Common pitfalls in information reporting.

Most tax advisers and their clients are aware of Sec. 6041's information reporting requirements for payments over $600 in any one tax year to unincorporated payees. Every trade or business (including a partnership or nonprofit organization) has to file information returns for certain payments made during the calendar year. Although the Service prefers to receive this information on magnetic media or electronically, neither is mandatory; paper is still acceptable, subject to certain limits. (Payments to medical and legal providers have different reporting requirements and ate beyond this item's scope.)

Form 1099-MISC

Form 1099-MISC, Miscellaneous Income, is the most widely used information reporting form. A payee has to file the form for each person to whom it paid during the year at least $10 in gross royalty payments, or $600 for rents or services, in the course of its trade or business. Some items that require a Form 11199-MISC include: (1) real estate, equipment or pasture rentals; (2) royalties to authors; (3) prizes and awards not paid as part of services rendered; and (4) compensation (such as fees, commissions and awards) and golden parachute payments paid to nonemployees for services.

Potential Problems

Form W-9: The most basic mistake a payer can make is failing to obtain from a payee Form W-9, Request for Taxpayer Identification Number and Certification. This form lists the payee's entity classification and taxpayer identification number (TIN). Many accounts payable departments will not process payments without a completed W-9.

TINs: The IRS marches TINs on Form 1099-MISC to its database. Under Sec. 6721, it can assess a $50 penalty for a business's failure to provide a correct TIN. Reasonable-cause penalty relief is available under Sec. 6724 if the mismatch was due to the payee, rattler than the payer; a completed W-9 will provide reasonable cause in most cases.

In the past, while the IP, S was quick to waive penalties, it seems to be reversing that trend; in general, unless it receives supporting evidence for all information reporting penalty-waiver requests, it will not waive penalties. The current maximum penalty per calendar year for failure to include TINs is $100,000, under Secs. 6723 and 6724(d)(2)(C).

Payment cards: A "payment card" transaction is one in which a cardholder payer uses a payment card (as defined in Notice 2003-12, Section 4.03), to purchase goods or services, and a merchant agrees to accept the card as payment. Cardholder-payers are responsible for reporting information on payments for goods and services. However, they often haw. difficulty (1) determining whether purchases are subject to information reporting and (2) obtaining TINs form payees.

The Service issued two proposed procedures on purchasing-card transactions. Notice 2003-13 would allow a "qualified payment card agent" (as defined in Notice 2003-13, Section 4.04) to solicit and collect the necessary entity' status and merchant-payee TIN. Notice 2003-37 provides an optional procedure for payers and their agents to use in determining if payment-card transactions are reportable. It would allow cardholder-payers to rely on merchant category codes to classify payees as either service or goods providers, to determine whether payments are reportable.

LLCs: Limited liability companies (LLCs) ate partnerships for tax purposes and require information reporting. Such reporting is required for payments to the many hotels that are limited partnerships or LLCs.

Conclusion

The Service has excellent publications on Form 1099-MISC and other information returns, containing detailed instructions and providing answers to almost any reporting question. Tax advisers can take advantage of this free resource easily online, at www.gov/formspubs.

FILOM TOM TURNER, CPA, DOOLEY AND VICARS LLP CPAs, RICHMOND, VA, AND KENNETH M. PARKER, CPA, PARKER & ASSOCIATES, CPAs, PLLC, JACKSON, MS

Mark H. Ely, J.D., CPA

Partner

Washington National Tax

KPMG LLP

Washington, DC