Electronic Filing of Forms 94x Falls Short of IRS Goal, New System May Help Increase Rate

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By Howard Perlman

An estimated 35.8 percent of employment tax forms in the Form 94x series were electronically filed for 2015, far lower than the mandated Internal Revenue Service goal of 80 percent of such forms being electronically filed, the Electronic Tax Administration Advisory Committee said June 22 in its 2016 annual report to Congress.

The Form 94x series includes Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return; Form 941, Employer’s Quarterly Federal Tax Return; Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees; Form 944, Employer's Annual Federal Tax Return; and Form 945, Annual Return of Withheld Federal Income Tax and related schedules.

While the estimated 2015 percentage of electronically filed forms was lower than the IRS goal, it exceeded the committee's projection in June 2015 that 33.3 percent of returns in the Form 94x series would be electronically filed for 2015. The estimated electronic filing percentage for 2015 also exceeds the committee's estimated electronic filing percentage of Forms 94x filed for 2014, which was 32.1 percent.

“Given the significant volume of Forms 94x, this trend” of less than 80 percent of such forms being electronically filed “will likely continue until the IRS implements a new electronic signature process for these returns,” the committee said in the report.

About 10,871,100 Forms 94x were electronically filed for 2015, up from about 9,515,300 such forms filed for 2014. With the projection that 37.2 percent of Forms 94x are to be electronically filed for 2016, about 11,360,800 such forms are to be filed for 2016, the report said.

The percentage of Forms 1099-MISC, Miscellaneous Income, commonly issued to independent contractors, also fell short of the IRS electronic filing goal of 80 percent. About 64.58 percent of Forms 1099-MISC are to be electronically filed for 2016, slightly down from the estimated percentage of 65.22 percent of such forms electronically filed for 2015, the committee said.

Electronic Filing Methods for Forms 94x and 1099-MISC

Forms 94x may be electronically filed using the Modernized e-File (MeF) system, which in December 2015 fully replaced the previous system for electronically filing the forms. The ability to file Forms 94x through the MeF system premiered in 2014.

Two general methods are available for employers to electronically file Forms 94x through the MeF system.

Under one method, employers may apply to become designated as an IRS authorized signer and use MeF software released by one of the IRS's authorized 94x MeF providers. The application process for becoming an IRS authorized signer includes registering for a Form 94x On-Line Signature Personal Identification Number.

It could take up to 45 days for employers to receive this 10-digit identification number after registering to receive it. When employers use MeF software to electronically submit Forms 94x, the forms are sent to an authorized provider that files the forms on their behalf.

The other method is to have the returns prepared and filed by an authorized 94x MeF provider. Reporting agents or third-party transmitters may apply with the IRS to use MeF software and complete parts of either method on behalf of employers.

The IRS in 2015 “concluded that the e-signature process is a major barrier to e-filing Forms 94x” and in fiscal 2018 is to start development of an improved signature system to enhance filing convenience, the committee said in the report.

Schedules A and R of Form 940 and Schedules B, D and R of Form 941 also can be electronically filed through MeF.

Forms 1099-MISC may be electronically filed through the Filing Information Returns Electronically ( FIRE) system.

The IRS goal of achieving an electronic filing rate of at least 80 percent for all federal tax returns was established as part of the Internal Revenue Service Restructuring and Reform Act of 1998 ( Pub. L. 105-206), signed by President Bill Clinton.

The law's target year for achieving the electronic filing rate of at least 80 percent was 2007. The Social Security Administration, which receives the country's Forms W-2, Wage and Tax Statement, met the 80 percent requirement in 2007 for 2006 forms.

Expanding Identity Data Matching

The IRS should expand access to its matching system for taxpayer identification numbers (TINs) so that employers and filing agents can be more proactive in ensuring that Social Security numbers or other identification numbers they include on forms submitted to or on behalf of employees are correct, which could reduce data mismatches that disadvantage employees, the committee said in the report.

The matching system, which allows employers to compare combinations of worker names and taxpayer identification numbers in their systems with such data in the IRS's systems, currently is accessible only for validating information on Forms 1099 subject to backup withholding, the committee said.

“For payers, expanded access to the TIN-matching system would allow them to resolve mismatches with payees before filing information returns,” the committee said. “That would reduce penalties for filing information returns with incorrect TINs and eliminate correspondence with the IRS to establish reasonable cause.”

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