Top 2016 Changes for Tax Information Reporting and What to Expect Next

With the 2016 tax reporting season mostly in the rear view mirror, it’s time to take a look back at the significant changes to the reporting landscape that occurred over the last 12 months. It’s also important to think about what those changes mean for the future. One thing is certain: 2016 was a year of significant changes in tax information reporting compliance. Governments want more information and they want it quickly. This accelerated pace of change requires compliance managers to stop thinking tactically and start thinking strategically to remain effective.

2016 In Review

The PATH Act The Protecting Americans from Tax Hikes Act (PATH) Act passed in December 2015, bringing significant changes to the 2016 reporting landscape. By way of a quick recap:

• The federal due dates for W-2s were accelerated from March 31 to January 31.
• Reporting non-employee compensation (1099-Misc.) also became due on January 31.
• Extensions for W-2s were no longer granted automatically but had to be requested.

The PATH Act also introduced a safe harbor for de minimis errors on information returns and payee statements. Specifically, filers are no longer subject to penalties under either Section 6721 or 6722 if an amount reported on the return is within $100 of the correct amount (assuming no withholding) or within $25 for amounts withheld. However, the safe harbor does not apply to intentional errors or an outright failure to file or furnish an information return or payee statement. Further, recipients remain free to require the issuance of a corrected return. Getting more information and getting it earlier — as was accomplished via the PATH Act — affords the federal government the opportunity to better validate the accuracy of related tax filings. States took notice: In response to the PATH Act, a number of states also accelerated their W-2 and 1099 due dates to match the newly imposed federal deadlines, including: As the dust clears, we find ourselves in a world where the majority of states require information reporting on January 31. Although businesses are required to do more and do it faster, there is little margin for error. Since Tax Year 2015, penalties and penalty thresholds have more than doubled.

Looking Ahead

While there aren’t any large-scale federal legislative changes on the immediate horizon, compliance managers should expect the trends established in 2016 to continue:

1. More states will accelerate due dates to January 31 — but not necessarily for all required filings, meaning many will impose multiple reporting deadlines.
2. States will expand their requirements — Oklahoma now requires W-2 reporting while Iowa requires W-2 and 1099 filings.
3. More states will move to disallow paper and magnetic media filing in favor of exclusive electronic reporting. In 2016, Oklahoma announced an electronic filing requirement for Form 1099 that was ultimately suspended for Tax Year 2016 but likely to be revisited in 2017.
4. More states may elect to not participate in Combined Federal State (CFS) filing. Many jurisdictions already require direct reporting regardless of whether or not 1099s were filed through CFS, so some states will likely follow in the footsteps of Virginia and Indiana, which opted to end their participation in CFS last year.
5. Increased penalties — it’s already clear that reporting penalties for Tax Year 2017 will be as significant as $530 per return with a penalty threshold of almost $3.2M.

Concluding Thoughts

Tax Year 2016 has shown us world of information reporting is constantly changing, requirements are accelerating and becoming more complex, and the financial repercussions of getting it wrong grow increasingly dire. Strategic solutions and an efficient year-round compliance process are key to staying ahead and avoiding penalties.