1099 presentation

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IRS Form 1099 Reporting: What you need to know

May 1, 2012

Presenter: Gregory P. Rhodes

Birmingham Huntsville Mobile Pensacola

2Birmingham Huntsville Mobile Pensacola

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1099 REPORTING: Overview

Form 1099 reporting requirements provide two important functions:

1. Form 1099 alerts the IRS that a payment has been made to a payee.

2. Form 1099 reminds a payee that he received a payment.

1099 REPORTING RULES


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PAYMENTS SUBJECT TO BACKUP WITHOLDING: General

If a payment is subject to backup

withholding, the payor of the payment must

generally withhold 28% of the payment to a

payee unless the payor can obtain and certify

certain information from the payee.



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PAYMENTS SUBJECT TO BACKUP WITHOLDING: Reportable Payments Interest (§ 6049)

Dividends (§ 6042(a))

Patronage Dividends (§ 6044 only to the extent such payment is in money)

Royalties (§ 6050N)

Fishing boats proceeds (§ 6050A)

Payments for services (§ 6041A(a))

Certain Miscellaneous Payments (§ 6041A)

Settlement of payment card transactions (§ 6040W)



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1099 REPORTING ISSUES Common Reportable Payment Situations

Interest Payments (1099-INT)

Bank deposit Bonds Indebtedness offered to the public. $600 or more paid in course of a trade or

business, including delayed death benefits, interest or damages, interest on state or federal tax refund, etc.

U.S. Bonds and Treasury Obligations Tax Exempt Interest (Municipal Bonds)



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Exemptions (1099-INT)

Payments on obligations issued by individuals.

Tax deferred interest not distributed.

Mortgage or student loan interest paid to lender.

Payments to non-resident aliens.



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Exempt Payees (1099-INT)

U.S. or foreign country

States and municipalities

Corporation

REIT

Financial institutions

Tax Exempt Organization

Registered Dealer in securities



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1099 REPORTING ISSUES Common Reportable Payment Issues

OID Payments (1099-OID)

Excess of a debt instrument’s stated redemption price at maturity over its issue price.

Exempt Payees

Corporation Tax Exempt Organization U.S. or foreign, state or municipality Registered Dealer in securities.



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1099 REPORTING ISSUES Common Reportable Payments

Sales of Securities (1099-B)

Sales by a broker of stocks, bonds, etc.

Receipt of stock or property that a broker knows has undergone a change of control.

Exempt Payees

Tax exempt organization U.S. or foreign state or municipality Corporation



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Dividends (1099-DIV)

Distribution by Corporation to shareholder Distribution by RICs

Exempt Payments

Certain redemption distribution Payment to nonresident alien



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Exempt Payees (1099-DIV)

Nonprofit Corporation U.S. or foreign country or subdivision Corporation REIT



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Royalties (1099-MISC)

Royalties from books, plays, patents, natural resources, etc. (if paid $10 or more)

Exempt Payments Surface Royalties (Rent)

Exempt Payees Corporation Nonprofit Organization U.S. or foreign county or subdivision



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Rents, commissions, non-employee compensation, etc. (if pay $600 or more) paid in the course of a trade or business. (1099-MISC)

Salaries, wages, commissions, other compensation

Interest (not reportable on 1099-INT) Rents Pensions Proceeds paid to an attorney.



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Exempt Payments (1099-MISC)

Generally payments aggregating less than $600

W-2 wages

Exempt Payees (1099-MISC)

Nonprofit Organization

U.S. or foreign country or a subdivision

A Corporation

Except: Attorney corporations



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AVOIDING BACKUP WITHOLDING: Certificates – Form W-9

A payor may reasonably rely upon a Form W-9 and will not be liable for taxes or penalties imposed under the backup withholding requirements unless one of the following occurs:

• The form does not contain the name and TIN of the payee;

• The form has not been signed or dated by the payee;

• The form does not contain the statement, when required, that the payee is not subject to withholding due to notified payee underreporting; or



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AVOIDING BACKUP WITHOLDING: Certificates – Form W-9 (cont.)

• The payee has deleted the jurate or other similar provisions by which the payee certifies or affirms the correctness of the statements contained on the form.

A payor is required to retain Form W-9 for at least three years (in paper or electronic format). Regs. §31.3406(g)-3(g)



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AVOIDING BACKUP WITHHOLDING Form W-9

W-9 submitted to Payee

• Prior to payment

• If payee refuses to submit, begin backup withholding immediately

• Assure TIN has correct form (SSN: 123-45-6789; EIN: 12-3456789)



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ON-LINE MATCHING PROGRAM:

Purpose:

• Allows Payors to check TIN/Payee Name combination prior to filing a 1099.

• Reduces number of backup withholding notices.



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ON-LINE MATCHING PROGRAM: Applicable Forms

Real Estate Broker Transaction (1099-B)

Dividends and Distribution (1099-DIV)

Interest Income (1099-INT)

Merchant Card Payments (1099-K)

Miscellaneous Income (1099-MISC)

Original Issue Discount (1099-OID)

Taxable Corporate Distributions (1099-PATR)



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ON-LINE MATCHING PROGRAM: Mechanics

Located on eService Registration home page.

No fee

Available 24 hours a day.

Interactive and Bulk Matching provided:• Interactive: 25 names• Bulk: 100,000 names



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ON-LINE MATCHING PROGRAM: Why Participate?

Eliminates notices from IRS.

Establishes Reasonable Cause under §6724 for Failure to File Correct Information Return.



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Completing Form 1099: Required Information

Form 1099 name field contains the name of the primary account owner.

Similarly, the primary account owner’s taxpayer identification number (TIN) must be used for reporting.



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Completing Form 1099: Special Payee Situations

Sole Proprietorship

• Individual’s name should be shown on all records as the primary owner.

• Business name can be shown on the second line, for example, “Tom Thomas” (first line), “d/b/a Thomas Construction” (second line).

• The individuals social security number (SSN) should be used for reporting purposes.



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Partnership

• Forms 1099 are required to be issued to a U.S. partnership since it is not deemed to be an exempt recipient.

• The EIN for the partnership should be used for reporting purposes.



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Limited Liability Companies (LLCs)

• The LLC’s name and EIN would be used.

• In the absence of supporting documentation, the payor would presume that the LLC is a partnership for reporting and withholding purposes. See IRS Pub. 3402, Tax Issues for Limited Liability Companies



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Single Member Limited Liability Companies (SMLLCs) (Disregarded)

• Individual’s name and SSN should be used for reporting purposes.

• Unless they “check the box.”



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Limited Liability Companies wanting to be treated as a corporation for tax purposes:

• Must file Form 8832, Entity Classification Election. Regs. §301.7701-3(c)(1)(i).

• An LLC making this election should attach documentation, such as a copy of Form 8832, to Form W-9 to ensure that the payor may treat them as exempt from reporting and backup withholding.



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Completing Form 1099: Formalities of Reporting and Due Dates

Generally, Forms 1099 (and related forms) must be submitted to the recipient (payee) by January 31 of the year following the payment year.

Forms 1099 must be submitted to the IRS by February 28 of the year following the payment.

The February 28 deadline is extended to March 31 in most instances in which the payor files the Form 1099 electronically with the IRS.



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Completing Form 1099: Combined Federal/State Filing Program

Program was established to simplify state information return filing and to assist payors or filers in avoiding the cumbersome duplication of submitting the same information to the state as well as to the IRS.

Once the IRS approves a filer’s participation in the program, the IRS will accept electronic media containing state reporting information and pass the information to the appropriate states participating in the program.




What to do after Forms 1099 have been submitted to the IRS/Payee.


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MECHANICS OF COMPLIANCE: IRS Responses

If no response, no action required

CP2100 or CP2100-A• Sent by IRS if there is an incorrect

Name/TIN match.• Large Filer (250 error documents) receive a

CD file CP2100.• Mid-Size Filer (50-250 error documents)

receives a paper CP2100.• Small Filer (less than 50 error documents)

receives a paper CP2100-A.



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MECHANICS OF COMPLIANCE: Response to CP2100A Notices

Missing TIN: Begin backup withholding immediately, and continue until a TIN is received.

• Begin solicitation process (initial, first annual, second annual)

Incorrect TIN: Compare account with records.

• If records agree, send a “B” Notice to Payee.

• If records don’t agree, update records. (No need to call IRS.)



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MECHANICS OF COMPLIANCE: B Notices

A “B” Notice is a notice sent to the Payee when a CP2100 or CP2100A Notice is received.

• First B Notice - sent after first CP2100 notice.

• Second B Notice – sent after second CP2100 notice received within a three calendar year period.


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FLOWCHARTING for INCORRECT NAME/TINs

INCORRECT NAME/TIN

Does the Name/TIN and the account number

on the notice match your records?

Is this the first notification?

This is the second

notification within a 3

year period.

YES NO

Is the mismatch due

to IRS processing?

Is the mismatch due

to an error in your

submission?

Correct your records if

necessary.

Stop backup withholding if

already begun.

NO

NO

YES

Mismatch due to record update.

No action required.

NO

No action required.

Update your

records with the certified

Name/TIN

YES Send the first

B-Notice with Form W-9 to the

payee.

Did the payee return a certified W-9

within 30 business days?

YES

YES

Begin backup

withholding within/by 30

business days.

NOBegin

backup withholding within/by 30

business days.

Update your

records

Send the second

B-Notice to the payee.

Did the payee return

a Social Security Number Printout Or A 147C within

30 business days?

NOYES

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FLOWCHARTING for MISSING TINs

Missing TIN

Is the missing TIN due to an error in your submission?

Are you backup

withholding on the account?

Continue to backup withhold until a TIN is

received.

YES

NO

Have you requested a

TIN?

Correct your records if necessary

Did you receive a

response?

Annual solicitation request for TIN, remit backup Form 945. Continue to backup

withhold until a TIN is received.

Remit backup withholding on

Form 945. Continue to back up withhold until a TIN is received.

Update your records and

STOP backup withholding.

Make annual solicitations for TIN

as required to avoid penalty.

Begin backup

withholding

No Yes

Yes

No

YES

NO



Making Payments to the IRS


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Backup Withholding

Periodic deposits required:

• Monthly if $50,000 or previously withheld.

• Semi-weekly if $50,000 or more in prior year withheld.

• Electronic Federal Tax Payment System now required.



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Backup Withholding – Year End

Use Federal Form 945.

• Due date January 31

• February 10th if fully paid.




The consequences of mistakes!


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Penalties – In General Under §§6721 (Failure to File Correct Information

Returns by the Due Date), 6722 (Failure to Furnish Correct Payee Statements), and 6723, the IRS has the ability to impose penalties for information reporting failures specific to returns filed with the IRS, recipient statements, and other requests for information.

IRS has significant discretion with regard to severity of a penalty.

Penalties imposed for intentional disregard are significantly greater.



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Penalties § 6721

Failure to file correct return with IRS.

• $30 per return if done within 30 days of due date ($250K maximum)

• $60/return if more than 30 days late but by August 1st ($500K maximum)

• $100/return if past August 1st ($1.5M maximum)



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Penalties § 6722

Failure to file payee statements.

• $100 per return (maximum $1.5M)

Reduced as follows:

• $30 if corrected within 30 days.

• $60 if corrected after 30days but before August 1st.



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Worker Classification/Audit Issues W-2 vs 1099

Options if potential classification issues exist.

Stay the course - § 530 and the Classification Settlement Program.

Voluntary Classification Program.



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Worker Classification/Audit Issues

Section 530 Relief: If satisfy then IRS must immediately discontinue its worker classification examination.

Company can continue to classify workers as independent contractors in future (even if they are not).

No assessment of any back employment taxes, penalties or interest.



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Satisfying Section 530 Criteria

In timely filed information returns consistently treating worker as an independent contractor (Annual 1099 Forms)

Other similarly situated company employees treated as independent contractors.

“Reasonable basis” for treating employee as an independent contractor.




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Establishing “Reasonable basis” under §530:

Reliance on court decisions, IRS Rulings (regardless of industry or business), TAMs, PLRs or Determination Letter (to the company);

Past audit with no assessment for employment tax or workers holding similar positions;




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Establishing “Reasonable basis” under §530:

• A longstanding practice of a significant segment of the industry in which worker engaged; or

• Some other reasonable basis (reliance on tax professional).




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Classification Settlement Program (CSP)

IRS instructed to determine if CSP offer applies in instances where § 530 relief determined inapplicable.

Determine which graduated settlement offer is appropriate.




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Classification Settlement Program

“One-Year – 100-percent offer”:

Applies if reporting consistency but NO substantive consistency or reasonable basis.

Result: 100-percent employment tax liability for one year under audit and reclassify workers.



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Classification Settlement Program

“One-Year – 25-percent offer”:

Applies if reporting consistency and “colorable argument” for substantive consistency or reasonable basis.

Result: 25-percent employment tax liability for one year under audit and reclassify workers.



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Section 530 / CSP Decision Chart


Are the Workers Employees?

Were Forms 1099 Timely

Filed?

Is Taxpayer Entitled to Code Sec. 530 Relief?

Type of CSP Offer

Yes No No None

Yes Yes No 1 year tax + CSP

Yes Yes Maybe 25% tax + CSP


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Worker Classification/Audit Issues Voluntary Classification Settlement Program

Allows reclassification outside Examination Process

Requirements:

Reporting consistency

Substantive consistency

Not under audit or audit



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Result:

10% of employment tax liability for most recent year (one year – 10 percent offer)

Treat workers as employees in future.

Extend assessment period by three years for next three years.

Make full payment at time of closing.



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Pros:

Reduce potential legal fees One year – 10 percent offer Certainty

Cons:

Immediate reclassification Question regarding §3509 special rates apply Extended assessment period of all employees State authorities get information.


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Birmingham Huntsville Mobile Pensacola

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1099 presentation

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int payments

payments subject

extentsuch payment

irs form

overview form

certificates form w

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