Form 1099 re-do: changes bring new filing requirements, increased penalties.
Internal Revenue Code Sec. 6041 requires Form 1099 information returns to be filed by every person engaged in a trade or business who makes payments [as defined in IRC Sec. 6041(a)] aggregating $600 or more in any taxable year to a single payee in the course of that payor's trade or business.
The regulations generally exempt payments to corporations, exempt organizations, governmental entities, international organizations or retirement plans.
The penalty for failing to file an information return generally is $50 for each return for which such failure occurs. The total penalty on a person for all failures during a calendar year cannot exceed $250,000. Additionally, special rules apply to reduce the per-failure and maximum penalty where the failure is corrected within a specified period.
However, the Patient Protection and Affordable Care Act of 2010, signed into law in March, carries a revenue raising provision that modified Form 1099 reporting requirements under Sec. 6041. Starting in 2012, the new law will require businesses to file an information return for all payments of goods or services aggregating $600 or more in a calendar year to a single payee (other than a payee that is a tax-exempt corporation). Congressional reports estimate that the new requirements will raise $17.1 billion over 10 years.
Further, the Small Business Jobs Act of 2010, signed into law in September, will require all persons who receive rental income (with a few exceptions) to issue Form 1099s for payments of $600 or more for rental property expenses starting in 2011. The penalties for failure to file information returns on time and failure to furnish a payee a statement also will be increased.
Below is a summary and timeline of the new rules applicable to Form 1099 information returns and penalties.
Under Sec. 6721, any person required to file an information return who fails to do so on or before the filing date is subject to a penalty that varies based on when, if at all, the correct information return is filed. For Form 1099 information returns required to be filed after Dec. 31, 2010, Sec. 6721 is amended to increase the failure to timely file information penalties as follows:
First-Tier Penalty: If a person files a correct information return after the prescribed filing date, but on or before the date that is 30 days after the prescribed filing date, the penalty will be $30 (up from $15) per return, with a maximum penalty of $250,000 (up from $75,000) per calendar year.
Second-Tier Penalty: If a person files a correct information return after the date that, is 30 days after the prescribed filing date, but on or before Aug. 1, the penalty will be $60 (up from $30) per return, with a maximum penalty of $500,000 (up from $150,000) per calendar year.
Third-Tier Penalty: If a correct information return is not filed on or before Aug. 1 of any year, the penalty is $100 (up from $50) per return, with a maximum penalty of $1.5 million (up from $250,000) per calendar year.
Intentional Disregard Penalty: If a failure is due to intentional disregard of a filing requirement, the minimum penalty for each failure is $250 (up from $100), with no calendar year limit.
Special lower maximum levels for this penalty apply to small businesses, defined as firms having average annual gross receipts for the most recent three taxable years that do not exceed $5 million. The maximum penalties for small businesses will be:
* $75,000 (instead of $250,000: if the failures are corrected on or before 30 days after the prescribed filing date;
* $200,000 (instead of $500,000) if the failures are corrected on or before Aug. 1; and
* $500,000 (instead of $1.5 million) if the failures aren't corrected on or before Aug. 1.
Inflation Adjusted Penalty: The failure to file penalty will be adjusted to account for inflation every five years with the first adjustment to take place after 2012, effective for each year thereafter.
Treatment of Rental Property Expenses After 2010 [Sec. 6041(h)]
For payments made after Dec. 31, 2010, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business.
In particular, rental income recipients making payments of S600 or more to a service provider (such as a plumber, painter or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to the IRS and to the service provider. Exceptions to this reporting requirement are payments made for:
* Any individual, including any individual who is an active member of the uniformed services or an employee of the intelligence community [as defined in See. 121(d)(9)(C)(iv)], if substantially all rental income is derived from renting the principal residence (within the meaning of Sec. 121) of such individual on a temporary basis;
* Any individual who receives rental income of not more than the minimal amount, as determined under regulations prescribed by the Secretary: and
* Any other individual for whom the requirements would cause hardship, as determined under regulations prescribed by the Secretary.
For example, Jane owns a rental house. In between tenants she hires Joe to paint the interior of the rental house for $2,500. Jane is considered to be in a trade or business and will have to issue Joe a Form 1099.
Payments of $600 or More After 2011
As mentioned above, Sec. 6041 requires Form 1099 information returns to be filed by every person engaged in a trade or business who makes payments aggregating $600 or more in any taxable year to a single payee in the course of that payor's trade or business.
For payments made after Dec. 31, 2011, amended Sec. 6041(a) will add "amounts in consideration for property" and "gross proceeds" to the list of payments subject to reporting. Thus, the payments to be reported on a Form 1099 will now include gross proceeds paid in consideration for property or services.
In addition, "person" will include any corporation that is not an organization exempt from tax under Sec. 501(a). Thus, payments to corporations that are not tax-exempt may be subject to information reporting.
Example: S Corp buys $1,000 of office supplies from Office Company Inc. during 2012. Under Sec. 6041(a), S Corp is required to issue Office Company a Form 1099 unless they meet the exception for duplicate reporting below.
Example: Dan, a sole proprietor, travels away from home on a business trip for a week. While on the road he pays $800 for his stay at Hotel Inc. of America. Under Sec. 6041(a), Dan is required to issue Hotel Inc. of America a Form 1099 unless he meets the exception for duplicate reporting below.
Relief for Duplicated Reporting After 2010
The Housing Assistance Tax Act of 2008 added Sec. 6050W to the IRC. requiring any payment settlement entity making payments (after Dec. 31, 2010) to a participating payee in settlement of reportable payment transactions to report annually to the IRS and to the participating payee the gross amount of such reportable payment transactions, as well as the name, address and taxpayer identification numbers of the participating payees.
A "reportable payment transaction" means any payment card transaction (e.g., a credit card or debit card) and any third-party network transaction (e.g., PayPal and eBay). A third-party settlement organization is not required to report unless the aggregate value of third party network transactions for the year exceeds $20,000 and the aggregate number of such transactions exceeds 200.
New Sec. 6041(j) allows the IRS to issue regulations and other guidance as may be necessary to carry out the purposes of the Form 1099 information reporting under Sec. 6041 and to issue rules to prevent duplicative reporting transactions. The IRS issued final regulations Aug. 13 addressing business purchases made with credit or debit cards that would be exempt from the new reporting requirements [under Sec. 6041(a)] because banks and other payment processors already report them under Sec. 6050W (i.e., relating to payment card and third party network transactions).
The final regulations under Sec. 1.6041-1(a)(1)(iv) and Sec. 1.6041A-1(d)(4) state that transactions that would otherwise be required to be reported on information returns under Sec. 6050W and either Sec. 6041 or Sec. 6041 A, are reported only under Sec. 6050W.
Solely for purposes of determining whether a payer is eligible for relief from reporting under Sec. 6041, the de minimis threshold for third-party network transactions in Sec. 1.6050W-1(c)(4) is disregarded because Sec. 6041 payer will be unable to determine whether the de minimis threshold applies. These regulations will apply to payments made after Dec. 31, 2010.
Reg. Sec. 1.6041-1(a)(v), Example 1: Restaurant owner Al, in the course of business, pays $600 of fixed or determinable income to repairman Bill by credit card. Bill is one of a network of unrelated persons that has agreed to accept Al's credit card as payment under an agreement that provides standards and mechanisms for settling the transactions between a merchant acquiring bank and the persons who accept the cards.
Merchant acquiring Bank Y is responsible for making the payment to Bill. Al, as payer, is not required to file an information return under Sec. 6041 with respect to the transaction because Bank Y, as the payment settlement entity for the payment card transaction, is required to file an information return under Sec. 6050W.
Reg. Sec 1.6041A-1(d)(4), Example 2: In the course of business, service recipient Amy pays $600 of fixed or determinable income to repairman Bob through a third-party payment network. Bob is one of a substantial number of persons who have established accounts with Yehay, a third-party settlement organization that provides standards and mechanisms for settling the transactions and guarantees payments to those persons for goods or services purchased through the network.
Yehay is responsible for making the payment to Bob. Amy is not required to file an information return under Sec. 6041A(a) with respect to the transaction because the transaction is a third-party network transaction that is subject to reporting under Sec. 6050W. Solely for purposes of determining whether the transaction is subject to reporting under Sec. 6050W, the de minimis threshold for third party network transactions in Sec. 1.6050W-1(c)(4) is disregarded.
The new Form 1099 filing requirements will impact all businesses and increase the burden and expense of reporting. Businesses will now have to obtain a taxpayer information number for all vendors, track all purchases made to each vendor, distinguish between cash and credit/debit card purchases and issue a Form 1099 to the vendor and the IRS showing the amount of total purchases that are not exempt from reporting.
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Following is a listing of upcoming tax update courses being taught by J. Patrick Garverick. Search and register for any of these offerings at www.calcpa.org/rsvp.
Federal Tax Update--Individuals
* Nov. 29: San Francisco
* Nov.29: Webcast
* Dec.1: Sacramento
Federal Tax Update--C & S Corporations, Partnerships & LLCs
* Nov. 30: San Francisco
* Nov. 30: Webcast
* Dec. 2: Sacramento
J. Patrick Garverick, CPA runs Garverick CPA and is a CalCPA Education Foundation instructor. You can reach him at www.garverickcpe.com.
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|Author:||Garverick, J. Patrick|
|Date:||Nov 1, 2010|
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