New Reporting Demands Meeting Challenges with Broader 1099 MISC Reporting, New 1099 K and Other Changes

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1 Presenting a live 110 minute webinar with interactive Q&A Form 1099: Preparing for Significant New Reporting Demands Meeting Challenges with Broader 1099 MISC Reporting, New 1099 K and Other Changes THURSDAY, DECEMBER 16, pm Eastern 12pm Central 11am Mountain 10am Pacific Td Today s faculty features: Michael Phillips, Partner, Calfee Halter & Griswold LLP, Cleveland Cindy Grossman, Giordani Swanger Ripp Phillips, Austin, Texas Scott Taylor, Tax Senior Manager, Eide Bailly, Minneapolis The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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4 Form 1099: Preparing for Significant ifi New Reporting Demands Webinar Dec. 16, 2010 Michael Phillips, Calfee Halter & Griswold LLP Cindy Grossman, Giordani Swanger Ripp Phillips Scott Taylor, Eide Bailly

5 Today s Program 2010 Health Care Reform Law And Form 1099 [Michael Phillips and Cindy Grossman] Slide 6 Slide 30 New Form 1099-K [Scott Taylor] Slide 31 Slide 35 New Form 1099 Penalties Slide 36 Slide 40 [Cindy Grossman] Revamping Form 1099 Compliance Efforts [Scott Taylor] Slide 41 Slide 43

6 Michael Phillips, Calfee Halter & Griswold LLP Cindy Grossman, Giordani Swanger Ripp Phillips 2010 HEALTH CARE REFORM LAW AND FORM 1099

7 Form 1099 Reporting Changes: Introduction > PPACA has given us a myriad of new requirements. > One of most far-reaching was under the radar until passage. Calfee, Halter & Griswold LLP

8 Introduction (Cont.) > In less than a half-page and very few words, the 1099 reporting requirements were dramatically expanded. > Services by corporations are now included. d > Include goods and merchandise Calfee, Halter & Griswold LLP

9 Introduction (Cont.) > The result certainly will be a massive administrative undertaking for almost every business. > Expanded to include persons receiving rental income Calfee, Halter & Griswold LLP

10 Introduction (Cont.) > Why? > Revenue-raiser ; compliance > Prospects Calfee, Halter & Griswold LLP

11 Changes To 1099 Reporting Rules > Previously, Sect information reporting > Form MISC > Apply to all persons engaged in a trade or business > Non-employee compensation for services Calfee, Halter & Griswold LLP

12 Changes To 1099 Reporting Rules (Cont.) > Where amounts total $600 or more for tax year > Reporting also required for interest, rents, royalties and certain other gains or income > Focus here is on MISC Calfee, Halter & Griswold LLP

13 Changes To 1099 Reporting Rules (Cont.) > Payees are individuals > Payments to corporations excluded except for certain specified payments > Report certain medical and health care payments and certain payments to attorneys Calfee, Halter & Griswold LLP

14 Changes To 1099 Reporting Rules (Cont.) > Two seemingly simple modifications to Sect > 6041 amended to add new subsection... (h) > Person includes any corporation > Except corporations exempt under 501(a) > This includes 501(c) organizations Calfee, Halter & Griswold LLP

15 Changes To 1099 Reporting Rules (Cont.) > Regulations previously made it clear that payments for merchandise were not subject to requirement. > PPACA amendment added the phrase amounts in consideration for property to the type of payments that are reportable on a Calfee, Halter & Griswold LLP

16 Practical Impact: Compliance > Burden of compliance will be substantial. > Estimates forecast that 1099 filings may increase twenty-fold, covering even small businesses. Calfee, Halter & Griswold LLP

17 Practical Impact: Compliance (Cont.) > Two modifications for businesses > Expand their information-gathering procedures to include payments to corporations for any services > Modify their systems to track the annual amount of purchases from each individual vendor, recording payee names, amounts and taxpayer information numbers. Calfee, Halter & Griswold LLP

18 Practical Impact: Compliance (Cont.) > Over-reporting is likely, given complexity and penalties. > Are you dealing with a corporation? > Is it 501(a) tax exempt? Calfee, Halter & Griswold LLP

19 Practical Impact: Compliance (Cont.) > Note concerns with various practical situations on merchandise purchases from vendors. Calfee, Halter & Griswold LLP

20 Practical Impact: Compliance (Cont.) > Possible exception for businesses using credit and debit cards to acquire goods or services from a corporation > IRS is considering guidance; comments have been invited. Calfee, Halter & Griswold LLP

21 Effective Date > These new rules are effective for payments made after Dec. 31, Calfee, Halter & Griswold LLP

22 Back-Up Withholding Concerns > Reporting rules make the payor responsible for identifying payor and payee. > Amounts paid > Must include name, address and TIN of payee Calfee, Halter & Griswold LLP

23 Back-Up Withholding Concerns (Cont.) > Exempt payees > Reportable payments > Include payments made in course of trade or business on Form MISC Calfee, Halter & Griswold LLP

24 Back-Up Withholding Concerns (Cont.) > If payee does not provide TIN, payor generally is required to withhold 28% from all subsequent payments. > If TIN does not match, it can lead to potential ti liability for the 28% backup withholding. Calfee, Halter & Griswold LLP

25 1099 Reporting: Administrative Rules Regulations generally called for IRS can prescribe regulations and other guidance as may be appropriate or necessary to carry out the purposes of the information reporting rules, including rules to prevent duplicative reporting of transactions Example: Treasury Reg (p)(1) payments to corporations 25

26 1099 Reporting: Political Landscape Generally 1099 changes wildly unpopular, but efforts to repeal have failed Congress Multiple proposals from both sides, Senate and House Repeal is difficult due to $19.3B price tag Disagreement on how to fund repeal Max Baucus, original author of 1099 provision, is one of the loudest advocates for repeal. Latest proposal from Baucus submitted on Dec. 2; not much time left in current session to pass reform/repeal Recent developments 26

27 1099 Reporting: Political Landscape (Cont.) Obama Administration Obama himself has suggested revision, but not outright repeal Treasury Secretary Geithner and DHHS Secretary Sebelius sent joint letter to Harry Reid Requesting reform, emphasizing i burden on small business Careful not to use the word repeal, lest it be applied to other provisions of the PPACA 27

28 1099 Reporting: Political Landscape (Cont.) IRS Commissioner Shulman suggested that the IRS will not require filing for businesses that purchase goods/services with credit cards. Under Treasury Reg (a)(1)(ii), if reporting is required under IRC 6050W, no reporting of the payment is required under IRC Thus, payments made by credit card after Dec. 31, 2010 generally will not be required to be reported by the payer. 28

29 1099 Reporting: Political Landscape (Cont.) National Taxpayer Advocate Concerned the new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate as compared with any resulting improvement in tax compliance. Also mentioned the paperwork influx to IRS Mismatch: Vendors are required to report all income received, but payers are only required to report payments aggregating $600 or more. Other organizations U.S. Chamber of Commerce sign-on letter New requirements would impose substantial paperwork and reporting burdens on the backs of governments, nonprofits, and businesses - especially small businesses. National Federation of Independent Businesses National Small Business Association - Nov. 18 testimony before Congress Advocates full repeal Does not believe IRS can handle influx of information or that information collected will be used effectively to close the tax gap U.S. Small Business Association - Nov. 18 testimony before Congress Advocates modification through legislative fix AICPA- Nov. 16 letter to Congress Advocates full repeal Padgett Business Services Nov. 18 hearing Advocates modification 29

30 1099 Reporting: Practical Impact Burden on small business Increase filings by dozens, if not hundreds Additional personnel to handle the recordkeeping needed Additional costs required to obtain and compile the required information Information collection efforts EIN, correct name, address W9 issuance may become standard Best practice is to obtain before first payment to new vendor made Payment aggregation tracking 30

31 Scott Taylor, Eide Bailly NEW FORM 1099 K

32 1099-K Reporting Housing Assistance Tax Act (2008) Created new Form 1099-K Starts t in 2011 First issue in early 2012 Payments from credit/debit cards, gift cards or electronic payments Main purpose is to catch income that is not being reported, hoping to close tax gap Focus is on online sales 32

33 1099-K Reporting (Cont.) Requires merchant accounts and third-party payment services that process credit/debit cards to report payments Minimum requirements At least 200 transactions And $20, or more Report the total gross dollar value of payments, along with a gross dollar value for each month 33

34 1099-K Reporting (Cont.) What does my business need to do? Initial thought: Nothing. Wait to receive Form 1099-K Need to provide your merchant processor with your EIN Non-compliance requires merchant processor to deduct backup withholding (28%) May want to take steps in being able to reconcile the amount reported on Form 1099-K to your business records 34

35 1099-K Reporting (Cont.) Example: Assume your business (online retailer) has $3 million in sales, all paid by credit cards. You would receive Form 1099-K reporting $3 million. What about returns, chargebacks, shipping costs or payment processing fees? 35

36 Cindy Grossman, Giordani Swanger Ripp Phillips NEW FORM 1099 PENALTIES

37 1099 Reporting: Penalties 2010 Patient Protection and Affordable Care Act changes penalty amounts and ceilings for 1099 reporting obligations and payee statements. Per-incident violations doubled; ceilings increased multi-fold. Penalties for intentional disregard of reporting obligations increase from $100 per offense to $250 per offense. 37

38 1099 Reporting: Penalties For Failure To File Information Return With IRS: IRC 6721 Returns Due Before 2011 Base penalty Lesser of $50/return or $250,000 ($100,000 for small businesses) Corrected within 30 days Lesser of $15/return or $75,000 ($25,000 for small businesses) Corrected by August 1 Lesser of $30/return or $150,000 ($50,000 for small businesses) Due to intentional disregard $100/return without limit Returns Due After Dec. 31, 2010 Base penalty Lesser of $100/return or $1,500,000 ($500,000 for small businesses) Corrected within 30 days Lesser of $30/return or $250,000 ($75,000 for small businesses) Corrected by August 1 Lesser of $60/return or $500,000 ($200,000 for small businesses) Due to intentional disregard $250/return without limit 38

39 1099 Reporting: Penalties For Failure To Provide Information Return To Payee: IRC 6722 Returns Due Before 2011 Base penalty Lesser of $50/return or $100,000 Corrected within 30 days Corrected by August 1 Due to intentional disregard Same as base penalty Same as base penalty $100/return Returns Due After Dec. 31, 2010 Base penalty Lesser of $100/return or $1,500,000 ($500,000 for small businesses) Corrected within 30 days Lesser of $30/return or $250,000 ($75,000 for small businesses) Corrected by August 1 Lesser of $60/return or $500,000 ($200,000 for small businesses) Due to intentional disregard $250/return 39

40 1099 Reporting: Penalties (Cont.) Inflation indexing Penalty amounts indexed for inflation, with first adjustment occurring in 2013 and adjusting each year thereafter $5M gross receipts threshold for small business is not indexed for inflation Effective for information returns required to be filed after Dec. 31,

41 Scott Taylor, Eide Bailly REVAMPING FORM 1099 COMPLIANCE EFFORTS

42 Overall 1099 Compliance Issues Small Business Act (Sept. 27, 2010) Rental property expense Expense payments after Dec. 31, 2010 Over $600 for service providers Plumber, painter, repair person, accountant t 42

43 Overall 1099 Compliance Issues (Cont.) What can be done now? Review current procedures to see if you are in compliance If not, set up procedures that will assist in the collection of information Gather taxpayer identification numbers (TINs), addresses, payment amounts Communicate with third parties assisting with the completion of 1099 s W