The Work Isn’t Over: Getting Ahead of the Next Information Reporting Cycle (Forms 1099 & 1042-S)

Filing season is over. That does not mean the compliance risk is.

Form 1099 and 1042-S filings for the 2025 tax year are done. What happens in the next 60 days determines how painful the 2026 cycle will be. Reporting outcomes are set by decisions made throughout the year, how data is collected, how payments are classified, and how controls are applied. The organizations that use this window to find and fix breakdowns will have an advantage over those that wait until Q4.

Several areas need attention now.

1. Threshold Changes: Broader Than a Filing Adjustment

The increase in reporting thresholds from $600 to $2,000 for certain payment types is often interpreted as a simple reduction in filing volume. That view overlooks the operational implications, especially in relation to backup withholding.

Starting in 2026, backup withholding generally applies once the $2,000 threshold is reached in situations where a valid Tax Identification Number (TIN) has not been obtained. If systems are not updated accordingly, organizations risk continuing to withhold at the outdated $600 level, leading to overwithholding.

Payees can recover excess withholding through their tax filings. Alternatively, the payor may be able to refund the excess withholding directly to the payee and recover those amounts from the IRS. This is only permitted if certain requirements are met, including that the correction is made before year-end and prior to issuing Forms 1099.

Update your systems before the first payment crosses $2,000. Overwithholding at the old threshold creates a correction problem that falls entirely on you to resolve.

2. The Shift from FIRE to IRIS: A Change in Process, Not Just Platform

The IRS transition from the FIRE system to IRIS represents more than a modernization effort. It fundamentally alters how filings are processed and evaluated.

Unlike the legacy system, IRIS introduces near real-time feedback, with submissions categorized as accepted, partially accepted (meaning certain filings were rejected but not the entire file), accepted with errors, or rejected. This accelerates the feedback loop and places a premium on getting data right the first time.

Organizations should be actively assessing:
• Whether internal systems can support IRIS requirements or if external providers are needed
• How data flows into the filing process and where validation occurs
• Whether error resolution processes are equipped to operate within shorter timelines

Name and TIN mismatches, in particular, will become more visible under this framework. Submissions flagged with errors will require correction within a defined window to avoid downstream notices, increasing the importance of accurate data at the point of entry.

For many businesses, this transition will highlight inconsistencies in data management and gaps in existing workflow issues best addressed well in advance of filing deadlines.

3. Payment Classification: Where Most Problems Begin

A recurring theme during reporting season is uncertainty around the nature of payments being made.

In many cases, classification decisions are deferred until year-end, when reporting obligations are determined. This approach often results in misclassification, overlooked reporting requirements, and time-consuming remediation efforts.

A more effective strategy is to address classification at the point of payment. This requires:
• Integrating tax considerations into accounts payable processes
• Establishing clear and consistent definitions for payment categories
• Embedding appropriate coding mechanisms within transaction systems

By shifting this responsibility upstream, organizations can significantly reduce ambiguity and avoid reactive fixes during reporting season.

4. Foreign Payees: An Ongoing Area of Exposure

Payments involving foreign individuals and entities continue to present challenges for many organizations. These payments are frequently under-identified, leading to gaps in reporting and withholding compliance.

Generally, payments to foreign persons are reportable when they represent U.S.-source income within certain categories, including services, rents, royalties, interest, and dividends. Identifying the relevant population, however, often proves difficult.

A structured review process can help address this gap:
• Begin with payees that have foreign addresses
• Reevaluate existing populations, including those currently receiving Forms 1099 or classified as exempt
• Expand the review to uncover entities that may have been incorrectly categorized

Cross-referencing Forms 5471 and 5472 surfaces cross-border transactions that would overwise go unidentified. Coordination across tax, finance, legal, and HR is also critical, particularly when dealing with foreign individuals in advisory and governance roles.

This requires sustained coordination across tax, finance, legal, and HR. Build it into the operating calendar, not just year-end.

5. State Reporting: Increasingly Complex and Independent

State-level reporting obligations continue to evolve, often diverging from federal requirements in both scope and execution.

Organizations must account for:
• Variations in state thresholds and filing rules
• Differences in participation in the Combined Federal/State Filing Program
• Additional direct filing or reconciliation obligations

Compliance at the federal level does not guarantee compliance at the state level. Overlooking these differences can create exposure, even when federal filings are accurate.

Closing Perspective

Reporting failures rarely come from the forms. They come from vendor onboarding gaps, misclassified payments, and systems that were never built to validate data at the point of entry. Fix those processes now, while the last cycle’s mistakes are still specific and fresh. By Q4, they’ll be a memory, and a repeat.

By Colin Brien
[email protected]
www.inforeportingsolutions.com