Corporate information reporting proposals and other initiatives to improve the administration and enforcement of employment taxes.

On June 8, 1993, Tax Executives Institute testified before Congress on the Clinton Administration's proposal to require businesses to file information returns in respect of payments to corporate service providers and other proposed to improve the administration and enforcement of employment taxes. The Institute's testimony was presented by TEI President Bob Perlman at a hearing before the Subcommittee on Commerce, Consumer, and Monetary Affairs of the House Committee on Government Operations. The written statement that TEI filed with the subcommittee - which was prepared under the aegis of TEI's Federal Tax Subcommittee on Payroll and Other Federal Taxes (whose chair is Clifford H. Omo of Mobil Administrative Services Company) - is reprinted below.

I. Introduction

Thank you, Mr. Chairman. I am Robert H. Perlman, Vice President of Taxes, Licensing, and Customs for Intel Corporation of Santa Clara, California. I am also President of Tax Executives Institute, on whose behalf I appear today. I am accompanied today by Michael Murphy, the Institute's Executive Director, and Timothy McCormally, our General Counsel and Director of Tax Affairs.

II. Background

Tax Executives Institute (TEI) is an organization of nearly 4,900 corporate tax professionals who are responsible for managing the tax affairs of the largest 2,400 corporations in the United States and Canada. TEI is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike.

TEI's members represent virtually every segment of industry, and the companies they work for are subject to the full range of employment tax and information reporting obligations (as employers, as both payers and payees, and as service providers and enterprises that contract for services). Although the companies represented by TEI's membership tend to be larger rather than smaller companies - indeed, a significant segment of the membership are employed by companies that are subject to continual audit as part of the Internal Revenue Service's Coordinated Examination Program - the Institute recognizes that the effective administration and enforcement of the Code's employment tax rules, through information reporting and otherwise, require a cost-effective partnership between businesses (large and small) and the IRS.

We believe that TEI's diversity and the professional training of our members - coupled with Executive Director Mike Murphy's extensive experience with the IRS (thirty years of service including five as Deputy Commissioner) - enable us to bring an important, balanced, and practical perspective to the issues raised by the Subcommittee's hearing. We understand the challenges confronting both taxpayers and the tax administrator in developing constructive enforcement strategies that do not unduly burden already compliant taxpayers. We are ready to work with the Subcommittee in improving the current system.

III. General Comments

TEI applauds the Congress's and the Administration's desire to target pockets of significant noncompliance and to take appropriate actions. We are proud of our record of working with the Subcommittee, IRS, Department of the Treasury, U.S. General Accounting Office, and congressional tax-writing committees in devising and fine-tuning diverse strategies for enhancing compliance in a cost-effective and equitable manner. In particular, TEI supports the Subcommittee's efforts to craft focused proposals to improve the administration and enforcement of employment taxes.(1) We are especially heartened by the Subcommittee's willingness to listen to taxpayer recommendations concerning H.R. 5011 (which then-Chairman Barnard introduced last year), and commend the Subcommittee for holding this hearing.

Mr. Chairman, the principal focus of TEI's testimony today is the proposal to expand information reporting to payments to corporate service providers. Such a proposal was included in H.R. 5011 last year, and was incorporated into the President's tax bill earlier this year. The proposal is now embodied in section 14251 of H.R. 2264, which was passed by the House of Representatives on May 27, 1993.(2) The Institute understands and appreciates that the Subcommittee's interests extend beyond the corporate information reporting proposals, and we are supportive of many of the Subcommittee's goals. For example, we applaud the objective of de-emphasizing the independent contractor-employee classification issue and focusing on ways to increase compliance among the independent contractor population. Moreover, although the Institute has not yet formulated a position on H.R. 5011's proposed changes to section 530 of the Revenue Act of 1978, we do support the statutory clarification of the tax law's worker classification rules and see benefit in making section 530 part of the Internal Revenue Code. We also support the thrust of many other provisions of H.R. 5011 - which range from limiting a payer's liability for worker misclassification (especially where all required information returns have been filed) to initiating a public information campaign concerning payer and payee obligations.(3) If desired, the Institute will respond in writing to the Subcommittee's questions about these other proposals.

Before turning to our specific concerns about the corporate information reporting proposal, TEI wants to acknowledge the Subcommittee's willingness to work with taxpayers to develop alternatives by which taxpayers' legitimate concerns can be assuaged, payer and payee burdens can be minimized, and the IRS's compliance objectives can be furthered. For example, the Subcommittee has taken a leadership role in recognizing the need for a computerized, telephone-based verification system for taxpayer identification numbers - a program TEI supports as a tool of payer empowerment. It has also recognized the desirability of developing one or more exemptions to corporate information reporting to minimize burden without compromising the goal of compliance. We view this hearing as merely one part of the Subcommittee's overall role in developing a workable approach to the corporate information reporting program.

IV. Comments on the

Administration's Proposal

A. Overview

President Clinton has proposed that payments made to corporate service providers be generally subject to information reporting. The Administration's "service industry noncompliance initiative" (or SINC), especially as it emerged from the House Ways and Means Committee and was passed by the House of Representatives, is similar to the following recommendation from the Subcommittee's November 1992 report:

The current information return reporting requirements and the corresponding matching program should be expanded to include nonemployee compensation payments made to corporations. The IRS Commissioner should be delegated regulatory authority to exempt corporations and classes of corporations from information reporting and/or matching of information reports with corporate tax returns if the IRS finds it unnecessary. (H.R. Rep. No. 102-1060, at 16.)

The key elements of the proposal are these: (i) the current (general) exemption from information reporting for payments to corporate service providers would be lifted, but (ii) the IRS would retain authority to exempt certain types of payments or types of payees where exemption would not undermine compliance.

B. Policy Concerns

about SINC

Mr. Chairman, TEI is committed to working with the government in attacking noncompliance in respect of service payments. Based on our analysis of SINC, however, we have significant reservations about the President's proposal, especially in light of its proposed January 1, 1994, effective date. We regret that, in its current form, the proposal would impose undue compliance burdens on already compliant payers and on payees that have already demonstrated an extraordinarily high level of compliance.

Thus, TEI submits that the proposal to require the filing of Forms 1099 in respect of service payments to corporations may impose substantial costs and yield little benefit to the tax administration system. Our concerns go not only to the potential effect of the proposal on our members as payees (recipients of the information returns), but also - and primarily - to the tremendous burdens the proposal would impose on all businesses as payers.

Let there be no mistake: The target of the Administration's SINC proposal is not the large and medium-sized corporations whose members belong to TEI. Nearly all the companies represented by our membership are subject to continual, or at least regular, audit by the IRS; they are subject to rigorous internal controls to prevent the nonreporting of income; and they have their financial statements certified by independent auditors. The IRS and the General Accounting Office have repeatedly acknowledged that larger corporations are extraordinarily compliant with respect to service payments and, indeed, other categories of income.

Notwithstanding the high compliance level of the large corporations, SINC would "deputize" payers to collect, prepare, and file information returns on payments to corporate service providers. The imposition of such a mandate - which would extend to payments made by nonprofit organizations, state and local governments, and even the smallest companies and sole proprietorships - would spawn significant administrative costs. Payers would have to change their accounts payable systems (which could involve both hardware and software changes), designate and train staff to perform the data entry tasks, and absorb the cost of preparing the necessary reports and sending them both to payees and the IRS. For example, accounting systems in many (if not most) companies do not currently distinguish between payments for services and other payments; all that is recorded is the aggregate account payable. Under SINC, payers would be required to change their systems to differentiate between the two types of payments. Regrettably, such a task is not as simple as "flipping a switch." Given the Joint Committee on Taxation's revenue estimate for SINC - $423 million(4) (as opposed to the Administration's initial $6.35 billion estimate) - TEI believes there is a strong possibility that the cost to the payer community would exceed the revenues flowing to the Treasury.(5)

The burdens that the proposal would impose on corporate payees should similarly not be underestimated. Corporations that receive the Forms 1099 would have to store them, and the SINC proposal raises the specter that payees might be compelled to formally match, or reconcile, the amounts so reported to their books of account or their tax returns - a process that the IRS acknowledges could lead to countless mismatches, especially where the payee is an accrual basis or fiscal-year taxpayer (receiving information returns prepared on a cash, calendar-year basis). The situation is further complicated where the payments are received by a subsidiary but reported on the consolidated return filed by the corporate parent. These considerations have properly led the IRS in the past to resist a broad-scale information reporting system; we suggest they apply with equal force to the "limited" program proposed by the Administration.

Finally, there continues to be no convincing evidence that the IRS would be able to process the millions of additional pieces of paper that would be generated under the proposal. IRS officials have estimated that between 20 and 35 million additional information returns would be required to be filed under the Administration's proposal. Anecdotal information received from our members, however, coupled with our extrapolation of the number of service-related business relationships in the country today, strongly suggests that even that not-insubstantial estimate is grossly understated.(6)

To appreciate the potential breadth and scope of the Administration's proposal, consider the information returns that would be received from one very small group of corporate service providers - the nation's long-distance carriers.(7) AT&T, MCI, Sprint, and their competitors would receive a Form 1099 from virtually every business in America - literally millions upon millions of information returns. What are the recipients supposed to do with them? What is the IRS supposed to do with the millions of Forms 1099 they receive in respect of the long-distance companies?(8) To our knowledge, there has never been any question about long-distance companies' reporting the gross amount of payments received, and yet they - and the IRS - would have to cope with millions of returns with no effect on the companies' compliance with the tax laws.

During the Ways and Means Committee's consideration of the Administration's tax bill, the SINC proposal was modified to confirm the IRS's authority to exempt certain payees and payments from corporate information reporting. This exemption authority has been a feature of the Subcommittee's bill from the outset. Because circumscribing the reach of any corporate information reporting program is absolutely essential to the program's viability, we believe Congress should provide the IRS with clear guidance on what types of payments and classes of payees should be exempted.(9) If such guidance is not forthcoming - through explicit language in the pertinent committee reports or, better yet, through the enactment of legislative exceptions - corporate information reporting runs the risk of becoming extraordinarily complex and expensive. Hence, unless great care is taken in developing the program, SINC will become the "car logs" or "section 89" provision of the 1993 tax bill.

In the ensuing sections of this statement, TEI offers its specific suggestions on how the burdens of SINC can be tempered without vitiating its compliance objective.

C. Specific Issues and

Recommendations

1. Express Disclaimer of Reconciliation. In discussing the SINC proposal, IRS and Administration officials have generally disclaimed any intention to require corporate payees to reconcile, or match, amounts reported on corporate information returns to their corporate tax returns. Nevertheless, the corporate community remains very much concerned about the burden any such reconciliation or matching program would spawn.(10) TEI recommends that Congress formally confirm - for example, through the inclusion of appropriate language in the committee report - that reconciliation is not part of SINC.

2. Large Payee Exception. In recognition of the high level of compliance already present among certain classes of corporations, TEI strongly supports the development of exemptions for one or more of the following:

* Payments to corporations that are subject to SEC reporting requirements and thereby have independent, certified financial statements.(11)

* Payments to corporations that are part of the Coordinated Examination Program (and therefore subject to continual audit by the IRS).

* Payments to corporations having gross receipts above a specified level (say, $15 million as reported on Form 1120).

Of the foregoing three bases for exempting payees, the gross receipts test may be the easiest to administer because a corporate payee's exempt status could be based on information set forth in the payee's income tax return - i.e., Line l(a) of Form 1120.(12)

In administering this exception, payers would have to possess the means of verifying a payee's taxpayer identification number (TIN) and its eligibility for exemption. We note that some question has arisen about the efficacy of "self-certification," whereby a payee files a form with the payer claiming exemption.(13) To the extent exemption from the program requires payer verification of a payee's TIN and exempt status, we recommend that payers not be required to file Forms 1099 with respect to payments to corporate service providers until the IRS can electronically confirm that the payee does not fall into an exempt category.(14)

The Subcommittee should continue to press the IRS to exploit emerging technologies to enhance compliance - in the service industry and elsewhere - to minimize payer and payee burden. Specifically, we recommend that Congress pursue a verification system similar to the "TELE-TIN" system contemplated by section 203 of H.R. 5011. As we understand the Subcommittee's proposal, a payer would establish contact with the IRS (perhaps through a modem-to-modem hook-up), key in the vendor/payee's name and TIN, and be instantly notified (i) whether the TIN is valid and (ii) whether the payee is exempt from information reporting (e.g., because its gross receipts exceed the threshold). If the payee's TIN were invalid, the payer would have to solicit a correct TIN or institute back-up withholding. We believe the TELE-TIN system holds much promise as a tool of payer empowerment.(15) Moreover, we submit that TELE-TIN should be formally linked to SINC. In other words, to avoid unduly burdening payers, the commencement of information reporting should be deferred until a reliable telephone verification system is operarational.(16) We also recommend that the back-up withholding system be decoupled from corporate information reporting, either permanently or at least until the IRS can demonstrate that it can administer the telephone verification system.

It is important to understand that the benefits of the large payee exception would not be confined to large payees. Yes, the exemption would reduce the number of superfluous information returns received by such payees. But more fundamentally, it would also eliminate a requirement otherwise imposed on all payers - large and small, for-profit and not-for-profit, private sector and governmental - and reduce the amount of virtually useless paper received by the IRS.

3. Definition of Reportable "Services." Under SINC, payers would be obliged to file information returns on all payments for "services," without regard to whether the service provider is a corporation. This requirement would bring a new dimension - and renewed urgency - to the question of "what is a reportable service?" "Services" is not a term that is unambiguously defined in the Internal Revenue Code or the applicable Treasury regulations. Although some guidance has been provided by the IRS - for example, in the Instructions to Forms 1099 (especially Box 7 of Form 1900-Misc), 1098, 5498, and W-2G - "services" remains a potentially broad term.

For example, if a taxpayer stays at a hotel, flies on an airplane, rides in a taxi, or eats at a restaurant, he or she seemingly purchases four different types of "services" (though a good portion of the restaurant bill would be for the food). Would these transactions give rise to multiple Form 1099 reporting requirements (assuming the dollar threshold is crossed)? In the absence of guidance, the answer would seem to be yes, and as a result, businesses would be compelled to keep track of a myriad of payments to a host of vendors (either directly or through credit card companies) and to file a multitude of information returns. Would such a broad-based reporting program significantly aid compliance or simply flood the system with needless mounds of paper and potentially expose payers to a raft of penalties for noncompliance?

The ramifications of SINC on credit card purchases would be especially horrific. Consider the business whose employees use credit cards to purchase a wide variety of goods and services. At the end of each month, the business sends a single check to the credit card company. Under SINC, the business would have to break down that payment into its different service and nonservice components (see Part IV.C.4.) and, at the end of the year, issue Forms 1099 to multiple service providers to which the business did not make any direct payments. Before it could do this, however, the business's expense account system would have to be revamped to capture the necessary information and the employees making the charge purchases would have to solicit TINs for each of the vendors with which they deal.

TEI believes that the definition of reportable service provided by a corporation should be clarified and narrowed to target perceived areas of noncompliance.(17)

4. No Required Segregation of Service from Non-service Payments. In addition to defining what constitutes "reportable services" for purposes of SINC, Congress should act to relieve payers of any obligation to segregate payments for services from payments for other items (inventory, other materials, reimbursements, etc.). Hence, payers would be able to satisfy their legal obligation by reporting the gross amount paid to corporate vendors.

Unless payers are authorized to report the gross amount of payments, nothing short of manually reviewing each invoice paid will assure accurate service payment reporting. Indeed, frequently the invoices themselves do no contain sufficient detail to permit the segregation of the service and non-service portions of the payments. We recognize that payers are currently required to segregate service from non-service payments, but believe TEI's recommended aggregation rule is necessary because of a projected ten-fold increase in the number of information returns. In other words, although payers may be able to cope with the current requirement of segregating service from non-service payments in respect of a discrete number of non-corporate payees, they could easily be overwhelmed by such a segregation requirement in respect of the much larger universe of corporate payees.(18) If TEI's proposed non-segregation rule is not adopted, the need for guidance on the definition of reportable services will become more pronounced.(19)

5. No Required Aggregation of Multiple Payments During the Year. To further mitigate payer burden, the Subcommittee should provide that payers may report payments on multiple Forms 1099, rather than aggregating all payments to the same payee on a single form. The Subcommittee's confirming that "transactional 1099s" are acceptable would be especially helpful in respect of payers that make payments from several different (and nonintegrated) locations.(20)

6. No Required Reporting of Intercompany Payments. TEI also recommends that payers not be required to report service payments made to members of the same consolidated group of corporations (e.g., intercompany charges for computer services provided by a service company).

7. Effective Date. Last but not least, TEI is not at all sanguine about the proposal that SINC apply in respect of all payments made after December 31, 1993. Corporate information reporting cannot be effected by a "flip of a switch," and it is unrealistic to assume that SINC can be implemented on such a short time frame. Time is required to understand the law, to develop plans for how to comply, to make the necessary systems changes, and to train the appropriate personnel. The need for a reasonable transition period is especially acute since payments for services rendered by corporations are currently not distinguished from other payments on many businesses' books (since reporting has never been required).

Thus, even if the proposal were enacted tomorrow ...

... even if the IRS were able tomorrow to issue the necessary guidance on what is and is not a "reportable service" (and on the raft of other issues raised by SINC) ...

... even if the telephone verification system necessary to an efficient system could be "on-line" tomorrow ...

... even if all these things were true - and none of them is - payers would still have difficulty in making the programming and other changes necessary to implement SINC by the end of 1993. We suggest, moreover, that the IRS, too, would be hard pressed to be ready by the proposed January 1, 1994, effective date.

Consequently, TEI recommends that the effective date of the corporate information reporting program be deferred until at least January 1, 1995. At a minimum, any requirement to institute back-up withholding in respect of corporate payees should be delayed until the IRS's TIN verification and exemption system is in place, and the IRS should make it clear that a good faith effort to comply with corporate information reporting requirements - especially during the transitional period before final regulations are promulgated - would be sufficient to avoid the assertion of penalties.

A more realistic effective date would permit the IRS to develop creative and effective strategies for implementing SINC and auditing compliance with the corporate information reporting rules. TEI believes that the IRS should develop and publish a timetable for issuing proposed - and then final - regulations well before SINC's effective date. The IRS should involve both the payer and the payee communities in the guidance process and should also adopt broad-based payer and payee education initiatives. Because the burdens of SINC would fall most heavily on the payer community - which is not the target of the compliance initiative but merely the IRS's "designated agent" - it is especially important to subject the IRS's plans to congressional oversight and taxpayer scrutiny on a before-the-fact basis.

In summary, TEI believes that the prudent postponement of SINC would permit both businesses and the IRS to approach corporate information reporting on an orderly, measured basis.

V. Conclusion

Mr. Chairman, Tax Executives Institute appreciates this opportunity to present its views on proposals to subject payments to corporate service providers to information reporting. We invite your questions.

(1) TEI representatives have met repeatedly with members of the Subcommittee's staff to discuss the proposals set forth in the Subcommittee's November 2, 1992, report. House Committee on Government Operations, Improving the Administration and Enforcement of Employment Taxes, H.R. Rep. No. 102-1060, 102d Cong., 2d Sess. (1992) (Union Calendar No. 595). We have also had similar discussions with IRS officials, both before and after the Clinton Administration announced its "service industry noncompliance initiative."

(2) The House bill would amend section 6401 of the Internal Revenue Code to provide, in new subsection (f), that "[n]o payment for the performance of services shall be exempt from the requirements of this section merely because it is a payment to a corporation." A similar amendment would be made to section 6041A. The Ways and Means Committee's report on the revenue-raising provisions of H.R. 2141 (WMCP:103-11) explains the proposal, as follows:

The bill provides that payments for services purchased in the course of the payor's trade or business will not be exempt from the information reporting requirements merely because the payments are made to a corporation. The committee understands, however, that the IRS may continue to exempt from information reporting certain types of payments and certain types of corporate payees where the risk of noncompliance is minimal. WMCP:103-11, at 315.)

(3) TEI has significant reservations about the proposed increase in information reporting penalties. Although IRS studies show that workers receiving Forms 1099 are more likely to report the income on their tax returns, the Institute does not believe it follows to increase the penalties on payers, especially if the rationale of such increases is to give IRS agents a greater incentive to ferret out inaccurate or missing Forms 1099. Surely, the IRS should not need increased information reporting penalties on payers to refocus its attention on the nonreporting of income by payees (workers), as opposed to worker reclassifications. Indeed, increasing penalties to change the IRS's behavior sums at odds with repeated declarations by Congress and the IRS that the purpose of penalties should not be to raise revenue. Increasing penalties should in no event be viewed as an adequate substitute for forthrightly addressing the worker classification.

On a related issue, the Institute understands that consideration is being given to modifying H.R. 5011 to increase the dollar threshold for information reporting from $600 to $1,000. (As introduced, the bill would have reduced the threshold to $100.) The reporting threshold has been $600 for more than 30 years, and TEI supports an increase in the threshold, in recognition of increases in the wage index since the $600 was fixed. Such a change would reduce payer burden.

(4) The Joint Committee initially estimated SINC to raise only $326 million in fiscal years 1994-1998.

(5) In proposing SINC, the Administration stated that "some payors have suggested that it would be less burdensome to report all payments [for services], rather than to except payments made to corporate service providers [as allowed by current law]." Based on our analysis, that "suggestion" represents at best a minority view.

(6) The number of required Forms 1099 would obviously depend on how the term "services" is defined as well as on the number and scope of IRS or congressionally approved exemptions.

(7) Treas. Reg. [section] 1.6041-3(d) currently exempts payments for "telephone" charges from information reporting, but it is not clear what the basis of the exemption is or whether it would survive SINC.

(8) Although the information returns filed by larger companies would be submitted on magnetic media, those filed by smaller companies - likely numbering in the millions - would be submitted on paper.

(9) For example, the payments made to long-distance carriers would fall within the ambit of payments that could be exempted from information reporting because "the risk of noncompliance is minimal." WMCP: 103-11, at 315.

(10) Although the proposal set forth in H.R. 5011 contemplates the IRS's "matching" of corporate Forms 1099, the Subcommittee's November 1992 report also makes clear that the IRS could exempt certain classes of payments or payees from any matching program. H.R. Rep. No. 102-1060, at 16.

(11) Publicly held companies in particular have no incentive to underreport income for financial reporting purposes. Moreover, financial controls mandated by the Securities and Exchange Commission represent a clear "audit trail" for IRS examiners to confirm that income is correctly and completely reported.

(12) An ancillary issue is whether the payee exception should be applied on a separate entity or a consolidated group basis. TEI prefers an approach that minimizes the number of Forms 1099 that must be sent, and we believe the goal of enhancing compliance would not be compromised by adopting the consolidated return approach.

(13) The Ways and Means Committee's report on the revenue-raising provisions of H.R. 2264 expresses the view that "payors cannot easily determine whether a business is actually conducted in corporate form (i.e., not subject to information reporting) because payees can simply claim to be incorporated, and payors are not required to verify such claims." WMCP: 103-11, at 315.

(14) As initially proposed by the Administration, SINC would have included an IRS initiative to assist payers in verifying the TINs of payees. That aspect of the program has been abandoned, apparently because the IRS cannot establish the program on schedule. Although no similar sympathy was shown for the burdens SINC would impose on payers, the critical point is that a telephone verification program - such as the Subcommittee is working on - would greatly enhance the effectiveness of any corporate information reporting program.

(15) Given the potential application of penalties (for not filing a Form 1099 or not instituting back-up withholding), some mechanism is needed for substantiating that payers verified a payee's TIN. The Subcommittee should address how a payer will prove that it verified the payee's TIN and exempt status. The verification system poses special problems on a transitional basis. For example, how can a payer purge its vendor of incorrect TINs? One approach would be for the payer to provide a magnetic tape with the names and TINs of all the vendors currently on its accounts payable system to the IRS for verification. We understand that the IRS will conduct a test of such a tape verification system this summer.

(16) Even if the necessary computer and communication programs could be expeditiously developed and brought "on-line," the IRS and payer community would need a reasonable transition period to implement corporate information reporting. Payers, for instance, would need to solicit TINs from their corporate vendors. The potential for "mismatches" between extant payer and IRS records would be great. There are a number of valid reasons a payee name in the payer's vendor records may not match the name in the IRS's master file - for example, the payee may be "doing business" under a different name, may be using a nominee, may have undergone a legal name change. Clearly, time must be provided to allow payers to purge their files of erroneous or out-of-date information.

An alternative to postponing the effective date of corporate information reporting would be to permit payers to report only the names and TINs of their corporate payees to the IRS, with no Forms 1099 being sent to the payees. This approach would advance the Administration's primary goal of identifying corporate nonfilers, though allowances would have to be made for those payers whose current vendor files do not contain information on TINs. Still another option would be the use of corporate payee self-certification (on the equivalent of Form W-9).

(17) As previously noted Treas. Reg. [section] 1.6041-3(d) currently excepts payment for telephone charges from information reporting. The same provision of the regulations also exempts "[p]ayments of bills for merchandise, telegrams, . . . freight, storage, and similar charges," though the basis of the exemption is unclear. (Some of the enumerated items clearly seem to be services whereas others do not.) We suggest that a provision that equates - or at least renders "similar" - charges for telephone, telegrams, storage, merchandise, and freight is potentially elastic enough to drive a truck through (or, in the long-distance example above, to let the customers of long-distance carriers off the hook) or to ensnare a payer hose interpretation of "similar" is not in sync with the IRS's. Absent more detailed guidance, how could a payer know what is or is not subject to information reporting?

(18) Rev. Rul. 81-232, 1981-2 C.B. 231, addresses the question of "mixed payments" in the context of automobile repairs (i.e., where a portion of a payment is for parts and the rest is for labor). To relieve payers of the burden of analyzing each and every payment (and of bifurcating individual accounts payable into their service and non-service components), the Subcommittee should instruct the IRS to modify and expand the ruling.

(19) The burden of bifurcating service from non-service payments would likely be reduced if the Institute's proposed $15 million large payee exception (see Part IV.C.2.) were adopted, because smaller payees are more likely to provide only services or only non-services to their customers. (In other words, fewer "reportable" payees would receive mixed service and non-service payments.) Nevertheless, TEI believes that the need for guidance on what constitutes a reportable service must be addressed as a high priority matter.

(20) To guard against abuse, the implementing regulations could provide that the "non-aggregation" rule could only be used if the payer reported all payments - not just those exceeding $600.