New Law Modernizes IRS, Updates Payroll Rules

The IRS gets a bad rap for being behind the times. Between its reliance on paper forms and complicated acronyms (1040-EZ, anyone?), you would be forgiven for not associating the agency with the state-of-the-art.

With a new law, the agency is looking to change that perception. The Taxpayer First Act, signed by President Trump earlier this month, goes a long way in modernizing the IRS’s approach to cybersecurity and some longstanding payroll forms. Below, we’ve summed up the changes most applicable to HR and payroll professionals.

Form W-2 Digital Threshold Shrinks

Today, there’s a good chance you receive your Form W-2 digitally—and an even better chance that your company files it with the IRS that way, too. For the businesses that prefer to use paper, the new law could soon force them to go digital.

Under existing rules, companies filing 250 or more W-2s or 1099s are required to do so digitally. Starting on January 1, 2021, that threshold drops to 100. In 2022, it will drop even lower: 10 or more forms. That means all but the smallest companies will be required to file W-2s and 1099s digitally.

Form 1099 Goes Digital

We’ve all heard about the gig economy’s growth in recent years. Per one study, the majority of U.S. workers will be freelancing by 2027. Ahead of that seismic shift, the IRS is set to make filing the Form 1099 easier than ever.

The Taxpayer First Act instructs the IRS to create a digital portal for businesses to prepare, maintain, and file independent contractors’ 1099 forms. Wondering what that might look like? The legislation specifically calls for the IRS to use the Social Security Agency’s website as a model. The agency will have until January 1, 2023 to launch the portal. 

Power of Attorney Changes

If you’ve ever worked with a payroll provider, you’ve likely heard your contact use the phrase “power of attorney.” This term refers to a third-party tax preparer’s authority to file and make inquiries on your company’s behalf.

The new law requires the IRS to publish guidance and uniform standards on how these relationships are established and verified. These rules will be used to standardize the acceptance of taxpayers’ signatures appearing on any accompanying power of attorney or "POA" forms. The IRS has six months from the signing of the bill to publish this guidance.

Cybersecurity Improvements

Many of the changes included in the new law deal with identity theft. The IRS will now be required to have a single point of contact for identity theft victims. As someone who regularly contacts the IRS, I sure wish I had a single point of contact for payroll and tax matters. 

Separately, the IRS will also be responsible for taxpayer notification if they suspect identity theft. While having your identity stolen is never a pleasant experience, the agency is posed to make it significantly easier for affected individuals to bounce back. 

When you think of IRS headquarters, chances are that you picture dingy drop ceilings, florescent lights, and no shortage of filing cabinets and loose paperwork. Basically, a scene straight out of 1987. 

But even so, the agency is set to make serious strides in how it works with both taxpayers and businesses. Between the anticipated release of the new Form W-4, the launch of a new withholding calculator, and the updates mentioned above, it looks to be a banner year for agency officials in Washington.