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2009 Information Reporting Program Advisory Committee Public Report Modernization Subgroup

  1. Taxpayer Identification Number Masking on Payee 1099s
  2. Form 5500, Annual Return/Report of Employee Benefit Plan, Enhancements
  3. Information Reporting through the ETA e-Channel Program
  4. E-Services Enhancements
  5. Form 3921, Exercise of a Qualified Incentive Stock Option Under §442(b) and Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under §423(c)
  6. Form 945-X, Annual Return of Withheld Federal Income Tax and Instructions


A. Taxpayer Identification Number Masking on Payee 1099s

Recommendation

IRS should issue guidance immediately permitting payers to issue payee statements showing only the last four digits of a payee’s Taxpayer Identification Number (TIN).

Discussion

Over the past two years, IRPAC presented proposals to the IRS regarding the masking of TINs on Forms 1099. As stated in its 2008 public report, IRPAC supports the research by the IRS in allowing TIN masking on forms that are delivered from the payer to the payee.

In IRPAC’s April 2009 meeting, members of the Office of Privacy, Information Protection, and Data Security (PIPDS) presented information that guidance (most likely in the form of a Revenue Procedure) should be forthcoming that would permit payers to mask TINs on payee statements. The Modernization Subgroup strongly supported the release of that guidance and offered assistance in the review prior to public release.

IRPAC met with PIPDS during the June 2009 meeting and learned that instead of guidance being issued imminently, PIPDS had submitted a priority guidance proposal for 2009-2010 requesting a Revenue Procedure containing a penalty waiver for payers who mask TINs on certain information returns (specifically, Forms 1099). The timing of any guidance, even, in fact, the eventual issuance of guidance, is now unknown. IRPAC respectfully requests that IRS consider IRPAC’s additional input as this pressing issue remains unresolved. In particular:

  1. The timing of guidance is critical to implementation. In order to mask TINs on Forms 1099 issued for tax year 2009, the industry would need immediate guidance. If guidance were issued in the form of a Notice, Announcement, or as instructions to the 1099 series, perhaps it could be issued more quickly.
  2. The proposed penalty waiver applies only to Forms 1099. The 1099 series generally includes additional information returns that are not numbered “1099” (i.e., the 1098 and 5498 forms). We request that all forms in the 1099 series be included in the final guidance.
  3. A penalty waiver is an indirect, temporary mechanism for permitting optional TIN masking. IRPAC requests issuance of more direct and affirmative guidance, which would explicitly permit payers to choose to mask TINs on the 1099 series of information returns.

After several years of carrying forward IRPAC’s recommendation to allow optional TIN masking on payee statements, it is time for IRS to act swiftly and decisively in issuing guidance on this important subject.

In response to OMB Memorandum (07-16), Safeguarding Against and Responding to the Breach of Personally Identifiable Information, IRS has developed a plan to eliminate and reduce the unnecessary use of Social Security Numbers (SSNs). PIPDS has consistently supported IRPAC’s TIN masking recommendation and the safeguarding of SSNs.

B.  Form 5500, Annual Return/Report of Employee Benefit Plan, Enhancements

Recommendations

To facilitate the IRS' processing and tracking of certain Form 5500 filings, IRPAC recommends the following changes:

  1. Form 8955-SSA Filing through e-Channel: Use the e-Channel program rather than Filing Information Returns Electronically (FIRE) to process the new Form 8955-SSA because
    1. The format (XML) is consistent with the Department of Labor (DOL) program allowing a more common experience to the filer,
    2. E-Channel XML interface will be integrated into existing software programs that support Form 5500, which will allow Third Party Administrators (TPAs) to e-file directly from the 5500 application, resulting in a greater number of e-filed Form 8955-SSA forms and a reduced likelihood that they will be included as attachments to 5500 filings, and
    3. E-Channel can provide immediate feedback by using available validation routines and acknowledgement processes, and f) use of the FIRE system, with its outdated technology, provides an unnecessary risk for the IRS and does not optimize the filer's experience.  
  2. Form 5500 Registration Statement: Provide an optional, simple paper and electronic registration statement for retirement plan sponsors who are not required to file a Form 5500 or Form 5500-EZ.
  3. Late Form 5500-EZ Filers: Expand the Employee Plans Compliance Resolution System (EPCRS) to accept voluntary correction of late Form 5500-EZ filings, as set forth in Appendix C

Discussion

Form 8955-SSA Filing through e-Channel

Currently, Schedule SSA for Form 5500, Annual Registration Statement Identifying Participants with Deferred Vested Benefits, is filed as a part of the Form 5500 filing that is transmitted to the Department of Labor (DOL) through their ERISA Filing Acceptance System (EFAST) program. However, beginning with filings for the 2009 plan year certain portions of the current filings, including the Schedule SSA, will not be filed electronically with the DOL. Instead, the IRS, as the agency responsible for collecting data for the Schedule SSA, must determine other processes for plan administrators to submit the required information.

In January, the IRPAC Modernization Subgroup met with the Tax Exempt and Government Entities (TEGE) operating division for an update on the IRS plan to support this form. At that briefing, the subgroup learned that the current plan was to implement an enhancement to the current FIRE system to allow for the filing of Form 8955-SSA. The Subgroup expressed two primary concerns:

  1. The FIRE system is a dated technology platform and should not be used to support new programs.
  2. Filing third party administrators have no knowledge of the FIRE system and its cumbersome nature will create unnecessary burden.

In April, the IRPAC Modernization Subgroup met with the Electronic Tax Administration (ETA) on the e-Channel initiative. The concept of the e-Channel initiative is to use the modernized e-file electronic "mailbox" to receive filings and provide acknowledgements. The underlying filing would still be formatted in the legacy format and would continue to be processed by the same systems. This program would allow filers to automate the process for sending/receiving information by supporting an automated program-to-program communication model.

In June, the IRPAC Modernization Subgroup again met with TEGE to receive a status update on the new form. The subgroup learned that the form was given an official IRS number (Form 8955-SSA) and that plans were proceeding to implement via the FIRE system. However, no development had begun. The subgroup informed TEGE of the conversation with ETA and expressed the desire for IRS to explore the option of using the e-Channel program to support Form 8955-SSA.

Form 5500 Registration Statement

Most retirement plans must file an annual report with either the DOL or the IRS. If the retirement plan covers employees other than the owner of the plan sponsor, it must file a Form 5500 with the DOL. If the plan covers only owners of the plan sponsor and has assets greater than $250,000 it must file a Form 5500-EZ with the IRS. If the plan covers only owners of the plan sponsor and has assets not greater than $250,000 there is no requirement to file a Form 5500 or a Form 5500-EZ.

The $250,000 filing threshold was recently increased from $100,000. As a result, many ”owner-only” plans are no longer required to file Form 5500-EZ.

A retirement plan may alternate from year-to-year among the three filing statuses (5500, 5500-EZ, and no filing). For example, a plan that covers only owners with assets not greater than $250,000 will need to file a Form 5500 when a non-owner employee begins participation in the plan. Similarly, a plan that covers only owners with assets not greater than $250,000 will need to file a Form 5500 when assets exceed $250,000.

Conversely, a plan that formerly was required to file a Form 5500/5500-EZ may have a change in status where the plan sponsor is no longer required to file either form. These varied requirements may cause confusion and uncertainty among plan sponsors and their advisors, and may trigger unnecessary correspondence from IRS and/or DOL inquiring why the plan sponsor has not filed a Form 5500/5500-EZ.

We recommend that the IRS institute a simple, voluntary registration statement that would be filed for a plan year when a Form 5500/5500-EZ is not required to be filed. This statement would serve three purposes:

  1. Prevent notices from IRS/DOL when a Form 5500/5500-EZ was filed in a prior year.
  2. Be considered a "return" for purposes of starting the statute of limitations. 
  3. Eliminate failure to file penalties for Form 5500/5500-EZ when the plan sponsor mistakenly believes that no filing was necessary.

The registration statement should contain minimal information (such as plan and sponsor name, Employer ID Number, and plan number) and should be filed using a paper postcard or electronically via Form 5500 preparation software on an "application-to-application" basis using XML. Form 5500 preparation software vendors should be able to provide this e-filing capability at little or no additional cost, as a similar "application-to-application" capability is currently provided for filing Form 5500. Filing of the registration statement would be completely voluntary, as IRS does not have the statutory authority to require it.

The benefits to the IRS of this registration statement includes the elimination of postage and other costs involved in issuing Notices requesting an explanation as to why a filing is not made. In addition, the registration statement will prevent plans not required to file a Form 5500/5500-EZ from becoming ”invisible” to the IRS and possibly widening the tax gap. The three effects of filing the registration statement cited above may be enough incentive for plan sponsors to file voluntarily.

The benefit to taxpayers includes the elimination of the need to respond to Notices from the IRS/DOL when filings were formerly required. In addition, the three effects of filing the registration statement may provide peace of mind to plan sponsors and their advisors and eliminate certain penalties when the plan sponsor/advisor mistakenly believes that no filing was necessary.

Late Form 5500-EZ Filers

A plan sponsor who fails to file Form 5500-EZ or Form 5500 for plans without employees (as described in 29 CFR § 2510.3-3(b) and (c)) is subject to strict penalties under the Internal Revenue Code. Specifically, the plan administrator may be assessed a penalty of $25 per day (up to $15,000) for late filing the Form 5500-EZ each year, unless a reasonable cause exception applies under Code § 6652(e). Importantly, unlike other Form 5500 filers, these filers cannot participate in the DOL's Delinquent Filer Voluntary Compliance Program because such plans are not subject to Title I of ERISA. 

Therefore, to facilitate voluntary compliance with the annual return requirement, IRPAC recommends that a new Appendix F be added to Revenue Procedure 2008-50, Employee Plans Compliance Resolution System, to provide for a streamlined Voluntary Compliance Program application for late Form 5500-EZ filers. This program would provide for filing of the missed returns, along with a filing fee of $200 for each annual Form 5500-EZ return, not to exceed $750 for a single, multi-year late filer application. See Appendix C for recommended changes to EPCRS. This program should extend to plan sponsors that become aware of the failure to timely file prior to, or within 90 days of, notification by the DOL or IRS of the failure.

The benefits to the IRS of adding a late 5500-EZ filer program to EPCRS will be increased 5500-EZ filings and a reduction in IRS assessments (and related waiver processing) and costs associated with such a program.

The benefits to taxpayers would include additional certainty in the correction process, and under an established program – EPCRS – that they are familiar with that provides predictable results. Moreover, this approach is consistent with the approach taken by DOL for ERISA-covered plans, and provides fees that are more in line with these small plans.

Form 8955-SSA filing through e-Channel: The Modernization Group learned through informal conversations with ETA that ETA had discussed the use of e-Channel for Form 8955-SSA with TEGE. IRS has not made a final decision about the filing method to be used for the Form 8955-SSA.

Form 5500 Registration Statement: TEGE has indicated that they would be receptive to the Form 5500 Registration Statement.

Late Form 5500-EZ Filers: A similar recommendation was made by IRPAC in its 2007 report. We urge IRS to implement a delinquent filer program for late Form 5500-EZ filers.

C.  Information Reporting through the ETA e-Channel Program

Recommendation

IRS should provide necessary funding to implement information reporting using the ETA e-Channel program.

Discussion

In IRPAC’s 2008 annual report, the Modernization Subgroup presented a recommendation to enhance the FIRE system used to process information returns. One of the primary recommendations of that report was to allow for an application-to-application model whereby systems that transmit data to the IRS would be able to connect directly without requiring manual uploads.

In IRPAC’s April 2009 meeting, ETA presented information on an e-Channel initiative. ETA indicated that the program was currently being considered, and was hopeful that funding would be provided to continue the initiative. 

The e-Channel initiative as described provided a method whereby the underlying information transmitted would maintain its existing format with an updated electronic “envelope” based on the IRS Modernized e-file (MeF) platform. This envelope would follow currently accepted data transmission standards that are widely used throughout the public and private sector; it would also constitute an application-to-application program. This envelope is consistent with the current MeF programs and uses the same interfaces.

No change is required in the underlying legacy systems. E-Channel merely provides an XML wrapper around the flat file required by the legacy system. The current front-end servers simply need to be reconfigured to accept XML rather than https file upload.

IRPAC strongly supports this project and encourages the IRS to fund the initiative. The program has the following benefits:

  1. This program will encourage software developers to support electronic filing rather than paper options.
    1. Supports unattended transmission: By providing the e-Channel program, IRS will allow software developers the ability to transmit with a single step.  This will lower the barrier for information reporting filers and will produce more electronically filed reports.
    2. Provides acknowledgement: The e-Channel program as described will offer an acknowledgement at the point of filing. By offering this option, errors can be resolved quickly before IRS accepts the filing. This will produce more accurate filings and will reduce back-end error resolution and the need to communicate after the filing.
    3. Uses industry standard format for the envelope. 
  2. Increase in number of information returns filed electronically as most software vendors currently support XML filing.
  3. Provides consistency with IRS MeF platform.
  4. Retains the value of existing systems by not modifying underlying information structure.  The effort required to update IRS systems to support MeF is daunting.  The e-Channel initiative provides the ability to migrate the systems as time allows while still providing the benefits listed above.
    IRS is currently in the process of evaluating their strategy for electronic filing.

This evaluation is being conducted because IRS will not meet its goal of 80% electronic transactions by 2010. IRPAC believes that this project could significantly increase the number of electronic transactions.

D.  E-Services Enhancements

Recommendations

IRPAC recommends that IRS enhance their e-Services product to support the information reporting industry, and has identified a number of e-Services enhancements aimed at improving information reporting in one or more of the following areas:

  1. Enhancements to the current e-Services system.
  2. Expansion of taxpayers who can access current e-Services.

Discussion

IRPAC is interested in expansion of e-Services that impact information reporting. On July 21, the Modernization Subgroup met with ETA to gather information on ETA’s strategic plan. At that meeting, ETA indicated that there is an ongoing study regarding advancing e-file, and a current study focused on e-Services. As ETA is in the process of evaluating requests with the specific focus on those that add value to the business, IRS requested that IRPAC provide suggestions for enhanced e-Services for ETA’s consideration. In response, IRPAC developed a list of ETA e-Services Enhancement Recommendations.

IRPAC understands that IRS ETA staff is currently evaluating requests submitted by industry. IRPAC encourages IRS to include the information reporting community to further their goal of the transition to electronic tax administration. IRPAC welcomes the opportunity to work with ETA on potential e-Services enhancements that impact information reporting.

E.  Form 3921, Exercise of a Qualified Incentive Stock Option Under §442(b) and Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under §423(c)

Recommendations

IRPAC has the following comments on the draft Forms 3921 and 3922 in order to more fully comply with IRC §6039 and proposed Treasury Regulations §1.6039-1.

  1. Yearly Forms: The forms need to have a "year" date rather than a revision date. These forms are annual forms as opposed to continuous use forms. 
  2. Consistent Terms: The copy designations and headings should match the language on the Form, and the terminology throughout the instructions and the form should also be consistent. For example, on Form 3922, the copy designation for Copy B references "For Recipient" rather than "Transferor" as used on the form. The term "payer" is also not appropriate. Moreover, the term "Transferor" on Form 3921 and 3922 to refer to different parties may be confusing. Inconsistencies on both forms should be addressed.
  3. Due Date: The due date on the forms is more favorable than indicated on the proposed regulations. Also, it may be helpful to permit electronic delivery for the recipient and corporate copy, and provide guidance on an appropriate substitute form.
  4. First Transfer: Form 3922 is limited to the first transfer of the stock; therefore, in the instructions for transferor, IRS should replace "transfer or transfers" with "first transfer" and in Box 7 instructions, replace "was transferred" with "was first transferred."  Also, the addition of Line 8 does not appear to be a required disclosure under the proposed regulations. If retained, there needs to be more explanation on when to use the actual exercise price or the deemed exercise price, as both numbers would generally be available at the time the return is filed. 
  5. Spacing:  Form 3921 could benefit from moving Lines 5 and 6 up 1 row. That would allow more text for the name and address box below; the extra line above is not necessary. Form 3922 could benefit from moving the Line under 5 and 6 up 1 row.  Also, move the line under Line 7 up 1 row. This change will maintain spacing for computer printing on the form.
  6. Other:  Please confirm that "keep for your records" is consistently designated where appropriate.  IRPAC recommends the more detailed reference to Publication 525, Taxable and Nontaxable Income, on Form 3922 be extended to the instructions for Form 3921. Also for Form 3921, instructions for Box 4 can delete (FMV) as it appears it is not used thereafter. For Form 3922, it does not appear necessary to include "to Transferor" and "by Transferor" in Boxes 1 and 2, which if removed would be consistent with Form 3921. 

Discussion

In the January 2009 meeting of IRPAC, the IRS offered a number of topics and Forms for the full committee to consider for comment. Forms 3921 and 3922 were accepted by the Modernization Subgroup. The Subgroup appreciates the opportunity to work with the Service. 

F.  Form 945-X, Annual Return of Withheld Federal Income Tax and Instructions

Recommendations

IRPAC members have concerns about the length of the instructions and the lack of definitions for certain key terms. The instructions should be short, concise in explanation, and contain examples and charts where helpful. The length of the instructions and the sometimes repetitive information is not as helpful to the user in identifying when and why this form should be used. Our suggestions will help minimize incomplete or incorrect filings.

Discussion

IRPAC provided specific comments about both the form and its instructions ( Appendix D). The form is brief, visually intuitive, and in plain English; but it needs some clarification and emphasis in certain areas. The Subgroup provided its specific suggestions. The Subgroup would like to see more concise and less repetitive information in order to decrease the length of the instructions. 

A key component of the Subgroup’s comments includes definitions. The Subgroup members are concerned that users may interpret a key term in the context of another IRS Form which may not be relevant to the Form 945 –X. Terms such as “administrative error” and “discovery” are used for many purposes in other IRS forms and instructions. The Subgroup asks that these terms be standardized, not just for the Form 945-X, but also as other Forms are developed or modified. For instance, regarding use of the term “discovery,” the Subgroup recommends the term be replaced with “ascertained” which is less confusing. It is a term that we recommend IRS examine in its overall use in instructions, forms and guidance.

The Subgroup also suggests that more examples be offered – or a grid – about how to handle corrections that cannot be made using Form 945-X. The Subgroup is concerned that the instructions can be read to imply that the user should not be troubled about under-withholding; Subgroup members believe that this may not be an appropriate message if it is done intentionally or because proper procedures were not in place to know withholding was required. The Subgroup also requests that it be emphasized that the payer should correct the withholding on a prospective basis.
Subgroup members are concerned about the need to highlight the use of this form exclusively for administrative error – that this form is used only for administrative error should be duly noted more clearly and more prominently earlier in the instructions and on the form itself. Our comments request clarification and further definition of what constitutes administrative error and what to do when an error is not covered under this definition.

There is also a general concern among members that there is no guidance as to what to do if there is an incorrect under-withholding. The Modernization Subgroup suggests providing information on ways to correct or avoid penalties. 

Since Form 945-X affects the retirement plans community, the Subgroup also recommends that its use and development be announced under the Retirement Plans Community section of IRS.gov as well as in the general forms website and highlighted in the Employee Plans Newsletter.

The instructions are unduly long and repetitive, which makes the prospect of reading them daunting. Appendix D offers specific suggestions made to IRS. A chart with definitions will aid in the user more clearly identifying what is needed to complete the new form with greater confidence and accuracy.

Definitions in one place would be helpful for the terms that are used freely such as administrative error; adjustment or adjustment process; claim or claim process; federal income tax or backup withholding. The following are the areas for improvement:

  1. Explain terms are used interchangeably.
  2. Define how both these terms may be used for backup withholding or withholding using Form 1099.
  3. Explain the uses for each types of federal income tax withholding (retirement, gaming, backup) in a brief way to ensure when the instructions provide specific information, that the user can identify when one would apply and understand why.
  4. Provide examples within the definitional section (e.g., Correct or Corrections as noted under What’s New, fifth paragraph). 

Finally, Form 945-X is used to correct both federal income taxes and backup withholding, but the instructions consistently refer only to federal income taxes. The Modernization Subgroup suggest that the Service either repeat federal income taxes/backup withholding each time or prominently inform the reader that both are intended when only one is mentioned.

Return to the 2009 IRPAC Public Report

Page Last Reviewed or Updated: 28-May-2014