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Daily Archives: April 4, 2025

Two-Factor Authentication

Posted on April 4, 2025 - 1:17 pm by

What is two-factor authentication?

Two-factor authentication (2FA) is one of the most effective measures to ensure security, especially when it comes to accounts related to Internal Revenue Service dealings. It requires two forms of identification to access an account or system. This adds a layer of extra protection beyond just a password. The two factors are:

  • Something you know: Typically, a password or PIN that’s personal to the user.
  • Something you have: A physical device such as a smartphone, which receives a time-sensitive code or verification prompt.

Additionally, 2FA is a critical step in the protection of taxpayer information due to the sensitive nature of data such as Social Security numbers (SSNs), Employer Identification Numbers (EINs), and financial records.

Therefore, before using any e-service or any other online IRS tool, such as the Modernized e-File [MeF] system, ensure that it has 2FA.

 

How Two-Factor Authentication Works

Let’s take an example of the IRS platforms to understand the 2FA mechanism.

  • Login Attempt: A user enters their username and password on an IRS portal (e.g., e-Services or Online Account).
  • Second Factor Prompt: The system requests additional verification.
  • Code Delivery: A one-time code is sent to the user’s registered phone (via SMS), email, or authenticator app (e.g., Google Authenticator for ID.me users).
  • Code Entry: The user inputs the code, which expires after a short period (e.g., 10 minutes).
  • Access Granted: Successful entry of both factors grants access to tax records or filing tools.

 

IRS Security Standards and 2FA

The IRS mandates robust security for anyone handling taxpayer data, as outlined in Publication 4557:

  • Safeguarding Requirement: Tax preparers and software providers must protect PII under IRC Section 7216, with 2FA as a recommended control.
  • Encryption Complement: 2FA pairs with 256-bit encryption for data at rest and in transit, a standard for IRS e-file systems.
  • Annual Security Reviews: The IRS encourages annual assessments, including verifying 2FA implementation.

For e-file providers, the IRS requires compliance with NIST Special Publication 800-63 standards, which endorse 2FA as a baseline for authentication.

 

 

Benefits of 2FA in IRS Taxation

2FA offers specific advantages in the tax ecosystem:

  • Protection Against Identity Theft: Prevents fraudulent access to taxpayer accounts, critical given the 1.4 million identity theft cases reported to the IRS in 2023.
  • Secure Filing: Ensures only authorized users submit returns or information returns (e.g., Forms 1099, W-2), reducing fraud risk.
  • Compliance Assurance: Aligns with IRS Publication 1345 requirements for e-file providers, enhancing trust in electronic submissions.
  • Data Breach Mitigation: Protects against phishing and credential stuffing, common threats to tax professionals managing client data.

For taxpayers and preparers, 2FA provides peace of mind when interacting with IRS systems or third-party tools like Tax1099.

 

Setting Up 2FA for IRS-Related Access

The setup process varies by IRS platform:

 

IRS Online Account (via ID.me):

  • Visit irs.gov and select “Sign in to Your Account.”
  • Create or log into an ID.me account with a password.
  • Enable 2FA by choosing SMS, email, or an authenticator app.
  • Verify identity with a government-issued ID and phone number.
  • Receive and enter a test code to activate.

 

e-Services:

  • Register or log in at the e-Services portal.
  • Update secure access by linking a mobile number or email.
  • Confirm 2FA setup with a received code.
  • Third-Party E-File Providers: Follow provider-specific instructions (e.g., Tax1099’s SMS-based 2FA setup), often requiring a phone number linked to the account.

The IRS provides step-by-step guides and support via its helpline (1-800-829-1040) for setup issues.

Qualified Intermediary (QI)

Posted on April 4, 2025 - 12:59 pm by

What is Qualified Intermediary (QI)?

A Qualified Intermediary (QI) is a person or foreign financial institution qualified under specific sections of the U.S. Internal Revenue Code (IRC). It acts as an intermediary for tax withholding and reporting purposes.

In the context of Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding), a QI facilitates the reporting of U.S.-source income paid to non-U.S. persons and ensures compliance with withholding requirements under Chapter 3 (IRC sections 1441-1446) and Chapter 4 (FATCA, IRC sections 1471-1474).

 

Roles and Responsibilities

  • Withholding on US-source Income:
    QIs calculate and impose appropriate withholding taxes-either the default 30 percent rate or a reduced treaty rate-on dividends, interest, or royalties paid directly to foreign account holders. All these figures appear in Form 1042-S, along with classification of income type, tax withheld, and exemptions.
  • Investor Classification:
    QIs identify account holders as U.S. persons, foreign persons, or FATCA-subject entities using documentation such as Form W-8 (i.e., W-8BEN for individuals) to verify tax status and eligibility for treaty benefits.
  • Income Reporting:
    QIs complete and submit Form 1042-S for every non-U.S. recipient, given the source of the income, the withholdings to be made, and relevant Exemption Codes (e.g., “04” for treaty exemptions). They also give copies to recipients as of March 15 of next year.
  • Documentation and Record-keeping:
    These include accurate recording by QIs, containing W-8 forms, FATCA statuses, and withholding certificates that support the information reflected in the Form 1042-S, which are obligatory to be kept for audits or inquiries by the IRS.
  • Remittance of Taxes:
    QIs deposit the withheld taxes to the IRS by Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) and ensure that remittances are made timely to avoid penalties.
  • Compliance with FATCA and Treaties:
    QIs ensure compliance with FATCA by identifying U.S. account holders and reporting their activities, while also applying tax treaty provisions when applicable, which may reduce or eliminate withholding.

 

QI vs. Non-QI Status on Form 1042-S:

  • A QI assumes primary withholding and reporting responsibility, often using its own QI Employer Identification Number (QI-EIN) on Form 1042-S.
  • A non-QI intermediary shifts these duties to upstream payers, complicating the process for FFIs and account holders.
  • Box 15a on Form 1042-S typically lists the QI’s QI-EIN, indicating its role in the payment chain.

 

Key Requirements:

  • QIs must enter a formal QI Agreement with the IRS, renewable every three years.
  • They undergo periodic compliance reviews to maintain QI status.
  • Documentation errors (e.g., missing W-8 forms) may trigger backup withholding (24%) or penalties.

Scheduled Filing

Posted on April 4, 2025 - 12:42 pm by

What is scheduled filing?

Scheduled filing refers to the preparation of various tax forms, including 1099s, W-2s, 941s, or 1095s, prior to a specified date for electronic submission to the IRS or another relevant authority on a fixed date in advance. Tax1099, an IRS-authorized e-file provider, integrates this service to give users the ability to control their filing timeline. Instead of filing their forms immediately, users can select a date for their automatic submission, allowing themselves time for review and making necessary adjustments while remaining compliant.

For example, a business preparing 1099-NEC forms for contractors could enter filing data any time during January (while delivering recipient copies) and schedule filing in March (before the electronic filing deadline —March 31). This helps with any necessary edits up to that date at absolutely no charge. This is different than instant filing, which provides a cushion for perfecting submissions.

 

How Scheduled Filing Works at Tax1099

Tax1099 is designed to ease out the filing process for every user, and scheduled filing is one such feature. Here’s a stepwise guide to help you schedule your next filings:

STEP 1— Preparation of the form: Once the user logs into the Tax1099 account, follow the same procedure as filing the form (manual filing, bulk import, integration, or using the API). Select the tax year, form type (e.g., 1099-MISC, W-2), and enter or import the data through integrations (like QuickBooks or Excel).

STEP 2 —Review and Validate: The platform’s automated system checks for errors (e.g., mismatched TINs, invalid addresses, missing information) with built-in error checks, TIN matching, and USPS Address Validation.

STEP 3— Schedule Your Submissions: Select “Schedule eFiling” from the dashboard and choose a preferred (future) submission date.

STEP 4— Confirmation: Once scheduled, forms are queued for transmission. Tax1099 processes vendor delivery (e.g., emailing or mailing recipient copies) immediately, while IRS submission occurs on the designated date.

STEP 5— Submission: On the scheduled date, forms are electronically filed with the IRS, and the acknowledgment is shared to the registered email ID.

 

Please note that the scheduling applies to the IRS and state form submissions. The recipient copy is delivered at the time of filing, ensuring vendors/contractors receive forms promptly to review.

 

Tax1099 Scheduled Filing feature benefits

  • Bulk Scheduling: Import data for multiple forms using CSV templates or integrations, ideal for businesses with large workforces or multiple EINs, and schedule them for a future date.
  • Edit Flexibility: Modify forms before the scheduled date without additional fees, reducing the need for corrected filings. Users can also click on “Change Schedule Date for All Vendor Files to the IRS,” enter a new submission date, and reschedule the filings.
  • Automated Notification: Receive reminders and updates about upcoming scheduled filings, ensuring timely submissions and compliance.