1099 Presentation

IRS Form 1099 Reporting:
What you need to know
May 1, 2012
Presenter: Gregory P. Rhodes

Birmingham Huntsville Mobile Pensacola
1

1099 REPORTING:
Overview

 Form 1099 reporting requirements provide
two important functions:

• Form 1099 alerts the IRS that a payment
has been made to a payee.
• Form 1099 reminds a payee that he
received a payment.

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1099 REPORTING RULES
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PAYMENTS SUBJECT TO BACKUP WITHOLDING:

General
 If a payment is subject to backup
withholding, the payor of the payment must
generally withhold 28% of the payment to a
payee unless the payor can obtain and certify
certain information from the payee.

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PAYMENTS SUBJECT TO BACKUP WITHOLDING:

Reportable Payments
 Interest (§ 6049)
 Dividends (§ 6042(a))
 Patronage Dividends (§ 6044 only to the extent
such payment is in money)
 Royalties (§ 6050N)
 Fishing boats proceeds (§ 6050A)
 Payments for services (§ 6041A(a))
 Certain Miscellaneous Payments (§ 6041A)
 Settlement of payment card transactions (§ 6040W)

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1099 REPORTING ISSUES
Common Reportable Payment Situations
 Interest Payments (1099-INT)
 Bank deposit
 Bonds
 Indebtedness offered to the public.
 $600 or more paid in course of a trade or
business, including delayed death benefits,
interest or damages, interest on state or federal
tax refund, etc.
 U.S. Bonds and Treasury Obligations
 Tax Exempt Interest (Municipal Bonds)

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 Exemptions (1099-INT)
 Payments on obligations issued by individuals.
 Tax deferred interest not distributed.
 Mortgage or student loan interest paid to
lender.
 Payments to non-resident aliens.

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 Exempt Payees (1099-INT)
 U.S. or foreign country
 States and municipalities
 Corporation
 REIT
 Financial institutions
 Tax Exempt Organization
 Registered Dealer in securities

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Common Reportable Payment Issues
 OID Payments (1099-OID)
 Excess of a debt instrument’s stated
redemption price at maturity over its issue
price.
 Exempt Payees
 Corporation
 Tax Exempt Organization
 U.S. or foreign, state or municipality
 Registered Dealer in securities.

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Common Reportable Payments
 Sales of Securities (1099-B)
 Sales by a broker of stocks, bonds, etc.
 Receipt of stock or property that a broker
knows has undergone a change of control.
 Exempt Payees
 Tax exempt organization
 U.S. or foreign state or municipality
 Corporation

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 Dividends (1099-DIV)
 Distribution by Corporation to shareholder
 Distribution by RICs
 Exempt Payments
 Certain redemption distribution
 Payment to nonresident alien

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 Exempt Payees (1099-DIV)
 Nonprofit Corporation
 U.S. or foreign country or subdivision
 Corporation
 REIT

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 Royalties (1099-MISC)
 Royalties from books, plays, patents, natural
resources, etc. (if paid $10 or more)
 Exempt Payments
 Surface Royalties (Rent)
 Exempt Payees
 Corporation
 Nonprofit Organization
 U.S. or foreign county or subdivision

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 Rents, commissions, non-employee compensation,
etc. (if pay $600 or more) paid in the course of a
trade or business. (1099-MISC)
 Salaries, wages, commissions, other
compensation
 Interest (not reportable on 1099-INT)
 Rents
 Pensions
 Proceeds paid to an attorney.

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 Exempt Payments (1099-MISC)
 Generally payments aggregating less than $600
 W-2 wages
 Exempt Payees (1099-MISC)
 Nonprofit Organization
 U.S. or foreign country or a subdivision
 A Corporation
 Except: Attorney corporations

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AVOIDING BACKUP WITHOLDING:
Certificates – Form W-9
 A payor may reasonably rely upon a Form W-9 and
will not be liable for taxes or penalties imposed
under the backup withholding requirements unless
one of the following occurs:
• The form does not contain the name and TIN of
the payee;
• The form has not been signed or dated by the
payee;
• The form does not contain the statement, when
required, that the payee is not subject to
withholding due to notified payee
underreporting; or
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AVOIDING BACKUP WITHOLDING:
Certificates – Form W-9 (cont.)
• The payee has deleted the jurate or other similar
provisions by which the payee certifies or affirms
the correctness of the statements contained on
the form.
 A payor is required to retain Form W-9 for at least
three years (in paper or electronic format). Regs.
§31.3406(g)-3(g)

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AVOIDING BACKUP WITHHOLDING
Form W-9
 W-9 submitted to Payee

• Prior to payment

• If payee refuses to submit, begin backup
withholding immediately

• Assure TIN has correct form
(SSN: 123-45-6789; EIN: 12-3456789)

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ON-LINE MATCHING PROGRAM:

 Purpose:

• Allows Payors to check TIN/Payee Name
combination prior to filing a 1099.

• Reduces number of backup withholding
notices.

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Applicable Forms

 Real Estate Broker Transaction (1099-B)
 Dividends and Distribution (1099-DIV)
 Interest Income (1099-INT)
 Merchant Card Payments (1099-K)
 Miscellaneous Income (1099-MISC)
 Original Issue Discount (1099-OID)
 Taxable Corporate Distributions (1099-PATR)

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Mechanics
 Located on eService Registration home page.

 No fee

 Available 24 hours a day.

 Interactive and Bulk Matching provided:
• Interactive: 25 names
• Bulk: 100,000 names

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Why Participate?

 Eliminates notices from IRS.

 Establishes Reasonable Cause under §6724
for Failure to File Correct Information
Return.

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Completing Form 1099:
Required Information
 Form 1099 name field contains the name of the
primary account owner.
 Similarly, the primary account owner’s taxpayer
identification number (TIN) must be used for
reporting.

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Special Payee Situations
 Sole Proprietorship
• Individual’s name should be shown on all
records as the primary owner.
• Business name can be shown on the second
line, for example, “Tom Thomas” (first line),
“d/b/a Thomas Construction” (second line).
• The individuals social security number (SSN)
should be used for reporting purposes.

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 Partnership
• Forms 1099 are required to be issued to a
U.S. partnership since it is not deemed to be
an exempt recipient.
• The EIN for the partnership should be used
for reporting purposes.

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 Limited Liability Companies (LLCs)
• The LLC’s name and EIN would be used.
• In the absence of supporting documentation,
the payor would presume that the LLC is a
partnership for reporting and withholding
purposes. See IRS Pub. 3402, Tax Issues for
Limited Liability Companies

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 Single Member Limited Liability Companies
(SMLLCs) (Disregarded)
• Individual’s name and SSN should be used for
reporting purposes.
• Unless they “check the box.”

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 Limited Liability Companies wanting to be treated
as a corporation for tax purposes:
• Must file Form 8832, Entity Classification Election.
Regs. §301.7701-3(c)(1)(i).
• An LLC making this election should attach
documentation, such as a copy of Form 8832, to
Form W-9 to ensure that the payor may treat
them as exempt from reporting and backup
withholding.

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Formalities of Reporting and Due Dates
 Generally, Forms 1099 (and related forms) must be
submitted to the recipient (payee) by January 31 of
the year following the payment year.
 Forms 1099 must be submitted to the IRS by
February 28 of the year following the payment.
 The February 28 deadline is extended to March 31
in most instances in which the payor files the Form
1099 electronically with the IRS.

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Combined Federal/State Filing Program
 Program was established to simplify state
information return filing and to assist payors or
filers in avoiding the cumbersome duplication of
submitting the same information to the state as
well as to the IRS.
 Once the IRS approves a filer’s participation in the
program, the IRS will accept electronic media
containing state reporting information and pass the
information to the appropriate states participating
in the program.

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What to do after Forms 1099 have been
submitted to the IRS/Payee.

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MECHANICS OF COMPLIANCE:
IRS Responses
 If no response, no action required

 CP2100 or CP2100-A
• Sent by IRS if there is an incorrect
Name/TIN match.
• Large Filer (250 error documents) receive a
CD file CP2100.
• Mid-Size Filer (50-250 error documents)
receives a paper CP2100.
• Small Filer (less than 50 error documents)
receives a paper CP2100-A.

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Response to CP2100A Notices
 Missing TIN: Begin backup withholding
immediately, and continue until a TIN is
received.
• Begin solicitation process (initial, first
annual, second annual)
 Incorrect TIN: Compare account with
records.
• If records agree, send a “B” Notice to
Payee.
• If records don’t agree, update records. (No
need to call IRS.)

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B Notices
 A “B” Notice is a notice sent to the Payee
when a CP2100 or CP2100A Notice is
received.
• First B Notice - sent after first CP2100
notice.
• Second B Notice – sent after second
CP2100 notice received within a three
calendar year period.

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FLOWCHARTING for INCORRECT NAME/TINs
Does the This is the
INCORRECT Name/TIN and the YES NO second
Is this the first
NAME/TIN account number notification
on the notice notification?
within a 3
match your
NO year
records?
period.

YES
Is the
mismatch due YES No action Send the
to IRS required. first Send the
processing? B-Notice second
with Form B-Notice
W-9 to the to the
NO payee. payee.
Mismatch
Is the due to
mismatch due record
to an error NO update.
in your Did the Did the
No action payee return
submission? payee return
required. a Social Security
a certified W-9
within 30 business Number Printout
YES days? Or A 147C within
30 business
Correct your days?
records if
YES NO
necessary. Update YES
your
records Begin NO
backup
with the Begin
withholding
certified Update backup
Stop backup within/by 30
Name/TIN your withholding
withholding if business
records within/by 30
already days. business
begun. days.

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FLOWCHARTING for MISSING TINs
Missing TIN
Are you Continue
Is the missing to backup
TIN due to an backup YES
NO withholding on withhold
error in your
submission? the account? until a
TIN is
received.
NO
YES

Correct your Begin
records if backup
necessary withholding

Remit backup
Annual solicitation withholding on
request for TIN, remit Did you Form 945.
Have you
backup Form 945. No Yes receive a No Continue to back
requested a
Continue to backup response? up withhold until a
TIN?
withhold until a TIN is TIN is received.
received.
Yes

Update your Make annual
records and solicitations for TIN
STOP backup as required to
withholding. avoid penalty.

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Making Payments to the IRS

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Backup Withholding

 Periodic deposits required:
• Monthly if $50,000 or previously withheld.
• Semi-weekly if $50,000 or more in prior year
withheld.
• Electronic Federal Tax Payment System now
required.

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Backup Withholding – Year End

 Use Federal Form 945.
• Due date January 31
• February 10th if fully paid.

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The consequences of mistakes!

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Penalties – In General
 Under §§6721 (Failure to File Correct Information
Returns by the Due Date), 6722 (Failure to Furnish
Correct Payee Statements), and 6723, the IRS has
the ability to impose penalties for information
reporting failures specific to returns filed with the
IRS, recipient statements, and other requests for
information.
 IRS has significant discretion with regard to severity
of a penalty.
 Penalties imposed for intentional disregard are
significantly greater.

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Penalties § 6721

 Failure to file correct return with IRS.
• $30 per return if done within 30 days of due
date ($250K maximum)
• $60/return if more than 30 days late but by
August 1st ($500K maximum)
• $100/return if past August 1st
($1.5M maximum)

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Penalties § 6722

 Failure to file payee statements.
• $100 per return (maximum $1.5M)
 Reduced as follows:
• $30 if corrected within 30 days.
• $60 if corrected after 30days but before
August 1st.

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Worker Classification/Audit Issues
W-2 vs 1099

 Options if potential classification issues exist.
 Stay the course - § 530 and the Classification
Settlement Program.
 Voluntary Classification Program.

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 Section 530 Relief: If satisfy then IRS must
immediately discontinue its worker
classification examination.
 Company can continue to classify
workers as independent contractors in
future (even if they are not).
 No assessment of any back employment
taxes, penalties or interest.

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 Satisfying Section 530 Criteria
 In timely filed information returns
consistently treating worker as an
independent contractor (Annual 1099
Forms)
 Other similarly situated company
employees treated as independent
contractors.
 “Reasonable basis” for treating
employee as an independent contractor.

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 Establishing “Reasonable basis” under §530:
 Reliance on court decisions, IRS Rulings
(regardless of industry or business),
TAMs, PLRs or Determination Letter (to
the company);
 Past audit with no assessment for
employment tax or workers holding
similar positions;

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 Establishing “Reasonable basis” under §530:
• A longstanding practice of a significant
segment of the industry in which worker
engaged; or
• Some other reasonable basis (reliance
on tax professional).

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 Classification Settlement Program (CSP)
 IRS instructed to determine if CSP offer
applies in instances where § 530 relief
determined inapplicable.
 Determine which graduated settlement
offer is appropriate.

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 Classification Settlement Program
 “One-Year – 100-percent offer”:
 Applies if reporting consistency but
NO substantive consistency or
reasonable basis.
 Result: 100-percent employment tax
liability for one year under audit and
reclassify workers.

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 Classification Settlement Program
 “One-Year – 25-percent offer”:
 Applies if reporting consistency and
“colorable argument” for substantive
consistency or reasonable basis.
Result: 25-percent employment tax
liability for one year under audit and
reclassify workers.

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 Section 530 / CSP Decision Chart

Were Forms Is Taxpayer
Are the Workers 1099 Timely Entitled to Code Type of CSP
Employees? Filed? Sec. 530 Relief? Offer
Yes No No None
Yes Yes No 1 year tax + CSP
Yes Yes Maybe 25% tax + CSP

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Voluntary Classification Settlement Program
Allows reclassification outside Examination Process

Requirements:
 Reporting consistency
 Substantive consistency
 Not under audit or audit

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 Result:
 10% of employment tax liability for most recent
year (one year – 10 percent offer)
 Treat workers as employees in future.
 Extend assessment period by three years for next
three years.
 Make full payment at time of closing.

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 Pros:
 Reduce potential legal fees
 One year – 10 percent offer
 Certainty
 Cons:
 Immediate reclassification
 Question regarding §3509 special rates apply
 Extended assessment period of all employees
 State authorities get information.

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