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NBA PRESIDENT EXPLAINS NEW 1099 REQUIREMENTS ON FOX NEWS
NBA President, David Bybee, CPA, CPB, was interviewed by Fox News chief Washington correspondent Jim Angle regarding the new health care reform Patient Protection and Affordable Care Act’s provision to expand information reporting requirements in 2012.
Information Reporting for Property or Services and Corporations After 2011
For payments made after Dec. 31, 2011 (Sec. 9006(c), PL 111-148, 3/23/2010) notwithstanding any IRS regulation issued before Mar. 23, 2010, for purposes of Code Sec. 6041(a) (see 60,414), "person" includes any corporation that is not exempt from tax under Code Sec. 501(a) (see 5014). Code Sec. 6041(h) as amended by Sec. 9006(a), PL 111-148, 3/23/2010.
Thus, a business is required to file an information return for all payments aggregating $600 or more in a calendar year to a single payee (other than a payee that is a tax-exempt corporation), notwithstanding any regulation promulgated before Mar. 23, 2010. Joint Comm Staff, Tech Expln of the Revenue Provisions of the Reconciliation Act of 2010, as Amended, in Combination With the Patient Protection and Affordable Care Act (JCX-18-10), 3/21/2010, p. 114, see 60,411.0038.
Observation: The phrase "calendar year" is not supported by the statute. Code Sec. 6041(a) (see 60,414) refers to the "tax year," not to the "calendar year."
Observation: Congress apparently wants to ensure that payments made by persons engaged in a trade or business, to a corporation other than a tax-exempt corporation (see 5014), of $600 or more in the aggregate in one tax year, will be reported to IRS if made in 2012 or thereafter. This will flag the payment for IRS, to help determine if it was properly reported by the corporate payee.
Observation: IRS will have to amend Reg §1.6041-3(p)(1) so that it no longer exempts from information reporting, payments aggregating $600 or more in one calendar year to corporations (other than tax-exempt corporations).
Example 1. R, a calendar-year taxpayer, is engaged in the trade or business of being a florist. In 2011, R pays D Corp., a calendar-year taxpayer, $12,000 to rent a storefront to conduct the florist business. R is not required to file an information reporting return with IRS for the $12,000 payment made to D.
Example 2. The facts are the same as in Illustration (1), except that R pays the $12,000 rent to D in 2013. R will be required to file an information reporting return with IRS for the $12,000 payment, setting forth the amount paid ($12,000) and D's name and address (see 60,414). R will also be required to provide D with a statement showing the $12,000 payment and include R's contact information (see 60,414.06). IRS will thus be on notice that R paid D $12,000 in 2013, and can check D's 2013 return to see if D properly reported the rent payment as income.
Observation: This information-reporting provision will increase the paperwork burden on businesses that routinely make payments each year totaling $600 or more per corporation.
Observation: Presumably, businesses will be able to use Form 1099-MISC to report the payments discussed above.
These rules do not override specific provisions elsewhere in the Code that except certain payments from reporting, such as securities or broker transactions as defined under Code Sec. 6045 (see 60,454) and its regulations. Joint Comm Staff, Tech Expln of the Revenue Provisions of the Reconciliation Act of 2010, as Amended, in Combination With the Patient Protection and Affordable Care Act (JCX-18-10), 3/21/2010, p. 114, see 60,411.0038.
Observation: Presumably, for example, these rules won't override the exemption from information reporting for interest paid to corporations under Code Sec. 6049 (see 60,494).
The above rules are effective for payments made after Dec. 31, 2011. Sec. 9006(c), PL 111-148, 3/23/2010.
IRS Authority to Issue Regulations to Prevent Duplicative Information Reporting of Transactions
IRS can prescribe regulations and other guidance as may be appropriate or necessary to carry out the purposes of the information reporting rules (see 60,414 et seq.), including rules to prevent duplicative reporting of transactions. Code Sec. 6041(i) as amended by Sec. 9006(a), PL 111-148, 3/23/2010.
Observation: Duplicative reporting could occur if a payment triggered information reporting under two different Code provisions.
Example 1. B, a dog groomer, pays E's law firm, E Corp., $100,000 in 2012 to defend a lawsuit a customer brings against B. B will have to report the payment under (1) Code Sec. 6045(f), because it is a payment of attorney's fees (see 60,454.06), and (2) Code Sec. 6041(h) (see above).
Observation: Presumably, IRS will issue guidance that will require B (in the Illustration above) to report the payment just once.
IRS SEEKING COMMENTS ON NEW EXPANDED INFORMATION REPORTING REQUIREMENTS
IRS is seeking comments on what guidance it should provide in connection with the expanded information requirements that were enacted as part of the Patient Protection and Affordable Care Act (Affordable Care Act, P.L. 111-48) Under these requirements, starting in 2012, business will have to report a wider range of payments to contractors, vendors and others, usually on Form 1099. IRS says the comments will help it implement the new rules in a manner that minimizes burden and avoids duplicate reporting.
Background
In general, information returns must be made by every person (payor) engaged in a trade or business who makes payments, as defined in Code Sec. 6041(a), aggregating $600 or more in any tax year to another person (payee) in the course of the payor's trade or business. (Code Sec. 6041) The information returns must be filed with IRS and corresponding statements must be sent to each payee. For payments made after Dec. 31, 2011, the Affordable Care Act amended Code Sec. 6041(a) to add payments of "amounts in consideration for property" and "gross proceeds" to the list of payments subject to reporting.
Current Reg. § 1.6041-3(p) generally excepts payments to corporations, exempt organizations, governmental entities, international organizations, and retirement plans from reporting under Code Sec. 6041. However, for payments made after Dec. 31, 2011, the Affordable Care Act added Code Sec. 6041(h), which provides that, notwithstanding any reg prescribed by IRS before Mar. 23, 2010, for Code Sec. 6041 purposes, the term "person" includes any corporation that is not an organization exempt from tax under Code Sec. 501(a). Thus, payments to corporations that are not tax-exempt may be subject to information reporting, starting in 2012.
The Affordable Care Act also added Code Sec. 6041(i) authorizing IRS to prescribe such regs and other guidance as may be appropriate or necessary to carry out the purposes of Code Sec. 6041, including rules to prevent duplicative reporting of transactions.
Request for Comments
IRS says it intends to issue guidance that will implement these changes to Code Sec. 6041 in a manner that minimizes burden and avoids duplicative reporting. IRS requests comments regarding possible approaches to the Code Sec. 6041 guidance that will assist in achieving those goals. For example, IRS has already issued a proposed reg that would allow a broad exception from Code Sec. 6041 information reporting for payment card transactions that would otherwise be reportable under Code Sec. 6050W, effective for payments beginning in 2011 (see New Form 1099-K Merchant Card and Third-Party Payments Requirement article below). Thus, business purchases made with payment cards will be exempt from information reporting under Code Sec. 6041.
IRS requests comments by Sept. 29, 2010, on additional circumstances in which duplicative reporting might otherwise occur under Code Sec. 6041 and another Code section, and on rules that would prevent such duplicative reporting. Specific comments are also requested regarding the burden associated with implementing the new reporting requirements for different types of taxpayers and businesses.
IRS also would like comments on these issues:
The appropriate scope of the terms "gross proceeds" and "amounts in consideration for property" and how to interpret them in a manner that minimizes the reporting burden and avoids duplicative reporting.
Whether or how the expanded reporting requirements should apply to payments between affiliated corporations.
The appropriate time and manner of reporting to IRS, and what, if any, changes to existing Form 1099 practices are needed to minimize burden in compliance with the new reporting requirements.
What, if any, changes to Form W-9, Request for Taxpayer Identification Number and Certification, and the existing rules for soliciting taxpayer identification numbers (TINs), are needed to minimize the burden for payors to obtain TINs from payees, what are the privacy concerns with respect to TINs, and what are other concerns regarding identifying payees.
How should the backup withholding requirements for missing TINs under the expanded new reporting requirements be administered in order to minimize burden on payors.
NEW FORM 1099-K MERCHANT CARD AND THIRD-PARTY PAYMENTS REQUIREMENT
IRS has issued proposed regs under Code Sec. 6050W, which requires that, starting with transactions in calendar year 2011, the gross amount of payment card and third-party network transactions be reported annually to participating merchants and IRS. The proposed regs would provide rules to implement reporting of credit card, debit card and similar transactions, as well as transactions settled through third-party payment networks, such as third-party organizations that settle online transactions. IRS has also released a draft version of new Form 1099-K, Merchant Card and Third-Party Payments, which would be used to make these reports. The proposed regs would be effective when finalized.
Observation: An IRS news release issued simultaneously with the proposed regs observes that Code Sec. 6050W is designed to improve voluntary tax compliance by business taxpayers and help IRS determine whether their tax returns are correct and complete.
Background
The "Housing Assistance Tax Act of 2008, Div. C. of P.L. 110-289, added Code Sec. 6050W . It generally requires banks to file an information return with IRS reporting the gross amount of credit and debit card payments a merchant receives during the year, along with the merchant's name, address, and TIN. Similar reporting is also required for third party network transactions (e.g., those facilitating online sales).
Specifically, under Code Sec. 6050W, any payment settlement entity making payment to a participating payee in settlement of reportable payment transactions (any payment card transaction and any third party network transaction) must file a return for each calendar year with IRS, and furnish a statement to the participating payee, setting out the gross amount of the reportable payment transactions, as well as the name, address, and taxpayer identification number (TIN) of the participating payees. A payment settlement entity is a merchant acquiring entity in the case of a payment card transaction and a third party settlement organization in the case of a third party network transaction. (Code Sec. 6050W(d))
In the case of a payment card transaction, a participating payee is any person who accepts a payment card as payment. In the case of a third party network transaction, a participating payee is any person who accepts payment from a third party settlement organization in settlement of such transaction. A participating payee doesn't include any person with a foreign address except as provided by IRS in regs or other guidance.
A merchant acquiring entity is the bank or other organization with the contractual obligation to make payment to participating payees in settlement of payment card transactions. A payment card transaction is any transaction in which a payment card is accepted as payment. A payment card is defined as any card that is issued pursuant to an agreement or arrangement that provides for: (a) one or more issuers of the cards; (b) a network of persons unrelated to each other, and to the issuer, who agree to accept such cards as payment; and (c) standards and mechanisms for settling the transactions between the merchant acquiring entities and the persons who agree to accept the cards as payment. (Code Sec. 6050W(b), Code Sec. 6050W(c), Code Sec. 6050W(d))
A third party network transaction is any transaction that is settled through a third party payment network. A third party payment network is defined as any agreement or arrangement that:
... involves the establishment of accounts with a central organization by a substantial number of persons who (i) are unrelated to such organization, (ii) provide goods or services, and (iii) have agreed to settle transactions for the provision of such goods or services pursuant to such agreement or arrangement;
... provides for standards and mechanisms for settling such transactions; and
... guarantees persons providing goods or services pursuant to such agreement or arrangement that such persons will be paid for providing such goods or services. (Code Sec. 6050W(c), Code Sec. 6050W(d))
A third party settlement organization is required to report with respect to third party network transactions of any participating payee only if (1) the aggregate amount with respect to the third party network transactions for the year that would otherwise be reported exceeds $20,000, and (2) the aggregate number of the transactions exceeds 200. (Code Sec. 6050W(e))
Reportable payment transactions subject to information reporting generally are subject to backup withholding requirements (Code Sec. 3406(b)(3)) and failure to file penalties apply for noncompliance. (Code Sec. 6724(d)) Backup withholding for amounts reportable under Code Sec. 6050W applies to amounts paid after Dec. 31, 2011.
General Approach of Proposed Regs
The proposed regs would provide guidance to interpret the definitions used in the statute. They would provide guidance to interpret the meaning of reportable payment transaction in the context of both payment card transactions and third party network transactions, and to determine the gross amount of the transaction to be reported. Gross amount would mean the total dollar amount of aggregate reportable payment transactions for each participating payee without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts. (Prop Reg § 1.6050W-1(a))
The proposed regs would require reporting, with respect to each participating payee, of the gross amount of the aggregate reportable payment transactions for the calendar year and the gross amount of the aggregate reportable payment transactions for each month of the calendar year. (Prop Reg § 1.6050W-1(a)(1))
Under the proposed regs, a payment settlement entity that is a person described as a U.S. payor or U.S. middleman in Reg. § 1.6049-5(c)(5), would not be required to report payments to participating payees with a foreign address as long as, before payment, the payee has provided the payment settlement entity with documentation upon which it may rely to treat the payment as made to a foreign person under Reg. § 1.1441-1(e)(1)(ii) . (Prop Reg § 1.6050W-1(d)(3))
Payment Card Transactions
A payment card would include all credit cards, debit cards, and stored-value cards (including gift cards), and the acceptance as payment of any account number or other indicia associated with a payment card. (Prop Reg § 1.6050W-1(b)(3); Preamble to Prop Reg 11/23/2009)
Cards Tied to FSAs and HRAs
The definition of payment card would encompass a card issued in connection with a flexible spending account (FSA) or health reimbursement arrangement (HRA). Payments made for medical care under FSAs or HRAs would continue to be exempt from reporting under Code Sec. 6041. (Preamble to Prop Reg 11/23/2009)
Stored-value Cards and Gift Cards
Stored-value card would mean any card with a prepaid value, including any gift card. A stored-value card would not be a payment card when the card is accepted as payment by a person who is related to the issuer of the card. In contrast, a stored-value card that a network of persons unrelated to the issuer has agreed to accept as payment would be a payment card when it is accepted as payment in a transaction with an unrelated person. (Prop Reg § 1.6050W-1(b)(4); Preamble to Prop Reg 11/23/2009)
Third-party Network Transactions
The proposed regs would flesh out the rules for third-party network transactions. (Prop Reg § 1.6050W-1(c))
Healthcare Networks
Health carriers operating a healthcare network would be outside the scope of Code Sec. 6050W because a healthcare network does not enable the transfer of funds from buyers to sellers. However, a shared-service organization would be a third party settlement organization of a third party payment network under specified circumstances. (Prop Reg § 1.6050W-1(e), Example 9; Preamble to Prop Reg 11/23/2009)
Accounts Payable Departments and Shared-service Organizations
An in-house accounts payable department would not be a third party settlement organization of a third party payment network because an in-house accounts payable department is not a third party. However, a shared service organization would be a third party settlement organization of a third party payment network under certain circumstances. (Preamble to Prop Reg 11/23/2009)
Automated Clearing House (ACH) Networks
The proposed regs would reflect that an ACH network is not a third party payment network, and an ACH therefore would not be required to report under Code Sec. 6050W. (Prop Reg § 1.6050W-1(e), Example 3)
Electronic Payment Facilitator
The proposed regs would flesh out the special rule for electronic payment facilitators. (Prop Reg § 1.6050W-1(d)(2))
Duplicate Reporting of the Same Transaction
Any payment card transaction that otherwise would be reportable under both Code Sec. 6041 and Code Sec. 6050W would have to be reported under Code Sec. 6050W and not Code Sec. 6041. (Prop Reg § 1.6041-1(a)(1)(iv))
Backup Withholding
The proposed regs would amend the regs under Code Sec. 3406 to provide that persons making information returns with respect to any reportable payment under Code Sec. 6050W made after Dec. 31, 2011 are included in the definition of payors obligated to backup withhold. (Prop Reg § 31.3406(a)-2(a))
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