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
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
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
• $200,000 (instead of
$500,000) if the failures are
corrected on or before Aug.
• $500,000 (instead of
$1.5 million) if the failures
aren’t corrected on or before
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
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
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
www.garverickcpe.com. 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