For organizations with information reporting and withholding requirements, tax documentation collection and validation can be a time-consuming and complex process. However, there are solutions that can help by automating the collection and validation of tax forms, like IRS Forms W-8 and W-9, freeing up resources to focus on other tasks. In addition to streamlining and centralizing your information reporting and withholding process, automated solutions can also reduce the risk of human error ensuring that data is accurately collected and reported.
How using Electronic Forms Reduces Penalties
One of the primary benefits of collecting electronic forms is that it can significantly increase efficiencies, thereby saving time and money while reducing exposure to costly penalties.
Incorrect information could lead to failing to report or reporting incorrectly, which can result in fines and penalties being imposed by the IRS. In 2022, penalties for failure to issue Forms 1099-MISC/NEC, for example, varied from $50 to $280 per form depending on how long past the due date the payer or withholding agent issued the form. It is also important to remember that there are intentional disregard penalties for failing to provide a correct payee statement, where the payer or withholding agent could be subject to a minimum penalty of $570 per form in 2022 or 10% of the income reported on the form, with no maximum.
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.
Under Chapter 3, withholding is required at a rate of 30%, or a reduced rate under an Internal Revenue Code exemption or tax treaty, on FDAP payments from U.S. sources. Again, if the withholding agent fails to withhold at this rate, then the withholding agent may be held liable for the tax, plus any applicable penalties or interest.
Here are some of the ways that collecting IRS Forms W-8 and W-9 electronically can help you:
Automated Data Entry
Electronic form collection allows for automated data entry, which means that data can be automatically saved and entered into your systems or third-party systems much more quickly and accurately than with paper forms. Instead of manually 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
Electronic forms can be submitted and validated much more quickly than paper forms, which means that you are in a better position to accurately withhold at the time of payment/onboarding. This significantly reduces any timing delays between form collection and validation which can eliminate penalties associated with failure to withhold correctly, or at all. If a payer or withholding agent does not withhold where required, then the payor or withholding agent becomes liable for that withholding amount.
Simplified Approval Process
Collecting forms electronically can simplify the approval process, as you can set up automated workflows that route forms to the appropriate approvers, if required, reducing the need for manual review and approval.
Improved Data Security
Data security is at the forefront of everyone’s mind today. Collecting tax documentation electronically can improve things from a data security standpoint, as the forms and the data captured can be stored securely in a digital format. In addition, personally identifiable information is no longer provided using unsecure methods, like email. Paper forms can be lost, stolen, or damaged, leading to exposure or loss of your customer’s personally identifiable information. Electronic records can be encrypted, and stored securely on servers/in the cloud, making it easier to control access and protect sensitive data.
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. Get Key Stakeholders Involved
The first step is to assess your need and current pain points, then get key stakeholders involved. 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.
Supporting the electronic collection and validation of IRS Forms W-8, W-9, 8233 and Self-Certifications, the application is white labeled and configured to meet your specific needs. 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.
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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