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Tax Information Reporting

The 21st Century IRS Act

Senay Redda  

Senay Redda  

On April 18, 2018 the House of Representatives almost unanimously, in a lopsided 414 to 3 vote, passed a series of bills that fundamentally reform the way the IRS works. This is significant on its own but for an organization that has struggled to modernize, the passage is striking.  The bills impact the organizational structure of the IRS, its systems and its processes.  One of these bills is H.R. 5445 – 21st Century IRS Act.  This bill could significantly impact the 1099 reporting industry as it seeks to overhaul some of its dated information technology infrastructure. As opposed to the recent tax law changes which impact tax policy, the 21st Century IRS Act seeks to overhaul how the IRS operates as a technology organization. The IRS has in recent years faced deep cuts in funding, so the very quick and overwhelming passage of the bill would otherwise be surprising if it had not occurred the day after the IRS experienced an electronic filing outage on April 17, the last day before the tax filing deadline. Perhaps the timing was coincidental, but the outage put tremendous focus on the IRS’s systems.

The potential impact of the 21st Century IRS Act is described in Sections 202 and 203 which respectively address the “Development of online accounts and portals” and “Internet platform for 1099 filings”. Section 202 requires the IRS develop secure individualized online accounts to provide services to taxpayers and return preparers. The IRS must also develop a process for the acceptance of tax forms, and supporting documentation, in digital or another electronic format. Section 203 requires the IRS to develop a 1099 platform where individuals and companies can prepare and file 1099 forms, prepare forms for distribution to recipients and maintain a record of completed and submitted forms.

At this stage there are no additional details, but some inferences can be made as the bill includes text indicating the 1099 platform should contain a user interface and functionality like the Business Services Online Suite of Services of the Social Security Administration (for W2s). Currently any employer or other filer wishing to file W-2s needs to use a specific electronic filing format called EFW2. The EFW2 file is comprised of fixed length records with specific fields in specific locations.  In recent IRS history, which is not all that recent, new filing specifications have leveraged the Extensible Markup Language (XML) format. In 2010 the IRS specified this format for individual tax return filings. They did the same in 2015 for Affordable Care Act (ACA) information returns. The same should be expected for 1099 filings.

The impact of all this is that companies who have heavily invested in systems, people and processes to manage 1099 reporting should either prepare to do so again or engage with a partner who can manage the process for them and help ensure compliance with tax deadlines, which, glitches aside, rarely move.

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