Editor’s note: This blog was updated on November 13, 2023
The 2023 1099 tax reporting season is rapidly approaching, and the changes and updates are still coming – from the IRS and states. How can you ensure you’re ready for the busy season in time? What are some best practices for ensuring your 1099 information is compliant? Here are four key ways you can pave the way for a smoother tax reporting season.
- Confirm 1099 data TIN information wherever possible. Ensure name and TIN information is correct before reporting it on a return to the IRS. Check name and TIN combinations against the IRS TIN matching database so you can fix issues before your organization files erroneous returns, avoiding backup withholding notices (i.e., B notices) and penalty notices (i.e., P notices). Reacting to B and P notice compliance requirements can be costly to your organization and create a negative client or payee experience. For payee information reported on returns that can’t be matched in the TIN matching system (e.g., Form 1098, etc.), ensure your organization is collecting Form W-9 information according to the IRS instructions. For example, forms reported to individual payee names should only contain an SSN and forms reported to non-individual payee names should only contain an EIN.
- Pilot the reporting process to ensure data is being produced as expected and that there are no errors. Whether it’s changes to the IRS and state requirements or changes to your own organizational systems and processes, it is important to perform a “dry run” of producing the 1099s for printing and mailing (or issuing electronically), and for filing the information with the IRS and applicable states. Partner with experts like Sovos so you can benefit from the individual transmittal testing completed with the IRS and states, which ensures that files are not rejected during the critical filing times.
- Send electronic statements. Reduce the volume of customer service calls your company receives during tax season. Send electronic statements to your recipients so they have real-time access to the information. Since the COVID-19 pandemic, the Treasury Inspector General for Tax Administration reported a 40% slowdown of delivery time for First Class Mail. Proactively communicate with your recipients to limit the amount of reprint requests your company receives due to 1099s getting lost in the mail. Note that the IRS does require consent to send 1099s electronically to recipients, the requirements can be found here.
- Don’t forget to send 1099s to the states too. Over 40 states require some form of direct state tax reporting for various 10-series and W-2 forms. Some require filing at different thresholds, some don’t participate in the IRS sharing program (i.e., CFS) and even some that do participate in CFS still require your organization to directly file 1099 and W-2 information. Make sure you know which states your organization is obligated to report to directly versus through the CFS, and what those specific requirements are for each.
2023 regulatory changes
For the 2023 reporting season thus far, we have seen a myriad of IRS and state changes to the withholding and/or information reporting requirements. For returns filed in early 2024, T.D. 9972 has lowered the e-filing threshold to just 10+ returns, counted in the aggregate. Meaning, if your business files more than 10 of any type of information return, you will need to file all information returns electronically for the 2023 reporting year. Previously, the electronic filing threshold was 250+ returns and was counted separately for each form type.
Included in the e-file mandate is Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. Per the regulation, all financial institutions are required to file Form 1042 electronically for 2023 calendar year reporting and beyond. Additionally, all other businesses must file Form 1042 electronically if they were also required to file information returns electronically (i.e. Forms 1099, etc.).
Over the last year, we have seen the IRS make strides in their efforts to modernize. For tax year 2023, businesses that plan to access one or more IRS System such as FIRE, IRIS, TIN Matching and more must establish an e-services account. To get an e-services account, a filer must create an account with the IRS third-party credentialing provider, ID.me. In addition to login credentials, there was also a change to Transmitter Control Codes (TCCs) that will affect all businesses that plan to use the IRS’ FIRE, IRIS or other systems to file 2023 information returns. All businesses with an existing TCC must have established their ID.me account and must have gone through the IR Application for TCC process to associate that existing TCC to the ID.me account by August 1. Businesses that did not do so must apply for a brand new TCC to gain access to IRS Systems to file 2023 returns.
In addition, the IRS Annual Publication 1220 was released, stating increases to penalties for returns. For 2023 filings, large businesses (gross receipts of more than $5 million) that do not file an accurate return by August 1 can face a penalty of $310 per return, with a max penalty of $3.78 million. If the IRS determines that the organization is intentionally disregarding, the penalty is now $630 with no maximum.
On top of federal reporting, there have also been a number of states continue to move to new or updated systems. States are also lowering their thresholds to align with IRS regulations. For example, Colorado, Maine and South Carolina will all follow IRS filing thresholds for 2023 reporting.
Lastly, the highly anticipated Form 1099-K threshold change is also set to be implemented for 2023 reporting. Initially set to go into effect for 2022 returns, the lowered 1099-K threshold will move to $600 with no transaction minimum for 2023 reporting. This will be a significant factor in the number of forms many third-party settlement organizations file, as the previous threshold was $20,000 with a 200-transaction minimum. This change in threshold limit is thought to closer align Form 1099-K with other 1099 forms. Learn more about the 1099-K threshold change here.
Streamline your tax information reporting and withholding
Tax information reporting and withholding requirements are constantly changing. Business cannot assume that just because specific requirements were in place one year, that they will be the same next year. Every year, Sovos reports 620 million tax forms, making us the #1 private filer of 10-series forms filed to the IRS. Companies have relied on our wide breadth of tax information reporting solutions for over 30 years. Sovos’ tax information reporting, withholding management and tax identity management solutions reduce manual work by up to 90%. This empowers our clients to focus on their most important business goals while ensuring compliance.
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