Deliver Forms Electronically and Stay in Compliance
Just about everything can be done electronically—you can buy your groceries, check-in at the airport, or meet your mate—all from your electronic device. To meet the needs of a growing population of technology-dependent account owners and to reduce errors, more financial organizations are seeking alternatives to providing hard-copy forms and accepting recipient elections on paper. But despite having the will, financial organizations may not see the way, and often shy away from using electronic methods because of the perceived risk in not using them correctly.
The current requirements for electronic delivery and consent are stringent—failure to follow the electronic delivery requirements may be viewed as not delivering the form at all. If your organization is considering electronic delivery or enabling electronic elections, it is important to stick to the IRS guidelines.
Delivering Forms Electronically
If your organization wants to deliver reporting forms, such as IRS Forms 1099-R, 1099-SA, 1099-Q, 5498, 5498-SA, and 5498-ESA, electronically, the IRS requires that the IRA owner consent to that delivery method. The individual also must demonstrate access to the electronic system before the form can be delivered electronically. Before consent, a disclosure must be provided containing the following information.
Default delivery – a paper form will be provided if no consent is given to receive the form electronically
Request for paper – how to request a paper form, and if such a request means consent to receive the form electronically is being withdrawn
Scope and duration – whether consent applies to all years, a particular year, or only to the form to be delivered immediately following consent
Withdrawal of consent – how to withdraw consent in writing (electronically or paper)
Information updates – how to update contact information
Notice of termination – the terms under which the organization would stop electronic delivery
Access period – the date after which the form will no longer be available electronically
The form must be available electronically or on the organization’s website until at least October 15 of that year (or the first business day after the 15th if it falls on a Saturday, Sunday, or legal holiday).
Required hardware and software – a description of the technology required to access the form, and a statement that the form may be required to be printed and attached to a tax return
A supplemental disclosure and consent may be needed if changes affect an individual’s ability to access the forms in the future.
IRS guidelines also require that a notice be given to the recipient that indicates when the form is available and how to access the form. The electronic notice must include in capital letters, "IMPORTANT TAX RETURN DOCUMENT AVAILABLE." If the notice is returned as undeliverable, the form must be delivered in hard copy within 30 days.
EXAMPLE: Your financial organization wants to provide clients Form 1099-R electronically by allowing them to log onto your website. Your organization sends an email telling Joe Davis that he can receive his Form 1099-R electronically if he consents. The email provides the appropriate disclosure and tells Joe how to consent to electronic receipt. Joe reads the disclosure and follows the instructions to consent. Once the Form 1099-R is available, your organization sends Joe an email notifying him that the form is available, including directions on how to access the form and the text, "IMPORTANT TAX RETURN DOCUMENT AVAILABLE." Joe logs onto your website and downloads the form.
Because your organization provided the appropriate disclosures, received Joe’s consent, and informed him how to access the form electronically, your organization need not send him a hard copy of his Form 1099-R; the delivery requirement has been met in accordance with the electronic delivery guidelines.
For more on the IRS electronic delivery instructions for reporting forms, see the General Instructions for Certain Information Returns and Treasury Regulation (Treas. Reg.) 1.402(a)-21.
Accepting Electronic Elections
If your organization wants to electronically capture your IRA owners’ elections—such as contribution elections, distribution requests, and beneficiary designationsthe elections must satisfy the IRS’ general guidelines for electronic delivery.
Present information as understandably as in paper format.
Identify the significance of the election and provide understandable instructions.
Retain the election so that it can be accurately reproduced upon request.
Your organization also must satisfy the criteria outlined in Treas. Reg. 1.401(a)-21(d) describing how to properly capture an individual election.
Access – The individual making the election must be able to access the system and the software required to make the election. Otherwise, the individual will not be treated as having access to make that election at all.
Security – The program used to capture the election must have sufficient security measures in place to ensure that the individual is the only one able to make the election.
Witness by Notary Public – If a notary public must witness a signature (such as a spouse’s signature for spousal consent to name a nonspouse beneficiary) the signature is valid if the individual’s election is witnessed in the physical presence of the notary public. Although there may be some state requirements for this, there is no federal guidance.
Reviews, Edits, and Confirmation – The individual must have the opportunity to review (and potentially edit or rescind) the election before that election becomes effective. The individual must receive confirmation of the election within a reasonable time by either a paper document or by electronic means that satisfy the notice delivery requirements.
Stay Informed and Be Prepared
The electronic delivery and signature rules likely will continue to be adjusted—or even substantially overhauled—as changes in technology influence electronic delivery options. It will be important for organizations to keep an eye on changes and adjust policies and procedures to ensure continued compliance.