What to Know About IRS e-Signature Rules
The IRS does not yet have a consistent set of rules for what constitutes a valid e-signature and as a consequence, each form has its own requirements and it is incumbent upon the compliance professional to remain current on the ever-changing rules.
On the plus side, the IRS is actively engaged in encouraging e-filing and electronic documentation. Almost every form has a method by which one can obtain a valid e-signature.
- The W-9 and W-4 forms may use e-signatures and the IRS rules around them are reasonable.
- The 1096/1099 e-file process does not require a signature, but certain companies may require you to attest to the accuracy of the 1099 information that you submit.
- Recipients of 1099 and W-2s must explicitly consent to receive their forms electronically, which does not require an e-signature, but does require a record of consent.
- The I-9 cannot be completed online at this time and the e-signature requirements are worded more strictly than the W-4 and W-9.
The IRS has allowed people to fill out W-9s with an e-signature since 1998. To be valid, online W-9s with an e-signature must meet the following conditions, as per the W-9 instructions, https://www.irs.gov/pub/irs-pdf/iw9.pdf (page 1)
- Ensure the information received is the information sent.
- Document all occasions of user access that result in the submission.
- Make reasonably certain that the person accessing the system and submitting the form is the person identified on Form W-9, the investment advisor, or the introducing broker.
- Require as the final entry in the submission an electronic signature by the payee whose name is on Form W-9 that authenticates and verifies the submission.
- The electronic signature must be under penalties of perjury and the perjury statement must contain the language of the paper Form W-9.
Words such as “reasonably certain” have yet to be challenged in court as to a specific definition.
One example of how a W-9 filing service handles these five criteria is as follows:
- Have the W-9 vendor fill in an online form that is saved to a database.
- Store in the database the date and time of the W-9 submission.
- Have the company requesting the W-9 enter the vendor’s email address. An email is then sent with a link to fill-in the W-9, with the email recorded in the database. The vendor’s email is the “reasonably certain” fulfillment that the company knows the identity of the vendor.
- Using a touch device such as a smartphone, tablet or the cursor of a computer, the vendor ‘signs’ the online W-9. This produces an image of a signature, much like a fax machine produces an image.
- The perjury statement is included above the signature line and presented clearly to the vendor.
W-9 with CP2100 notices
If a payer has received a CP2100 notice from the IRS, meaning that the recipient’s Tax ID number submitted with a 1099 did not match what the IRS has on file, the payer must send a “B-notice” to the recipient along with a blank paper W-9.
For the first B-notice, the recipient must return the paper W-9 with an original signature. An e-signature cannot be used to meet any of the B-notice requirements.
See more details here: https://www.irs.gov/pub/irs-pdf/p1281.pdf
A 1096 form is the summary of a paper 1099 submission to the IRS and requires a signature. The 1096 is only required when submitting paper.
For 1099 e-file, the IRS does not require a separate 1096 form. Thus, there is no e-signature requirement for the e-filing of 1099s.
This being said, in order to reduce fraud, 1099 e-file providers will often ask the client to attest that all information they submit to the IRS is correct and not knowingly incorrect. This is similar to the 1096 attestation about being “true, correct and complete." This confirmation is recorded in a database for each client submitting 1099s for e-file.
1099 Recipient “Consent” To Receive Forms Electronically
In order to deliver 1099 and W-2 forms electronically to the recipient, the recipient must explicitly “consent” to receive the form in that manner.
This does not require an e-signature from the recipient, but does require a record of consent.
See page 16 of the IRS 1099 General Instructions for complete details: https://www.irs.gov/pub/irs-pdf/i1099gi.pdf
It is not as simple as a checkbox with the recipient saying “I consent,” but rather the IRS requires the payer to include these items as part of the consent process:
1. The recipient must consent in the affirmative and not have withdrawn the consent before the statement is furnished.
2. The consent by the recipient must be made electronically in a way that shows that he or she can access the statement in the electronic format in which it will be furnished.
3. You must notify the recipient of any hardware or software changes prior to furnishing the statement.
4. Prior to furnishing the statements electronically, you must provide the recipient a statement with the following statements prominently displayed:
- If the recipient does not consent to receive the statement electronically, a paper copy will be provided.
- The scope and duration of the consent. For example, whether the consent applies to every year the statement is furnished or only for the statement for a particular year, as applicable, immediately following the date of the consent.
- How to obtain a paper copy after giving consent.
- How to withdraw the consent. The consent may be withdrawn at any time by furnishing the withdrawal in writing (electronically or on paper) to the person whose name appears on the statement. Confirmation of the withdrawal also will be in writing (electronically or on paper).
- Notice of termination. The notice must state under what conditions the statements will no longer be furnished to the recipient.
- Procedures to update the recipient's information.
- A description of the hardware and software required to access, print, and retain a statement, and a date the statement will no longer be available on the website.
Payers should confirm that their e-delivery procedures to their recipients conform to these rules. In an example case, the recipient receives an email notifying them of their form’s availability electronically, along with the preceding words of consent.
Once the recipient clicks on the “retrieve my form” button, which confirms consent, the company has conformed to the IRS guidance.
If the recipient fails to consent before January 31, it is recommended to mail paper, even though recipients often wait until later in the year to pick up their forms electronically.
The IRS permitted electronic signatures for the W-4 in 1997. It has substantially the same verification requirements as the W-9: https://www.irs.gov/pub/irs-regs/td8706.txt
The I-9, on the other hand, cannot be completed online due to the in-person identification verification requirements.
The part of the I-9 that can be completed online has e-signature requirements with different wording from the W-4 and W-9:
- The system for capturing electronic signatures must allow signatories to acknowledge that they read the attestation and attach the electronic signature to an electronically completed Form I-9.
- The system must also affix the electronic signature at the time of the transaction.
- Create and preserve a record verifying the identity of the person producing the signature.
The IRS has not specifically delineated what methods may be used to “verify the identity” of a person online. Since the I-9 cannot be fully completed without a face-to face interaction, it is not time effective to implement an online, IRS-compliant e-signature process for an I-9 at the time of this writing.
More information on the latest I-9 requirements: https://www.uscis.gov/i-9
IRS instructions for e-signatures vary depending on the form, so allow extra time to understand and comply with the rules. Businesses converting from paper to electronic forms will reap the benefits of better record keeping, more effective communication