Taxpayer First Act: Everything SMBs Need to Know About H.R. 3151

The Taxpayer First Act, passed in 2019, contains some important yet little-known provisions impacting small businesses.

small business owner at desk
Among other things, the Taxpayer First Act seeks to enhance the taxpayer experience and modernize IRS operations

Also known as H.R. 3151, the Taxpayer First Act was signed into law on July 1, 2019. Though the Act has flown under some employers’ radars, it contains a number of provisions small businesses should know about in 2021.

What is the Taxpayer First Act?

The Taxpayer First Act aims to extensively redesign how the Internal Revenue Service delivers services to businesses and individual taxpayers. The Act seeks to accomplish this goal through 5 overarching strategies:

  1. Enhance the taxpayer experience. Includes implementing a comprehensive customer service strategy, renaming the IRS Office of Appeals as the IRS Independent Office of Appeals, granting low-income individuals greater tax-related assistance, adopting whistleblower reforms, and mandating the IRS to provide certain information during phone calls with taxpayers.
  2. Modernize the IRS. Involves a series of information technology changes, such as Form W-2 and Form 1099 electronic filing, debit and credit card payments. Also involves electronic signatures authorizing disclosure (from the IRS) to a practitioner with power of attorney.
  3. Organize the IRS. Includes streamlining the agency’s structure, administering training to IRS employees, prohibiting the IRS from rehiring certain fired employees, and requiring the IRS to notify taxpayers whose return information has been subject to unauthorized access or disclosure by an IRS employee.
  4. Strengthen cybersecurity. Covers tax refund fraud, formalizes changes made to the Electronic Tax Administration Advisory Committee, permits the IRS to share certain return data with the Information Sharing and Analysis Center, establishes a single point of contact for identity theft victims, and requires the IRS to notify a taxpayer of suspected identity theft.
  5. Enforce a fair and just tax system. Modifies the IRS’ asset-seizure process, clarifies the “innocent spouse relief,” and prohibits the IRS from using private collection agencies to collect delinquent taxes from specific individuals. This section also limits the actions the IRS can take when issuing a John Doe summons or a designated summons.

Modernizing the IRS

Of the above 5 categories, #2 impacts employers the most by:

  • Reducing the threshold for filing W-2s and 1099s electronically
  • Requiring an internet portal for Form 1099 filing and management
  • Enabling the IRS to directly accept credit and debit card payments
  • Directing the IRS to publish guidance on electronic signatures authorizing disclosure to a practitioner with power of attorney

Now, we outline the details of these changes.

New filing threshold for electronic W-2 and 1099 filings

Currently, businesses filing 250 or more Form W-2s, Form W-2cs, or Forms 1099 must do so electronically.

However, the Taxpayer First Act lowers the electronic filing threshold for W-2s, W-2cs, and 1099s, from:

  • 250 to 100, effective January 1, 2021
  • 100 to 10, effective January 1, 2022

Come 2022, even very small businesses (i.e. those filing at least 10 W-2s or 1099s) will need to file electronically.

This means that come 2022, even very small businesses (i.e. those filing at least 10 W-2s or 1099s) will need to file electronically. For now, only businesses filing at least 100 W-2s or 1099s must file electronically in 2021.

The Taxpayer First Act permits the IRS to waive these electronic filing requirements. The IRS can waive requirements if the taxpayer can show inability to file electronically due to lack of internet access.

To file your W-2s electronically, you can go directly through the Social Security Administration’s Business Services Online. Or, you may use payroll software like Zenefits — which will file your W-2s (and even your 1099s) for you.

Internet portal for Form 1099 filings

The Taxpayer First Act orders the IRS to establish an internet portal that businesses can use to file Forms 1099 electronically. This includes Form 1099-MISC for independent contractors.

The IRS must develop this online platform by January 1, 2023. Further, the online portal for Forms 1099 should be modeled after the Social Security Administration’s system for electronic W-2 filing.

The internet portal lets businesses:

  • Prepare and file 1099s with the IRS
  • Distribute 1099s to parties other than the IRS
  • Create and maintain taxpayer records
  • Access IRS resources and guidance

Credit and debit cards payments

Previously, the IRS could not directly accept tax payments via credit and debit cards. This was due to a limitation on paying the fees charged by the card issuer. Instead, the IRS utilized a third-party processor to receive credit and debit card payments.

Under the Taxpayer First Act, the IRS can directly accept credit and debit card payments for taxes, provided the taxpayer pays the fee. And, as stated by the U.S. Senate Committee on Finance, the IRS must “seek to minimize these fees when entering into contracts to process credit and debit cards.

Electronic signatures authorizing disclosure to a practitioner

If you hire a third party — such as a payroll service provider — to manage your payroll tax obligations, you may grant them power of attorney. With an IRS power of attorney, the practitioner can make and respond to IRS inquiries on your behalf.

If you hire a third party — such as a payroll service provider — to manage your payroll tax obligations, you may grant them power of attorney. With an IRS power of attorney, the practitioner can make and respond to IRS inquiries on your behalf.

The Taxpayer First Act orders the IRS to publish guidance on accepting taxpayers’ electronic signatures, which are intended to authorize disclosure to a practitioner with power of attorney.

This guidance is available in Internal Revenue Manual (IRM) 10.10.1, IRS Electronic Signature Program, which was published on December 3, 2019.

IRM 10.10.1 includes:

  • Conditions under which electronic signatures can be used
  • What constitutes a legally binding electronic signature
  • Permissible types of electronic signatures
  • Process for identifying and authenticating the signer
  • Identity-proof methods to confirm the signer’s identity
  • Signature methods for IRS forms, such as Form 941 (Employer’s Quarterly Federal Tax Return) and Form 940 (Employer’s Annual Federal Unemployment Tax Return)

If you give your payroll provider or tax preparer IRS power of attorney, the IRS must provide e-signature options. These requirements are based on the procedures in IRM 10.10.1.

A quick note about identity theft

As mentioned earlier, the Taxpayer First Act requires the IRS to develop a single point of contact for victims of tax-related identity theft. According to the IRS, The contact will track the taxpayer’s case to completion and coordinate with other IRS employees to resolve case issues as quickly as possible.

On February 3, 2020, the IRS launched “Identity Theft Central” which is an online portal that makes it easier for businesses and taxpayers to access information on identity theft. Consider sharing this important resource with your employees.

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