Form 1099 by linxiaoqin


									Form 1099
Re-Do Changes Bring New Filing Requirements, Increased Penalties
                                         By J. Patrick Garverick, CPA

                       Get ready for coming changes to Form 1099 filings,            Below is a summary and timeline of the new
                 including increased penalties for late filings and new        rules applicable to Form 1099 information returns and
                 filing requirements.                                          penalties.
                       Internal Revenue Code Sec. 6041 requires Form
                 1099 information returns to be filed by every person
                                                                               Increased Penalty
                 engaged in a trade or business who makes payments [as
                                                                                     Under Sec. 6721, any person required to file an
                 defined in IRC Sec. 6041(a)] aggregating $600 or more in
                                                                               information return who fails to do so on or before the
                 any taxable year to a single payee in the course of that
                                                                               filing date is subject to a penalty that varies based on
                 payor’s trade or business.
                                                                               when, if at all, the correct information return is filed. For
                       The regulations generally exempt payments to
                                                                               Form 1099 information returns required to be filed after
                 corporations, exempt organizations, governmental
                                                                               Dec. 31, 2010, Sec. 6721 is amended to increase the failure
                 entities, international organizations or retirement plans.
                                                                               to timely file information penalties as follows:
                       The penalty for failing to file an information
                                                                                     First-Tier Penalty: If a person files a correct
                 return generally is $50 for each return for which such
                                                                               information return after the prescribed filing date, but
                 failure occurs. The total penalty on a person for all
                                                                               on or before the date that is 30 days after the prescribed
                 failures during a calendar year cannot exceed $250,000.
                                                                               filing date, the penalty will be $30 (up from $15) per
                 Additionally, special rules apply to reduce the per-failure
                                                                               return, with a maximum penalty of $250,000 (up from
                 and maximum penalty where the failure is corrected
                                                                               $75,000) per calendar year.
                 within a specified period.
                                                                                     Second-Tier Penalty: If a person files a correct
                       However, the Patient Protection and Affordable
                                                                               information return after the date that is 30 days after
                 Care Act of 2010, signed into law in March, carries a
                                                                               the prescribed filing date, but on or before Aug. 1, the
                 revenue raising provision that modified Form 1099
                                                                               penalty will be $60 (up from $30) per return, with a
                 reporting requirements under Sec. 6041. Starting
                                                                               maximum penalty of $500,000 (up from $150,000) per
                 in 2012, the new law will require businesses to file
                                                                               calendar year.
                 an information return for all payments of goods or
                                                                                     Third-Tier Penalty: If a correct information return
                 services aggregating $600 or more in a calendar year to
                                                                               is not filed on or before Aug. 1 of any year, the penalty is
                 a single payee (other than a payee that is a tax-exempt
                                                                               $100 (up from $50) per return, with a maximum penalty
                 corporation). Congressional reports estimate that the
                                                                               of $1.5 million (up from $250,000) per calendar year.
                 new requirements will raise $17.1 billion over 10 years.
                                                                                     Intentional Disregard Penalty: If a failure is due
                       Further, the Small Business Jobs Act of 2010, signed
                                                                               to intentional disregard of a filing requirement, the
                 into law in September, will require all persons who
                                                                               minimum penalty for each failure is $250 (up from $100),
                 receive rental income (with a few exceptions) to issue
                                                                               with no calendar year limit.
                 Form 1099s for payments of $600 or more for rental
                                                                                     Special lower maximum levels for this penalty
                 property expenses starting in 2011. The penalties for
                                                                               apply to small businesses, defined as firms having
                 failure to file information returns on time and failure to
                                                                               average annual gross receipts for the most recent
                 furnish a payee a statement also will be increased.
                                                                               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

4   Tennessee CPA Journal   |   JANUARY/FEBRUARY 2011
year thereafter.                                               Form 1099 unless he meets the exception for duplicate
                                                               reporting below.
    Treatment of Rental Property Expenses
After 2010 [Sec. 6041(h)]                                      Relief for Duplicated Reporting After 2010
      For payments made after Dec. 31, 2010, recipients of            The Housing Assistance Tax Act of 2008 added Sec.
rental income from real estate generally are subject to the    6050W to the IRC, requiring any payment settlement
same information reporting requirements as taxpayers           entity making payments (after Dec. 31, 2010) to a
engaged in a trade or business.                                participating payee in settlement of reportable payment
      In particular, rental income recipients making           transactions to report annually to the IRS and to the
payments of $600 or more to a service provider (such as a      participating payee the gross amount of such reportable
plumber, painter or accountant) in the course of earning       payment transactions, as well as the name, address and
rental income are required to provide an information           taxpayer identification numbers of the participating
return (typically Form 1099-MISC) to the IRS and to the        payees.
service provider. Exceptions to this reporting requirement            A “reportable payment transaction” means any
are payments made for:                                         payment card transaction (e.g., a credit card or debit card)
   • Any individual, including any individual who is an        and any third-party network transaction (e.g., PayPal
active member of the uniformed services or an employee         and eBay). A third-party settlement organization is not
of the intelligence community [as defined in Sec. 121(d)(9)    required to report unless the aggregate value of third
(C)(iv)], if substantially all rental income is derived from   party network transactions for the year exceeds $20,000
renting the principal residence (within the meaning of         and the aggregate number of such transactions exceeds
Sec. 121) of such individual on a temporary basis;             200.
   • Any individual who receives rental income of not                 New Sec. 6041(j) allows the IRS to issue regulations
more than the minimal amount, as determined under              and other guidance as may be necessary to carry out
regulations prescribed by the Secretary; and                   the purposes of the Form 1099 information reporting
   • Any other individual for whom the requirements            under Sec. 6041 and to issue rules to prevent duplicative
would cause hardship, as determined under regulations          reporting transactions. The IRS issued final regulations
prescribed by the Secretary.                                   Aug. 13 addressing business purchases made with
      For example, Jane owns a rental house. In between        credit or debit cards that would be exempt from the new
tenants she hires Joe to paint the interior of the rental      reporting requirements [under Sec. 6041(a)] because
house for $2,500. Jane is considered to be in a trade or       banks and other payment processors already report them
business and will have to issue Joe a Form 1099.               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)
Payments of $600 or More After 2011
                                                               and Sec. 1.6041A-1(d)(4) state that transactions that would
       As mentioned above, Sec. 6041 requires Form 1099
                                                               otherwise be required to be reported on information
information returns to be filed by every person engaged
                                                               returns under Sec. 6050W and either Sec. 6041 or Sec.
in a trade or business who makes payments aggregating
                                                               6041A, are reported only under Sec. 6050W.
$600 or more in any taxable year to a single payee in the
                                                                      Solely for purposes of determining whether a payer
course of that payor’s trade or business.
                                                               is eligible for relief from reporting under Sec. 6041, the de
       For payments made after Dec. 31, 2011, amended
                                                               minimis threshold for third-party network transactions
Sec. 6041(a) will add “amounts in consideration for
                                                               in Sec. 1.6050W–1(c)(4) is disregarded because Sec.
property” and “gross proceeds” to the list of payments
                                                               6041 payer will be unable to determine whether the de
subject to reporting. Thus, the payments to be reported
                                                               minimis threshold applies. These regulations will apply
on a Form 1099 will now include gross proceeds paid in
                                                               to payments made after Dec. 31, 2010.
consideration for property or services.
                                                                      Reg. Sec. 1.6041-1(a)(v), Example 1: Restaurant
       In addition, “person” will include any corporation
                                                               owner Al, in the course of business, pays $600 of fixed or
that is not an organization exempt from tax under Sec.
                                                               determinable income to repairman Bill by credit card. Bill
501(a). Thus, payments to corporations that are not tax-
                                                               is one of a network of unrelated persons that has agreed
exempt may be subject to information reporting.
                                                               to accept Al’s credit card as payment under an agreement
       Example: S Corp buys $1,000 of office supplies from
                                                               that provides standards and mechanisms for settling the
Office Company Inc. during 2012. Under Sec. 6041(a), S
                                                               transactions between a merchant acquiring bank and the
Corp is required to issue Office Company a Form
                                                               persons who accept the cards.
1099 unless they meet the exception for duplicate
                                                                      Merchant acquiring Bank Y is responsible for
reporting below.
                                                               making the payment to Bill. Al, as payer, is not required
       Example: Dan, a sole proprietor, travels away from
                                                               to file an information return under Sec. 6041 with respect
home on a business trip for a week. While on the road he
                                                               to the transaction because Bank Y, as the payment
pays $800 for his stay at Hotel Inc. of America. Under Sec.
                                                               settlement entity for the payment card transaction, is
6041(a), Dan is required to issue Hotel Inc. of America a

                                                                                        JANUARY/FEBRUARY 2011      |   Tennessee CPA Journal   5
    continued from page 5

    required to file an information return under Sec. 6050W.           Could the Form 1099
          Reg. Sec. 1.6041A-1(d)(4), Example 2: In the course
    of business, service recipient Amy pays $600 of fixed or        Requirements be Repealed?
    determinable income to repairman Bob through a third-
                                                                       Senate Finance Committee Chairman Max Baucus,
    party payment network. Bob is one of a substantial
                                                                 D-Mont., continues to urge the Senate to pass legislation
    number of persons who have established accounts
    with Yehay, a third-party settlement organization that       to eliminate the expanded 1099 reporting requirements for
    provides standards and mechanisms for settling the           businesses in the health care reform bill.
    transactions and guarantees payments to those persons              Eliminating the bookkeeping and filing requirements
    for goods or services purchased through the network.         would free up resources for small businesses to grow
          Yehay is responsible for making the payment to         and create jobs, he argued. Baucus asked for unanimous
    Bob. Amy is not required to file an information return       consent in the Senate to eliminate the additional reporting
    under Sec. 6041A(a) with respect to the transaction          requirements for small businesses during the debate over
    because the transaction is a third-party network             extending the Bush-era tax cut rates and unemployment
    transaction that is subject to reporting under Sec.          benefits, but members objected to passing the measures in
    6050W. Solely for purposes of determining whether the        the midst of that process.
    transaction is subject to reporting under Sec. 6050W,              “Small-business owners want us to repeal Form
    the de minimis threshold for third party network             1099 reporting requirements so they have additional
    transactions in Sec.1.6050W-1(c)(4) is disregarded.          resources to grow their businesses and hire new workers,”
          The new Form 1099 filing requirements will             said Baucus. “Today we should have – and could have
    impact all businesses and increase the burden and            – delivered the paperwork relief small businesses need.
    expense of reporting. Businesses will now have to            Eliminating these paperwork requirements is a simple,
    obtain a taxpayer information number for all vendors,        common-sense idea that senators on both sides of the aisle
    track all purchases made to each vendor, distinguish         support, and it is deeply disappointing to see partisanship
    between cash and credit/debit card purchases and             stand in the way of progress for small-business owners.”
    issue a Form 1099 to the vendor and the IRS showing                Baucus has been pushing to repeal the new
    the amount of total purchases that are not exempt from       requirements for small businesses to report payments
    reporting. n                                                 made for goods and services using 1099-MISC forms. A
                                                                 total of 95 senators have supported repealing the 1099
    About the Author:                                            reporting requirements in the past. Small-business
           J. Patrick Garverick, CPA, runs Garverick CPE and     owners have expressed concern that the resources
    is a frequent TSCPA seminar speaker. You can reach him at    required in January 2012 to complete the forms may be                                        more than they can accommodate.
                                                                       In November, Baucus introduced legislation to repeal
         Reprinted with permission from the California Society   the requirements, but the bill failed to pass.
    of CPAs.                                                           Repealing the requirements this year would
                                                                 give small-business owners the certainty of knowing
                                                                 they do not have to prepare to implement these new
                                                                 recordkeeping and recording provisions in 2012, Baucus
                                                                       The AICPA has called on Congress to repeal the new
                                                                 Form 1099 requirements as well, because “businesses do
                                                                 not need the added cost of more regulatory requirements
                                                                 at a time when their efforts must be focused on
                                                                 profitability and sustainability.”
                                                                       The first 1099 forms would be due in 2013, so
                                                                 businesses would need to begin keeping records in
                                                                 2012. Under the Small Business Jobs Act of 2010, similar
                                                                 reporting requirements would apply to owners of rental
                                                                 property for expenses related to the rental property and
                                                                 would take effect in 2011 for reporting in 2012.
                                                                       The business implementation costs associated with
                                                                 the likely generation and receipt of millions of forms and
                                                                 the potentially challenging reconciliation processes for
                                                                 taxpayers should be weighed against the uncertainty of
                                                                 the benefit to be derived by the government, the AICPA

6   Tennessee CPA Journal   |   JANUARY/FEBRUARY 2011

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