Tax Insights: Final IRS regulations on e-file for businesses expand requirements without addressing access issues for non-US filers

Issue 2023-10

In brief

On February 21, 2023, the US Department of Treasury (Treasury Department) and the US Internal Revenue Service (IRS) issued final regulations T.D. 9972 (the Regulations) amending the rules for filing information returns electronically. The Regulations affect persons required to file withholding tax returns, certain information returns, partnership returns, corporate income tax returns, unrelated business income tax returns, registration statements, disclosure statements, notifications, actuarial reports and certain excise tax returns. The Regulations require electronic filing (e-filing) for various returns that may currently be paper-filed. 

In detail

Background

The Regulations reflect changes made by the Taxpayer First Act (TFA) and impose e-filing requirements on persons required to file certain returns, including partnership and corporate income tax returns, withholding tax returns and certain information returns. The Regulations apply equally to domestic and non-US filers.

Specifically, the Regulations reduce the 250‑return e-filing threshold (enacted in 1998) to a 10‑return threshold. Under current regulations, non-financial filers may generally paper-file certain returns if they have fewer than 250 slips. The 250‑return threshold applied separately to each type of information return covered under the regulations. The Regulations reduce the threshold from 250 to 10 slips, and also require filers to aggregate across return types to determine whether a filer meets the 10-return threshold. The new provisions to electronically file applicable returns take effect for returns required to be filed during calendar year 2024 (i.e. generally applies to returns for calendar year 2023).

Electronic filing rules for information returns

Of the many returns included in the Regulations, some commonly filed information returns that are specifically mentioned include Form 1042‑S and the Form 1099 series. In calculating whether a filer is required to file at least 10 returns, all the information returns mentioned in the Regulations are counted in the aggregate. This means that a non‑financial filer who typically paper-filed 10 Forms 1099 and four Forms 1042-S will now be required to e‑file all Forms 1099 and 1042‑S, because the aggregated total slips exceeds the 10 count threshold.

Transmitter Control Code issues for non-US filers

To file an information return electronically, US and non-US filers must obtain a Transmitter Control Code (TCC). On September 25, 2022, the IRS announced new procedures for filers to authenticate their identities to create an account to apply for a TCC. The changes were made to strengthen validation controls and protect against unauthorized filings and input of fraudulent information returns. All existing TCC holders must complete the new authentication process before August 2023 or existing TCC authorizations will expire.

There are barriers for non-US filers in obtaining a new TCC or updating a current TCC. For example, the proposed authentication procedures require users to have an authorized individual with a US Taxpayer Identification Number. This is problematic for non‑US filers that generally do not have users with US-based information and, therefore, are not able to complete the mandatory authentication to maintain or apply for a TCC.

The IRS has been aware of this challenge and has not yet proposed a solution. The comments to the Regulations acknowledge the barrier to e-filing for non‑US filers, but did not provide any exceptions to the Regulations for non‑US filers. Some non‑US filers have had to engage third parties to electronically file information returns on their behalf. However, this is not always a desirable solution for many financial services filers, including Qualified Intermediaries, who may prefer not to share sensitive account information outside of their organizations.

The IRS has stated that it is working to develop updated authentication procedures for non‑US filers that comply with the required standards and will inform the public in subsequent guidance or public pronouncement when these procedures become available.

The takeaway

The changes to the e‑filing requirements apply to returns required to be filed in calendar year 2024. Filers should start assessing the impact by examining the number of returns filed in previous calendar years to determine whether electronic filing is required. US filers should ensure steps to obtain a TCC are complete/underway and non‑US filers should start assessing potential fall‑back plans in case the authentication procedures for obtaining a TCC are not sufficiently modified.