronically. Because the Schedule K-1s are filed with the IRS as part of the Form 1065, they also are filed electronically.
  • Tax-exempt organization returns. Only the largest and smallest tax-exempt organizations are required to electronically file their annual information returns. Organizations with assets of $10 million or more and that file at least 250 returns during a calendar year must electronically file Form 990, “Return of Organization Exempt From Income Tax.” Private foundations and charitable trusts (regardless of asset size) that file at least 250 returns during a calendar year must electronically file Form 990-PF. Organizations that file Form 990-N (e-postcard) also must electronically file. If a tax-exempt organization fails to meet its filing requirements for three consecutive years, the IRS automatically revokes the tax-exempt status of the organization.

Taxpayer First Act

The TFA, enacted on July 1, 2019, extends the e-file requirement to all tax-exempt organizations required to file statements or returns in the Form 990 series or Form 8872, “Political Organization Report of Contributions and Expenditures,” for tax years beginning after July 1, 2019. The statute gives the IRS the authority to provide up to a two-year delay of the mandatory electronic filing requirement for both:
  • Small organizations (generally organizations with gross receipts of less than $200,000 and gross assets at the close of the tax year of less than $500,000)
  • Organizations filing Form 990-T
The act requires the IRS to notify an organization after its second consecutive failure to file in order to give the organization time to meet its filing requirements and prevent automatic revocation of its tax-exempt status. The IRS notice will include information about the applicable filing requirements. This provision applies to failure to file returns or notices for two consecutive years if the return or notice for the second year is required to be filed after Dec. 31, 2019.

The TFA also authorizes the IRS to phase in lower electronic filing thresholds under a plan that is phased in over a period of years, eventually allowing the IRS to require electronic filing by taxpayers that file at least 10 returns in a calendar year. The TFA retains the current statutory requirement that partnerships with more than 100 partners must file their returns electronically.

Conclusion

The statute requires Treasury and the IRS to prescribe rules for electronic filing by regulation. Therefore, implementation of the TFA’s reduction of the 250-return electronic filing threshold and expansion of electronic filing of tax-exempt entity returns requires Treasury and the IRS to publish regulations. In light of this, it is unclear whether the proposed regulations published in 2018 will be finalized or whether these rules will be incorporated into new proposed regulations implementing the electronic filing requirements under the act.
 

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