Electronic IRS Form Collection: Automating To Increase Efficiency

For organizations with information reporting and withholding requirements, tax documentation collection and validation can be a time-consuming and complex process. Electronic IRS form collection software automates the collection and validation of tax forms. By automating the collection of Forms W-8 and W-9, you free up resources for other tasks. These solutions streamline information reporting, reduce human error, and ensure accurate data collection and reporting.

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How Using Electronic Forms Reduces Penalties

Collecting electronic forms significantly increases efficiencies, saving time and money while reducing exposure to costly penalties.

Failing to report or reporting incorrectly due to incorrect information can result in the IRS imposing fines and penalties.

Depending on the delay in issuance, penalties for failing to issue Forms 1099-MISC/NEC varied from $50 to $280 in 2022. Intentional disregard penalties were also available, with a minimum penalty of $570 per form or 10% of reported income. There was no maximum penalty.

In addition, failure to withhold taxes on reportable payments transfers liability for tax plus penalties and interest to the payer. This means that under Chapter 61, backup withholding is required at a rate of 24% on gross amount for reportable payments when:

  • The payee fails to provide a valid TIN in the manner required on or before time of payment,
  • The IRS notifies a payer that they filed a 1099 containing incorrect name/TIN information, or
  • The payee certifies on Form W-9 that they are subject to backup withholding.

FDAP payments from U.S. sources are withheld at a 30% rate, or a reduced rate under an exemption or tax treaty under Chapter 3. Withholding agents may be liable for the tax, plus any applicable penalties and interest, if they fail to withhold at this rate.

Here are some of the ways that collecting IRS Forms W-8 and W-9 electronically can help you:

Automated Data Entry

Electronic IRS Form Collection enables automated data entry, allowing quicker and more accurate saving and entry of data into your systems or third-party systems compared to paper forms. Instead of entering and digitizing data from paper forms, electronic forms can automatically capture and populate data into your system, reducing the risk of human error and eliminating the need for manual data entry.

Faster Turnaround Time

You can submit and validate electronic forms much more quickly than paper forms. This puts you in a better position to accurately withhold at the time of payment/onboarding. This significantly reduces any timing delays between form collection and validation. Meaning you can eliminate penalties associated with failure to withhold correctly, or at all. If a payer or withholding agent does not withhold where required, then they become liable for that withholding amount.

Simplified Approval Process

Collecting forms electronically simplifies the approval process. It enables automated workflows to route forms to the appropriate approvers, reducing the need for manual review and approval.

Improved Data Security

Data security is at the forefront of everyone’s mind today. As the forms and data can be stored in a digital format, collecting tax documentation electronically can improve data security. In addition, personally identifiable information is no longer provided using unsecure methods, like email. Paper forms may be lost, get stolen, or damaged, risking exposure or loss of your customer’s personally identifiable information. Electronic records, however, allow encryption and secure storage on servers or in the cloud. This Facilitates easier access control and protection of sensitive data.

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How to Automate Your Form Collection Process

Implementing a process to electronically collect and validate tax forms as part of your onboarding process may seem like a daunting task, but it doesn’t have to be. Here are some steps to get started and ways that we can help:

1. Involve Key Stakeholders

The first step involves assessing your needs and current pain points, and then involving key stakeholders. In our experience, implementing new tools goes a lot more smoothly when everyone is in agreement. It is important as you are assessing your needs, to also assess the timeframe for implementation. A common misconception is that documentation collection and validation is a one-time activity; on the contrary, it is a continuously moving target, and it can take time to get a process in place to become compliant with both existing and new customers.

It is also a good time to consider centralizing these efforts; depending on your line of business, there is a good chance you are collecting tax forms for both your vendor and customer base. Using a tool to achieve compliance across your organization can help in standardizing and centralizing your processes and procedures, which will go a long way in the event of an IRS audit.

2. Choose An Electronic Forms Tool

Once you have assessed your needs and timeline, and involved the key stakeholders, you’ll need to choose a tool that best suits your needs. As a leading provider in tax technology, Comply Exchange’s eForms and Admin tools help organizations across industries with their information reporting and withholding requirements.

The application supports the electronic collection and validation of IRS Forms W-8, W-9, 8233, and Self-Certifications. While collecting forms electronically is a huge step forward in fully automating your form collection process, there are ways to create efficiencies and automate in the event that you still require paper forms. These can include things like OCR and even AI-enabled tools to read data off of paper forms, whether typed or handwritten.

3. Train Your Staff

Finally, like with any new technology, you’ll need to train key staff on how to use the new applications. Training is already a very important and often overlooked component in your information reporting and withholding process. Key departments and staff should be training on new tax requirements and the new technology that you will use to automate those tax requirements.

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Comply Exchange’s eForms tool is a great solution for organizations looking to collect tax documentation electronically. With its user-friendly interface, customizable form templates, and real-time validation features, the eForms tool makes it easy for organizations across industry to collect tax documentation upfront.

With automated workflows, an in-suite withholding rate generator, approval routing, and document storage, Comply Exchange’s back-office Admin application is a comprehensive tool to validate, store, maintain and monitor your tax documents.

Designed with data security in mind, Comply Exchange uses industry-standard encryption and secure storage practices to protect sensitive compliance data, ensuring that organizations can comply with data privacy regulations and maintain data security.

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This document contains general information only and is not a substitute for accounting, tax, or any other professional advice or services. The information provided is considered accurate at the time of publishing and will not be updated with new regulation requirements.

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