The IRS has officially announced they are eliminating the automatic 30-day extension of time for the 1099-MISC with Nonemployee Compensation. This move forces organizations with large amounts of independent contractors to question current tax information reporting processes, ensuring they don’t endure the same challenges faced from the original PATH Act deadline changes.
PATH Act History
In 2015, the IRS passed the PATH (Protecting Americans from Tax Hikes) Act, making it easier for the IRS to detect and prevent refund fraud. The PATH Act required tax information filers to accelerate a traditional end of March deadline to the end of January for filing W-2s and 1099-MISCs with Nonemployee Compensation (NEC) to the IRS. Accelerating the deadline from March to January means the IRS would not issue refunds to individuals without receiving tax information from the filer first…or does it?
Even though the PATH Act took effect in 2017 for 2016 filings, the IRS still allowed organizations to file an automatic 30-day extension of time to push the deadline from the end of January to the end of February. Organizations viewed this as being extremely beneficial, because they had 30 extra days to cleanse their data before sending to the IRS, therefore reducing penalties. With refunds being delayed until February 15, this created a 15-day window where the IRS may be issuing refunds without having received filer’s tax information, which created fraudulent refunds no longer protecting Americans.
Just a Matter of Time
From the beginning of the PATH Act, we saw the IRS implementing difficult means for obtaining an automatic extension of time for W-2 forms but not 1099-MISCs (NEC). In order to receive a 30-day extension of time for W-2s, you had to provide the IRS with an explanation for why you are requesting the extension. Between the IRS not aligning extension of time requirements for W-2 forms and 1099-MISC (NEC) forms, and the 15-day window where the IRS may be issuing fraudulent refunds by not referencing filer’s tax information filings, Sovos knew it was just a matter of time before the automatic 30-day extension of time was eliminated.
73% of all 1099-MISC (NEC) forms in tax year 2017 were filed with a 30-day extension of time, which means only 27% of organizations are prepared to file 1099-MISC (NEC) in January.
Less Time, More Penalties
In the first year the PATH Act was implemented, organizations faced many challenges when attempting to file returns to the IRS by the end of January, or February with an extension of time. The most common challenges organizations faced in the first year were:
- Scalability – Organizations quickly realized that current processes were inefficient and were not able to scale to meet accelerated deadlines imposed by the IRS. In fact, the number of W-2 Forms filed late nearly doubled from tax year 2015 to tax year 2016, which is when the PATH Act went into effect. Late filings lead to a $50 – $270 penalty for every record filed late.
- Data integrity – Organizations no longer had two months to cleanse data before filing with the IRS, which lead to a 30% increase in the amount of W-2 corrections filed from tax year 2015 to tax year 2016. Penalties related to data inaccuracies, such as TIN/Name mismatches, are up to $270 per incorrect record or a $3,215,000 maximum penalty.
- Monitoring Compliance Updates – The fact that the number of W-2 forms filed late had doubled once the PATH Act went into effect could also be a sign of organizations not staying up to date with regulatory changes. This is one of 50,000 regulatory changes that Sovos tracks on a yearly basis and so should your organization.
More Changes to Come
The IRS is always looking for ways to not only improve the quality of information being received, but also improving the speed in which they collect information. We have only seen the IRS accelerate deadlines for forms related to the PATH Act: W-2s and 1099-MISCs (NEC). However, it is likely that it won’t stop there. Other form types expected to have filing deadlines accelerated are high growth forms and forms with large returns being reported.
Learn more about how the Sovos Tax Information Reporting solution helps organizations stay on top of constant regulatory change.