1099 Update for Accounting Pros. Marianne Couch, J.D. COKALA Tax Information Reporting, LLC November 17, 2016

Transcription

1 1099 Update for Accounting Pros Marianne Couch, J.D. COKALA Tax Information Reporting, LLC November 17, 2016

2 No New Form W-9 We are watching for it. New Form W-8BEN-E IRS has modified the Form W-8BEN-E generally, you are required to begin using the new form, or update your substitute to comport with the new form, 6 months after the IRS finalizes it; however, the IRS has announced that you may continue using the 2014 version of the Form W-8BEN-E through 12/31/16. Begin using the new version 1/1/17 New Limitation on Benefits section for treaty claims You will need to include an LOB code on Forms 1042-S that report amounts exempted from withholding per an income tax treaty New FATCA-entity type More space to include a GIIN Parts XXIX and XXX have switched places so that now, the names of U.S. owners of passive NFFEs have been moved above signature line Copyright COKALA Tax Information Reporting Solutions, LLC 2

3 Form 1042-S Draft of 2017 Form 1042-S released (for filing in 2018), shows many changes in code numbers plus changes in form layout The IRS has released its draft of the 2017 Form 1042-S; see Unique form identifier number: New at the top of the 2017 Form 1042-S is a 10-box space which you must fill with a 10- numeral Unique Form Identifier. It is unique to the form (not to the recipient of income) and cannot be the recipient s U.S. or foreign TIN. It must contain exactly 10 numerals (no alpha characters). Amendment number box: A new Amendment No. box has been added alongside the previously existing checkbox that is checked to indicate that the Form 1042-S is an Amendment. Copyright COKALA Tax Information Reporting Solutions, LLC 3

4 Draft 2017 Form 1042-S Cont. New line 15 with checkbox. The layout has been altered to add line 15 with a box to Check if pro-rata basis reporting. Having a checkbox for this information is not new (for 2016 it s at the top of the form) but the location and line designation are new. New position for status codes in 13f and 13g. Line 13e, Recipient s U.S. TIN, if any, has a shorter measure (a narrower but deeper box). Lines 13f, Ch. 3 status code and 13g, Ch. 4 status code (which refer to the status codes of the recipient) have been moved. These position changes are important because substitute Forms 1042-S and substitute statements for recipients must conform in format to the official IRS form. Codes added, codes eliminated, codes re-defined. We counted a dozen changes in the code numbers for income type, withholding exemption or status. Copyright COKALA Tax Information Reporting Solutions, LLC 4

5 Form 1042 Four New Items Reportable on 2016 Form ) New Line 63c(1) Adjustments for overwithholding. Under the new draft instructions for 2016, the line 63 has been broken into two lines. You are to now use line 63c(1) to report amounts you repaid to the beneficial owner or payee in the year following the calendar year of overwithholding pursuant to either the reimbursement or set-off procedure. An amount reported in line 63c(1) is a reduction rolled into line 59 (a reduction of the withholding agent s tax liability). Copyright COKALA Tax Information Reporting Solutions, LLC 5

6 Form 1042 Four New Items Reportable on 2016 Form New Line 63c(2) Adjustments for underwithholding. This means additional withholding from payments in the next calendar year, attributable to payments made in the year for which the Form 1042 is filed. The additional amounts may be withheld from future payments to the beneficial owner or future contributions by the beneficial owner to an account held in custody or otherwise controlled by the withholding agent. 3. New line 65a Tax paid during calendar year. This means deposits of tax withheld during the calendar year in which the related payment was made. On Form 1042 for 2016, it means federal deposits of amounts you withheld in 2016 from payments made in New line 65b Tax paid during subsequent year. This means deposits of tax applicable to payments made in the calendar year of the Form 1042, but actually withheld in the next calendar year (to the extent permitted under an applicable regulation section in chapter 3 or 4). On Form 1042 for 2016, this may include federal deposits of amounts you withheld in 2017 to make up for underwithholding in 2016 when the payments were made. Previous versions of Form 1042 used a single line 65 labeled Total paid by electronic funds transfer (or with a request for extension of time to file) which did not help the IRS identify that your federal deposit and Form 1042-S compliance for the reported calendar year were proven by deposits made in separate calendar years. Copyright COKALA Tax Information Reporting Solutions, LLC 6

7 Form 1099-MISC Reporting NEC Now Due January 31 st NEC = non-employee compensation (amounts reported in box 7). These forms will be due January 31 to both the payee and the IRS beginning in 2017 (reporting TY 2016 payments). The January 31 IRS due date applies equally to paper forms and electronically filed forms. For 1099-MISC box 7 reporting, electronic filing does not give you any later filing date. Forms W-2 and W-3 are also subject to the new January 31 filing due date. Copyright COKALA Tax Information Reporting Solutions, LLC 7

8 Form 1099-MISC Reporting NEC Now Due January 31 st If you have reportable payees with a box 7 amount and an amount in another box of the Form MISC, you have a choice of filing a single 1099-MISC that reports both boxes by January 31 or filing one 1099-MISC that reports the box 7 amount by January 31, then filing another 1099-MISC for the same payee that reports the other box amount by the standard February 28 (paper) or March 31 (electronic) due date. Copyright COKALA Tax Information Reporting Solutions, LLC 8

9 Form 1096 Transmittal for TY 2016 shows change to cover NEC MISC Filers of paper forms should note that the IRS has made changes to Form 1096 for use with information returns that report 2016 payments (Form 1096 is the transmittal form that must accompany paper Forms 1099 filed with the IRS.) Box 7 of Form 1096 has been changed to provide a checkbox that must be checked if the form accompanies Forms MISC with NEC in box 7. The IRS has eliminated indications of final return. That was the previous use of box 7 on Form 1096 but it has been removed from the form. Copyright COKALA Tax Information Reporting Solutions, LLC 9

10 Probable Elimination of Automatic 30-day Extension Proposed regulations, REG , would eliminate automatic 30-day extensions of the IRS filing due date, but the first filings for which this could apply would be 2017 forms due in The term "automatic" means that the filer does not have to provide a reason as to why it needs an extension, but it must still file Form 8809 to request the extension. Copyright COKALA Tax Information Reporting Solutions, LLC 10

11 Probable Elimination of Automatic 30-day Extension When the automatic 30-day extension is eliminated, the IRS will still accept and consider requests for 30-day extensions but a sufficiently worthy reason must be provided to the IRS and the form will require the signature of an individual authorized to sign for the reporting business. This is the standard that currently applies if a second 30- day extension is requested by a payer that already claimed a first 30-day automatic extension. Copyright COKALA Tax Information Reporting Solutions, LLC 11

12 Extension and Form 1099-MISC Reporting NEC The automatic 30-day extension is still available for Forms 1099 filed in 2017 for payments made in 2016, but note the change in due date if requesting an extension for Forms 1099-MISC reporting non-employee compensation ("NEC"). Form 8809 requesting automatic 30-day extension is due to the IRS no later than January 31, 2017 If you decide to claim the automatic 30-day extension for your MISC NEC forms, and your other 1099s, and your 1042-S forms, you will be able to claim them all on one Form 8809 filed by January 31, 2017, or you can send more than one Form 8809, each one sent no later than the earliest due date of the form(s) you specify on the Copyright COKALA Tax Information Reporting Solutions, LLC 12

13 Changes on the Form 8809 Form has been converted to a fill-in form that lets you type information into the form after you download the PDF from the IRS website. IRS won t start accepting your Forms 8809 for filing extensions until after January 1, The form is on the IRS website at Copyright COKALA Tax Information Reporting Solutions, LLC 13

14 Form 8809 The first 30-day extension of the IRS filing due date, usually referred to as an automatic extension because it is simply claimed by the filer on Form 8809 without having to furnish a written explanation of need, is available for 2016 Forms: 1094-C, 1095-C, 1095-B, 1097, 1098 series, 1099 series,1099-misc NEC, 3921, 3922, W-2G, 5498, ESA, 5498-QA, 5498-SA, 1042-S, and 8027 Copyright COKALA Tax Information Reporting Solutions, LLC 14

15 Form 8809 Form 8809 is also used to request a second 30-day extension for the information returns listed above, but a second extension is not automatic. A second extension may be granted at the discretion of the IRS; it requires a showing of extraordinary circumstances or catastrophe explained in writing attached to a Form 8809 signed under penalties of perjury. Copyright COKALA Tax Information Reporting Solutions, LLC 15

16 Increase in Penalties $260 for failure to file, file timely, or file correctly (up from $250). Maximum penalty ceilings: $3,178,500 ($1,059,500 for small businesses) $1,589,000 for penalties at $100 (corrections done by August 31 st ) ($529,500 for small businesses) $529,500 for penalties at $60 (corrections done within 30 days after the required filing date) ($185,000 for small businesses) Small business = gross receipts of $5,000,000 or less. Copyright COKALA Tax Information Reporting Solutions, LLC 16

17 Corrections For 1099s filed after 12/31/16, no correction will be required if: the dollar amount for a single type of payment reported on the Form 1099 was in error but within $100 of the correct amount; or the dollar amount reported as withheld tax was in error but within $25 of the correct amount. Note: if the payee requests a correction, payer must correct. Copyright COKALA Tax Information Reporting Solutions, LLC 17

18 Pub Taxation of Limited Liability Companies The IRS has released a new edition of Publication 3402, Taxation of Limited Liability Companies. It s a publication that could be helpful to some of the people who furnish confusing and incomplete Forms W-9 to your organization. Pub explains some basic information that is also found in the instructions for Form W-9 (pages 2 through 4 of the IRS W-9), but Pub is more conversational in tone, uses larger type and gives more complete explanations of important concepts. Pub is available at Copyright COKALA Tax Information Reporting Solutions, LLC 18

19 TIN Matching Program Currently, only names and TINs that will appear on Forms 1099 subject to the backup withholding requirements (1099-B, -DIV, -K, -INT, -MISC, - OID, and PATR) are authorized to be run through the TIN Matching Program. Expanded authorization to use the TIN Matching Program has been recommended for years by IRPAC, the Information Reporting Program Advisory Committee to the IRS (but for a wide range of information returns, not only the 1095 series), and also is a legislative recommendation of the Administration for fiscal See IRS Pub. 2108A for information on the TIN Matching Program Copyright COKALA Tax Information Reporting Solutions, LLC 19

20 Disregarded Entities The IRS has issued a clarifying regulation applicable to partnerships that own disregarded entities, and has several times clarified that a disregarded business entity (DE) is a separate taxpayer in its own name only for employment and excise taxes, but this is not the case for purposes of filing information returns. Copyright COKALA Tax Information Reporting Solutions, LLC 20

21 Disregarded Entities Instead, the parent entity or individual owner of the DE does the 1099 or 1042-S reporting under their name and EIN or SSN. For payments being made to the DE, the parent or individual owner of the DE is considered the payee of reportable income on Forms 1099 and 1042-S and, if withholding is involved under IRC chapter 3 or chapter 4 or if backup withholding is required, it is based on the status of the owner of the DE, not the DE. Copyright COKALA Tax Information Reporting Solutions, LLC 21

22 Sole Proprietors/Single-Member LLCs/DEs on the Form W-9 Sole proprietorships and single-member LLCs should complete the Form W-9 the same way as do DEs; filers should report reportable payments to sole proprietors and single-member LLCs under the name and TIN of the owner, even if payments are made to or in the business name of the sole proprietorship or single-member LLC. For sole proprietorships, and single-member LLCs owned by an individual, you may use either the SSN or the EIN of the owner; IRS prefers the SSN, if you have it. Copyright COKALA Tax Information Reporting Solutions, LLC 22

23 Treasury Inspector General for Tax Administration (TIGTA) Report On November 4, 2016, TIGTA released its audit report of the Internal Revenue Service s (IRS) progress with enforcing backup withholding requirements. TIGTA first reported in September that it noted deficiencies with backup withholding and other reporting requirements related to payment cards. TIGTA found that payers did not withhold nearly $9 billion in backup withholding tax when they submitted Tax Year (TY) 2013 information returns with missing or incorrect TINs. Identified 13,647 payers who submitted 27,576 information returns with the same missing payee TIN for two years in a row (TYs 2012 and 2013). These returns reported payments of about $14.3 billion. Payers were required to immediately withhold nearly $4 billion from these payees, but just more than $1 million was withheld. Identified 62,714 payers who submitted 203,751 information returns for which the payee TIN was incorrect in four consecutive years. These returns reported payments totaling nearly $17 billion, and payers were required to withhold nearly $5 billion from these payees, but only $1 million was withheld. Copyright COKALA Tax Information Reporting Solutions, LLC 23

24 Audit/Examination Employment Tax Examinations Include Exam Of Information Return Filing Compliance If a company undergoes an employment tax examination by the IRS, the examiner is required to also determine whether the company filed information returns as required. The internal IRS directive calls the examiners attention specifically to look at Forms 1099-MISC, 1099-K, 1099-INT and W- 2, plus etc. If the appropriate forms were not correctly filed, the examiner must consider expanding the audit to include a penalty case file and/or review Form 945 in connection with establishing whether backup withholding requirements have been met. See pdf. Copyright COKALA Tax Information Reporting Solutions, LLC 24

25 TIN Truncation on Correspondence from IRS You may see the IRS truncate your organization s TIN on correspondence it sends to you. If done, IRS probably presumes you could identify the entity to which the correspondence applies if only the final four digits of the TIN are visible. Example: truncated EIN would appear as **- ***6789 or xx-xxx6789. Copyright COKALA Tax Information Reporting Solutions, LLC 25

26 Reminder that Tax Returns Ask About Form 1099 Filing On Form 1040 Schedule C: check Yes or No on line 11 for "Did you make any payments in 2015 that would require you to file Form(s) 1099? (see instructions" and line 12 to check Yes or No for "If "Yes," did you or will you file required Forms 1099?" On the partnership return Form 1065: Lines 18a and 18b in Schedule B of Form 1065, Yes or No checkboxes for "18a Did you make any payments in 2015 that would require you to file Form(s) 1099? See instructions... 18b If Yes, did you or will you file required Form(s) 1099?" On the corporation return Form 1120: Lines 15a and 15b in "15a Did the corporation make any payments in 2015 that would require it to file Form(s) 1099?... b If Yes, did or will the corporation file required Forms 1099?" Copyright COKALA Tax Information Reporting Solutions, LLC 26

27 President s Federal Fiscal Year 2017 Proposals That Would Affect Information Reporting Expand TIN Matching beyond just forms subject to backup withholding: negligible revenue effect Independent contractors required to certify TIN and may have tax withheld: $424 million additional revenue over the first 10 years Reporting of account balances held by foreign persons: $1 million additional over the first 10 years January 31 IRS filing date for most information returns: $72 million additional revenue over the first 10 years Copyright COKALA Tax Information Reporting Solutions, LLC 27

28 President s Federal Fiscal Year 2017 Proposals That Would Affect Information Reporting Require the use of average cost basis method for stock that is a covered security: $1.2 billion additional revenue over the first 10 years Require non-spouse beneficiaries to take inherited IRA distributions over no more than five years: $6.1 billion additional revenue over the first 10 years Limit Roth conversions to pre-tax dollars: $231 million additional revenue over the first 10 years. Copyright COKALA Tax Information Reporting Solutions, LLC 28

29 IRS Future State The IRS has opened a webpage devoted to future plans and recommendations on how to improve tax processing systems, increase electronic filing and payment options, expand services available on IRS.gov and in general use technology to improve the way taxpayers do business with the IRS. The concepts are being presented and discussed under the name Future State at Copyright COKALA Tax Information Reporting Solutions, LLC 29

30 IRS Future State The IRS acknowledges that new technology can make many things possible but it needs to be done in a way that meets the needs of taxpayers and the tax community in an efficient and effective manner while respecting taxpayer rights. The National Taxpayer Advocate is holding hearings on Future State concepts and plans, and has expressed concerns about recognizing the extent to which taxpayers will continue to need telephone and in-person assistance, and the importance of complying with the Taxpayer Bill of Rights; see to-hold-public-forum-on-february-23-on-taxpayer-service-needs-and- Preferences. Copyright COKALA Tax Information Reporting Solutions, LLC 30

31 National Taxpayer Advocate s Report National Taxpayer Advocate Nina Olson publicly released her Annual Report to Congress. It s available at annual-report-to-congress. The report discusses the 24 most serious problems encountered by taxpayers, many of which have to do with IRS customer service Report will be delivered to Congress at the end of December. The Advocate recommends that Congress amend IRC sections 6055 and 6056 to allow entities required to file information returns under these sections (Forms 1095-B and 1095-C) to verify TINs with the IRS prior to filing the returns. Copyright COKALA Tax Information Reporting Solutions, LLC 31

32 Legislation (S. 3157) The Stolen Identity Refund Fraud Prevention Act (S. 3157) was introduced in Congress in August with bipartisan approval of the Senate Finance Committee. Direct impact on information reporting would result from the following provisions of S. 3157: Electronic filing threshold reduced to 20 returns. The threshold for mandatory e-filing of information returns would go from 250 to 20 over a five-year phase-in period. On-line Form 1099 filing and statement production. The IRS would be required to provide an on-line service to prepare and file Forms 1099, prepare Forms 1099 for distribution to recipients, and create and maintain necessary taxpayer records. If passed, this would begin with Form 1099-MISC for 2018 (due to the IRS and recipients in 2019), and be available for other Forms 1099 for 2020 (due to the IRS and recipients in 2021). Scannable code required on paper returns that were prepared with an electronic program. Any return of tax which is prepared electronically, but is printed and filed on paper, would have to display a code which can, when scanned, convert the return to electronic format. This would begin with information returns for 2017 due to the IRS in 2018 (if passed). Copyright COKALA Tax Information Reporting Solutions, LLC 32

33 S The bill also contains two provisions that would affect IRS use of budgeted funds. Streamlined critical pay authority would be restored to fund important IRS information technology jobs through September 30, The loss of critical pay authority, and the resulting loss of highly valued technology experts, were recently publicized by the Commissioner. In addition, the Commissioner would be given authority to transfer up to $10 million from any IRS account appropriation, to any other IRS account if the transferred amounts are used solely for preventing, detecting, and resolving potential cases of tax fraud. Copyright COKALA Tax Information Reporting Solutions, LLC 33

34 S Identity theft for purposes of filing federal tax returns or any other documents filed to the IRS or Treasury would be a felony under a Code amendment included in S. 3157, punishable by up to five years imprisonment and/or a fine of up to one-quarter million dollars. Another provision requires the IRS to establish a new system for notifying taxpayers of suspected identity theft. Other amendments would provide that the unauthorized use of the identity of an individual includes the unauthorized use of the identity of the individual to obtain employment, and require additional coordination between the Social Security Administration and IRS. The text of S. 3157, covering these and other items, is available at Copyright COKALA Tax Information Reporting Solutions, LLC 34

35 Legislation (S. 3156) The Taxpayer Protection Act of 2016, S. 3156, was also introduced in August after bipartisan approval by the Senate Finance Committee. This bill includes numerous provisions governing IRS administration and operations, plus a provision for mandatory electronic filing by tax-exempt organizations and for the IRS to publicly release tax-exempt organization returns as soon as practicable in a machine readable format that does not permit alteration or manipulation of such return. See S at Copyright COKALA Tax Information Reporting Solutions, LLC 35

36 SENATE DEMOCRATS SPONSOR A BILL TO ADDRESS EMPLOYEE VERSUS INDEPENDENT CONTRACTOR ISSUES S 2252 would permit the IRS to issue prospective guidance clarifying whether individual workers are employees or contractors for purposes of employment taxes, and would prohibit retroactive assessments with respect to employees who are reclassified as employees through this process. Section 530 of the Revenue Act of 1978 would be repealed. Currently under section 530, a service recipient may treat a worker as an independent contractor for federal employment tax purposes, even though the worker actually may be an employee under common law rules, if the service recipient has a reasonable basis for treating the worker as an independent contractor and certain other requirements are met if the worker (or any in a substantially similar position) has not been treated as an employee for any period beginning after 1977 and the service recipient filed all federal tax returns (including 1099s) on a basis consistent with treating the worker as an independent contractor. If a service recipient meets the requirements of section 530 under current rules the IRS is prohibited from reclassifying the workers as employees, even prospectively and even as to newly hired workers in the same class. Copyright COKALA Tax Information Reporting Solutions, LLC 36

37 Resources for Determining Worker Status IRS Pub. 15-A Form SS-8 IRS Page Copyright COKALA Tax Information Reporting Solutions, LLC 37

38 NEW IRS AUDIT TECHNIQUE GUIDE COVERS ENTERTAINMENT INDUSTRY IRS Audit Technique Guides (ATGs) are written to instruct examiners about issues and terminology pertinent to a particular industry and what to look for when conducting income tax audits. A new ATG was issued for the entertainment industry and is well worth reviewing if your organization makes payments to artists, entertainers, technicians, producers and managers or other payees in the businesses of music, film, video and live performance. It provides useful background for how the IRS views payments that are income or affect net income including royalties, advances, expense reimbursement or allowances, fringe benefits, travel. See Employed/Entertainment-Audit-Technique-Guide. Copyright COKALA Tax Information Reporting Solutions, LLC 38

39 Change in Internet Security Technical Standards for FIRE System The IRS FIRE Text System server no longer supports SSL 3.0 (Secure Socket Layer 3.0) as one of the FIRE System s Internet Security Technical Standards, and the IRS intends to soon remove SSL 3.0 from the FIRE Production System (the active filing system for Forms 1099, 1098, and similar information returns and Forms 1042-S). The removal date for the FIRE Production System will be posted on the FIRE website, Copyright COKALA Tax Information Reporting Solutions, LLC 39

40 Change in Internet Security Technical Standards for FIRE System The IRS FIRE Text System server no longer supports SSL 3.0 (Secure Socket Layer 3.0) as one of the FIRE System s Internet Security Technical Standards, and the IRS intends to soon remove SSL 3.0 from the FIRE Production System (the active filing system for Forms 1099, 1098, and similar information returns and Forms 1042-S). The removal date for the FIRE Production System will be posted on the FIRE website, Copyright COKALA Tax Information Reporting Solutions, LLC 40

41 Questions? Questions? Q uestions? Questions? 41