New IRS Compliance Headaches for Businesses

Contained within the recently enacted healthcare legislation are new form 1099-MISC reporting requirements that have the potential of creating significant tracking and paperwork burdens for your company.  The government projects the new reporting rules will generate $17.1 billion of tax revenue through 2019, the theory being that those who do not get forms 1099 underreport their income.  Though the new requirements do not take effect until 2012, planning now for their implementation will save you aggravation later.

Under the current rules, a business must issue a form 1099-MISC to report payments that aggregate to $600 or more during the calendar year to any single payee, excluding corporations.  There are a few exceptions, the most notable of which are that payments to an incorporated law firm and to an incorporated health service provider are subject to these reporting requirements.  Further, with few exceptions, such payments are generally for services.  Purchases of equipment, furniture, supplies, and other tangible personal property were not reported.

The form 1099-MISC asks for the following information with respect to the payee:

  • Name and address
  • Tax identification number (TIN, which is their business federal identification number or, in the case of an individual, their Social Security number)
  • Total amount paid for the calendar year

Many businesses do not obtain the needed reporting information until it is determined that a 1099 must be issued, issue the forms only to those recipients for whom they already have complete information, or even don’t bother to issue the forms at all.

The forms are due in the hands of the recipients by January 31 and with the government by February 28.  Failing to file these forms or filing forms with a missing or incorrect TIN risks penalties up to $50 per form and can therefore add up fairly quickly.

Enter the healthcare law.  Contained within its 2,700 pages are new reporting requirements that are effective with payments occurring in 2012 and later.  This means these rules will apply to forms 1099-MISC that are due January 31, 2013.  The reporting requirements expand to include:

  • All corporations other than tax-exempt organizations
  • Payments for tangible personal property – these are best defined as things you can touch and that can be moved.

Examples requiring a 1099-MISC to be issued:

  • Your business has a $3,500 maintenance contract from Computers-R-Us, Inc. to provide computer technical support.
  • Your employee attends a $600 seminar put on by Raw Knowledge, Inc. and stays at the Fairland Inn (owned by Fairland Holdings, Inc.) for three nights at $300 per night.
  • You buy $5,000 worth of used furniture from Joe Smith, an individual.
  • You purchase a company car from Ben’s Benz, LLC for $90,000.
  • You typically entertain customers at a handful of restaurants, paying each restaurant more than $600 during the year.

As you can conclude, these new requirements will create a dizzying quantity of forms 1099-MISC that must be generated, that never had to be generated before.  While a large company already has staff to handle tax reporting obligations, most small and medium size businesses do not.  The information gathering and reporting has gotten a whole lot bigger, harder, and time consuming.

The penalties for filing forms late, or with incorrect TINs, or not fling at all increase to a $50 penalty for unintentional noncompliance, and a $100 penalty for intentional noncompliance.

To complicate matters further, businesses that could otherwise file these forms on paper may be required to file electronically.  The IRS requires electronic filing of a particular type of return when there are at least 250 of them to file.  Each form 1099-MISC is a separate return.  Given these new reporting requirements, it is not hard for even a small business to exceed this threshold and be forced to file electronically.

Steps to take to comply with the new reporting requirements:

  • Make it a policy to obtain the payee’s TIN before making any payments.  Requesting a TIN can be accomplished by requesting a form W-9 from the payee.  This form, which they complete and sign, will give you their name, address, and TIN.  This is an information form only, it is not sent to the IRS but rather it is retained in your records.  Don’t write a check until that W-9 is in hand!
  • Inevitably emergencies will come up that require disbursements before a W-9 is obtained.  Send a form W-9 with the payment, requesting that it be completed and faxed back as soon as possible.  Designate one individual who is in charge of tracking W-9’s that have not yet been returned.
  • Review your accounting software to assess its capabilities, so you can then determine the extent of work that will be required to ultimately produce the forms 1099:
    • Does the software allow you to “tag” payees as ones who get a form 1099?
    • Can it generate a report listing each payee and the total amount paid?
    • Is it able to generate a report listing all information needed to produce the forms 1099?If you outsource your payroll or have a separate payroll program, can your accounting software generate an electronic file containing the necessary data in a format that your payroll provider/payroll software can import for 1099 generation?
    • Can your accounting software print the forms 1099?

Also be aware of the backup withholding rules.  This has been in existence for quite some time, and requires you to withhold 28% of the amount due to the payee if the payee does not furnish you their TIN or if the IRS notifies you that the payee is subject to the withholding.  Below is basic information concerning backup withholding compliance for missing TINs:

  • Backup withholding begins when the payee does not furnish their TIN when you ask for it.  You should therefore establish a means of tracking such requests.
  • Amounts withheld are remitted monthly to the IRS.
  • An annual report (form 945) is filed by February 1 of the following year.
  • The payee still gets a form 1099-MISC that contains all information, including the amount of taxes withheld, even though the TIN box will be blank.
  • To protect yourself from penalties, two additional requests for the TIN are required – once by December 31 of the year the transaction occurred, and a second time by December 31 of the year after the year in which the transaction occurred.

What appears to be an innocuous request for more 1099’s is actually a compliance headache complete with expensive minefields.  In developing your system of compliance, a competent professional should be consulted.  Though it is possible for this provision to be repealed, operating under this assumption and conducting business as usual may very well turn out to be an extremely expensive mistake.  The time to act is now!

In accordance with Internal Revenue Service rules, any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS.  Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties. 

The information contained in this article is of a general nature and should not be construed as legal or tax advice.  Individuals with specific questions and factual situations should consult their own legal counsel , accountant or other consultant who is competent in this field.

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Contained within the recently enacted healthcare legislation are new form 1099-MISC reporting requirements that have the potential of creating significant tracking and paperwork burdens for your company.  The government projects the new reporting rules will generate $17.1 billion of tax revenue through 2019, the theory being that those who do not get forms 1099 underreport their income.  Though the new requirements do not take effect until 2012, planning now for their implementation will save you aggravation later.

Under the current rules, a business must issue a form 1099-MISC to report payments that aggregate to $600 or more during the calendar year to any single payee, excluding corporations.  There are a few exceptions, the most notable of which are that payments to an incorporated law firm and to an incorporated health service provider are subject to these reporting requirements.  Further, with few exceptions, such payments are generally for services.  Purchases of equipment, furniture, supplies, and other tangible personal property were not reported.

The form 1099-MISC asks for the following information with respect to the payee:

  • Name and address
  • Tax identification number (TIN, which is their business federal identification number or, in the case of an individual, their Social Security number)
  • Total amount paid for the calendar year

Many businesses do not obtain the needed reporting information until it is determined that a 1099 must be issued, issue the forms only to those recipients for whom they already have complete information, or even don’t bother to issue the forms at all.

The forms are due in the hands of the recipients by January 31 and with the government by February 28.  Failing to file these forms or filing forms with a missing or incorrect TIN risks penalties up to $50 per form and can therefore add up fairly quickly.

Enter the healthcare law.  Contained within its 2,700 pages are new reporting requirements that are effective with payments occurring in 2012 and later.  This means these rules will apply to forms 1099-MISC that are due January 31, 2013.  The reporting requirements expand to include:

  • All corporations other than tax-exempt organizations
  • Payments for tangible personal property – these are best defined as things you can touch and that can be moved.

Examples requiring a 1099-MISC to be issued:

  • Your business has a $3,500 maintenance contract from Computers-R-Us, Inc. to provide computer technical support.
  • Your employee attends a $600 seminar put on by Raw Knowledge, Inc. and stays at the Fairland Inn (owned by Fairland Holdings, Inc.) for three nights at $300 per night.
  • You buy $5,000 worth of used furniture from Joe Smith, an individual.
  • You purchase a company car from Ben’s Benz, LLC for $90,000.
  • You typically entertain customers at a handful of restaurants, paying each restaurant more than $600 during the year.

As you can conclude, these new requirements will create a dizzying quantity of forms 1099-MISC that must be generated, that never had to be generated before.  While a large company already has staff to handle tax reporting obligations, most small and medium size businesses do not.  The information gathering and reporting has gotten a whole lot bigger, harder, and time consuming.

The penalties for filing forms late, or with incorrect TINs, or not fling at all increase to a $50 penalty for unintentional noncompliance, and a $100 penalty for intentional noncompliance.

To complicate matters further, businesses that could otherwise file these forms on paper may be required to file electronically.  The IRS requires electronic filing of a particular type of return when there are at least 250 of them to file.  Each form 1099-MISC is a separate return.  Given these new reporting requirements, it is not hard for even a small business to exceed this threshold and be forced to file electronically.

Steps to take to comply with the new reporting requirements:

  • Make it a policy to obtain the payee’s TIN before making any payments.  Requesting a TIN can be accomplished by requesting a form W-9 from the payee.  This form, which they complete and sign, will give you their name, address, and TIN.  This is an information form only, it is not sent to the IRS but rather it is retained in your records.  Don’t write a check until that W-9 is in hand!
  • Inevitably emergencies will come up that require disbursements before a W-9 is obtained.  Send a form W-9 with the payment, requesting that it be completed and faxed back as soon as possible.  Designate one individual who is in charge of tracking W-9’s that have not yet been returned.
  • Review your accounting software to assess its capabilities, so you can then determine the extent of work that will be required to ultimately produce the forms 1099:
    • Does the software allow you to “tag” payees as ones who get a form 1099?
    • Can it generate a report listing each payee and the total amount paid?
    • Is it able to generate a report listing all information needed to produce the forms 1099?If you outsource your payroll or have a separate payroll program, can your accounting software generate an electronic file containing the necessary data in a format that your payroll provider/payroll software can import for 1099 generation?
    • Can your accounting software print the forms 1099?

Also be aware of the backup withholding rules.  This has been in existence for quite some time, and requires you to withhold 28% of the amount due to the payee if the payee does not furnish you their TIN or if the IRS notifies you that the payee is subject to the withholding.  Below is basic information concerning backup withholding compliance for missing TINs:

  • Backup withholding begins when the payee does not furnish their TIN when you ask for it.  You should therefore establish a means of tracking such requests.
  • Amounts withheld are remitted monthly to the IRS.
  • An annual report (form 945) is filed by February 1 of the following year.
  • The payee still gets a form 1099-MISC that contains all information, including the amount of taxes withheld, even though the TIN box will be blank.
  • To protect yourself from penalties, two additional requests for the TIN are required – once by December 31 of the year the transaction occurred, and a second time by December 31 of the year after the year in which the transaction occurred.

What appears to be an innocuous request for more 1099’s is actually a compliance headache complete with expensive minefields.  In developing your system of compliance, a competent professional should be consulted.  Though it is possible for this provision to be repealed, operating under this assumption and conducting business as usual may very well turn out to be an extremely expensive mistake.  The time to act is now!

In accordance with Internal Revenue Service rules, any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS.  Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties. 

The information contained in this article is of a general nature and should not be construed as legal or tax advice.  Individuals with specific questions and factual situations should consult their own legal counsel , accountant or other consultant who is competent in this field.

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