Here you will find the slides from the August 28, 2018 Ernst &Young LLP webcast where we reviewed the evolving nature of state information reporting and withholding requirements (e.g., Forms 1099).
3. Page 3 State information reporting and withholding
Stephanie Faiad
Ernst & Young LLP
Employment Tax
State Information Reporting
and Withholding Services
Stephanie.Faiad@ey.com
Ray Grove
Ernst & Young LLP
Indirect Tax
State Information Reporting
and Withholding Services
Raymond.Grove@ey.com
State information and
reporting:
The increasingly complex and fluid state
reporting environment
Stephanie Swann
Ernst & Young LLP
State Information Reporting
and Withholding Services
Stephanie.Swann@ey.com
Moderator
Speakers
Meet our speakers
4. Page 4 State information reporting and withholding
Why information reporting?
Withholding and reporting life cycle
State information reporting and withholding
considerations
Penalties and controversy
Gap analysis and leading practices
Contact us
Agenda
5. Page 5 State information reporting and withholding
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Why information reporting?
6. Page 6 State information reporting and withholding
► Help individuals to accurately
report their income on federal,
state and local income tax returns
► Record income tax withholding for
the year if applicable
► Provide proof of income, for
instance, for credit applications
► Verify non-wage income reported
on tax returns (e.g., interest,
dividends, royalties, cancellation
of debit)
► Verify income tax deductions
claimed (e.g., mortgage interest,
student loan interest, certain
bond income, alimony)
► Confirm income tax withholding
reported
► Enforce penalties in cases of
non-filing, underpayment or
underreporting
► Close the tax gap
Individuals
Information statements
Government
Information returns
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Why information reporting?
7. Page 7 State information reporting and withholding
17%
Non-filing and
underpayment
83%
Source of the tax gap
Closing the tax gap can
help governments raise
revenue without
increasing taxes
What is the tax gap? *
► The tax gap is measured as the difference
between total taxes owed and total taxes paid
► Can represent up to 20% of the total tax
liability
► The gross federal tax gap for tax years 2008
to 2010 was estimated at $458 billion
Information reporting narrows the gap
► Where there is no information reporting
requirement, approximately 63% of income
goes unreported
► Where information reporting is required, about
7% of income from easily identified sources
goes unreported (e.g., interest, dividends and
pensions)
► If both information reporting and withholding is
required, the rate of unreported income drops
to approximately 1%
* Source: Internal Revenue Service, Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2008-2010, April 2016
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Closing the tax gap
8. Page 8 State information reporting and withholding
Payees/Taxpayers
► Due to recipient on January 31
► Electronic statements may be
provided if certain requirements are
met
► Generally no extension of time
available
► January 31 filing due date applies to
Form 1099-MISC if nonemployee
compensation reported in box 7
► Due date for other returns depends
on type of information return, most
due March 31 if filing electronically
► Electronic filing is required if 250 or
more of each type of information
statement
► Publication 1220 provides the
required formatting
► Files must be submitted using
IRS FIRE system
IRS
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Form 1099 federal reporting
requirements
9. Page 9 State information reporting and withholding
Requesting filing extensions
Final regulations (T.D. 9838)
► A request for extension of the time to file federal
information returns with the IRS is obtained by
filing Form 8809
► Generally, two 30-day extensions can be
requested
► The first 30-day extension is automatic
► The second 30-day extension is approved by the
IRS for extraordinary circumstances (e.g., fire or
other disaster)
► The automatic 30-day extension is not available for
Form W-2 (except for Form W-2G) and Forms
1099-MISC where nonemployee compensation is
reported in Box 7
► In time for the 2019 filing season, the IRS intends to
add checkboxes to Form 8809 to identify additional
circumstances under which a non-automatic extension
will be granted
► Abatement of penalty may be available to filers who
fail to file timely but do not receive a filing extension
time to file
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10. Page 10 State information reporting and withholding
Polling question #1
How confident are you in your compliance practices
around 1099 reporting?
A. Very
B. Somewhat
C. Unsure
D. I know I have gaps
E. Does not apply (EY, faculty, other)
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11. Page 11 State information reporting and withholding
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State information reporting and
withholding considerations
12. Page 12 State information reporting and withholding
Filing due date
Reporting formats
Payee copy due date
Reporting methods/forms
Penalties
State variations
Payment threshold that
triggers reporting
Employer filing threshold
Withholding requirements
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State Form 1099 reporting
variations
13. Page 13 State information reporting and withholding
Created by IRS to simplify reporting across federal
and state jurisdictions. IRS will forward original
information return data to states for correctly
formatted records
Must apply for the program and submit test files
Limitations of CFS:
Not all states participate. If you have reporting
requirements in states that do not participate,
you must always report directly
Some states that do participate in CFS still
require direct reporting in certain circumstances
Not all forms are part of the CFS program. If a
state requires a non-CFS form, you will need to
report directly for those forms
Some states have specific CFS
requirements
Perform analysis to determine if CFS is meeting all
state information reporting obligations
Forms
included
Form 1099-B
Form 1099-DIV
Form 1099-G
Form 1099-INT
Form 1099-K
Form 1099-MISC
Form 1099-OID
Form 1099-PATR
Form 1099-R
Form 5498
Participating states
Tax year 2017
Alabama Massachusetts
Arizona Michigan
Arkansas Minnesota
California Mississippi
Colorado Missouri
Connecticut Montana
Delaware Nebraska
Georgia New Jersey
Hawaii New Mexico
Idaho North Carolina
Indiana North Dakota
Kansas Ohio
Maine Oklahoma
Maryland South Carolina
Wisconsin
Note that the IRS CFS option does not satisfy all of the
reporting and withholding requirements.
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Combined federal state (CFS)
filing option
14. Page 14 State information reporting and withholding
No direct
reporting
requirement
Direct reporting
requirements
met with CFS
Some or all of
direct reporting
requirements are
not met with CFS
FL
ME
VT
NH
NY
PA
WV
NC
SC
GA
IL
OH
IN
MIWI
KY
TN
ALMS
AR
LATX
OK
MOKS
IA
MN
ND
SD
NE
NMAZ
CO
UT
WY
MT
WA
OR
ID
NV
CA
VA
CT
RI
DE
MD
NJ
MA
WA
DC
AK
HI
State information reporting
Direct reporting requirements overview
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15. Page 15 State information reporting and withholding
All of these must be considered in determining if and when withholding is required in
connection with the information reporting requirements
Are specific
withholding
forms required?
What rate of
withholding is
required?
Is voluntary
withholding
permitted?
Is backup
withholding
required?
What payments
are subject to
withholding?
If requested, is
voluntary
withholding
mandatory?
When is
withholding
remitted?
What
reconciliation
returns/reports
are required?
Are
reconciliation
returns
submitted with
information
returns?
What penalties
apply for failure
to withhold, or to
withhold
correctly?
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State information withholding
considerations
16. Page 16 State information reporting and withholding
Polling question #2
Does your organization perform direct state withholding
and reporting today for Form 1099 payments?
A. Yes, we fully comply and have the appropriate tax
technical knowledge and operational capacity to do
this work
B. No, we are not compliant and believe we may have
obligations; however, lack the tools and knowledge
C. Unsure
D. No, I wasn’t aware of these obligations
E. Does not apply (EY, faculty, other)
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17. Page 17 State information reporting and withholding
Alabama
Alabama Act 2017-294 installs a requirement for payment settlement
entities (PSEs) to file Form 1099-K for all payees with an Alabama
address.
Starting in tax year 2018, organizations are required to file Forms 1099
and W-2G with the Iowa Department of Revenue. Previously, filing of
these forms was not required.
Iowa
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Starting in tax year 2017, filing of Form 1042-S is required.
North Carolina
State information reporting
developments
18. Page 18 State information reporting and withholding
State information reporting
developments, cont’d
Act 43 of 2017 created new withholding obligations for certain
payers of Pennsylvania-sourced income and lessees of
Pennsylvania real estates to non-residents. Starting January 1,
2018, anyone making the following payments must withhold at
the statutory rate of 3.07%:
Payments of PA-source non-employee compensation or business
income to a non-resident individual or disregarded entity that has a
non-resident member and is reported on a Form 1099-MISC
A lessee of PA real estate who makes a lease payment in the course
of trade or business to a non-resident lessor
Pennsylvania
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Vermont
Vermont Act 73 of 2017 requires third party settlement
organizations (TPSOs) to report payments that equal or
exceed $600 per person. This change dramatically lowers the
filing threshold, which previously followed the federal threshold
of $20,000 and 200 or more transactions per person.
19. Page 19 State information reporting and withholding
State nexus considerations
► Many organizations are surprised by what actions may
constitute nexus in various states
► Some factual questions to consider:
► Do we have a location in the state?
► Do we own any property in the state?
► Do we sell products or services for use in the state?
► Do we provide services or have contracts with a government
entity?
► Do we have any independent contractors or other agents
operating within the state?
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20. Page 20 State information reporting and withholding
South Dakota v. Wayfair, Inc.
Nexus impact
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21. Page 21 State information reporting and withholding
Polling question #3
How do you perform your 1099 reporting today?
A. We outsource it to a firm
B. We perform it in-house with home-grown tools
C. We license a technology and have a team that
performs the work
D. Unsure
E. Does not apply (EY, faculty, other)
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22. Page 22 State information reporting and withholding
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Withholding and reporting
life cycle
23. Page 23 State information reporting and withholding
Information reporting/withholding
Life cycle
Taxpayer identification
number (TIN) solicitation
(documentation)
Obtain Form W-9 for US non-wage
income or Form W-4P for pension and
annuity payments and respond to IRS
CP2100 and 972CG notices
Reconciliation
Balance withholding to
governmental tax payments;
balance accounts payable
records to total reported on
information returns/statements
Penalty response
Penalties apply for failure to
furnish accurate and timely
information statements to
taxpayers and/or information
returns to the governmental
agencies
Reporting
For federal purposes, reporting includes the
annual Form 945 for reporting income tax
withholding, providing information statements
to taxpayers (e.g., Form 1099-MISC) and filing
information returns (e.g., Form 1099-MISC,
copy A) with the IRS
Witholding and
remitting (regular or
backup tax)
Regular withholding applies to a
lmited range of payments (e.g.,
gambling income), otherwise, a flat
24% backup tax rate applies (28%
prior to 2018) under certain
conditions
Onboarding Tax collection and remittance Governmental transactions
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24. Page 24 State information reporting and withholding
B Notice management
Process flow
B Notice
management
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25. Page 25 State information reporting and withholding
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Penalties and controversy
26. Page 26 State information reporting and withholding
§6721 Failure to timely file an accurate information return with IRS (for returns filed in 2018)
Filed/corrected Maximum
On or after On or before Penalty Maximum small business
1/1 3/31 $0 N/A N/A
4/1 4/30 $50 $545,500 $191,000
5/1 8/1 $100 $1,637,500 $545,500
8/2 $270 $3,275,500 $1,091,500
Intentional
disregard $540 No limit No limit
§6722 Failure to timely furnish an accurate employee statement (for returns filed in 2018)
Furnished/corrected Maximum
On or after On or before Penalty Maximum small business
1/1 1/31 $0 N/A N/A
2/1 3/2 $50 $545,500 $191,000
3/3 8/1 $100 $1,637,500 $545,500
8/2 $270 $3,275,500 $1,091,500
Intentional
disregard $540 No limit No limit
*See Rev. Proc. 2018-18 IRB 2018-10
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Federal information reporting penalties
Penalties double for errors on both payee copy and return filed with IRS
27. Page 27 State information reporting and withholding
► States typically will apply a similar standard to the federal “reasonable
cause” for abatement purposes
► Examples: Variation in definition and application of reasonable cause
► Minnesota: A reasonable cause results from circumstances beyond your
control
► California: Failure to file occurred despite exercise of ordinary business
care and prudence
► Connecticut: Determined on an individual basis based on all facts and
circumstances
► Examples: Difference in per form penalty amounts by state
► Minnesota: $50 per form
► California: Same as federal
► Connecticut: $5 per form
State controversy
Penalty abatement and reasonable cause
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28. Page 28 State information reporting and withholding
Information reporting penalties
Failure to report and failure to respond
► Process
► Notice 972CG proposes an IRC §6721(a) penalty for the
information returns that were filed late, filed on incorrect media, or
filed with missing or incorrect TIN, or a combination
► CP15 or CP215 – 45 days to respond to Notice 972CG. If no
response, full assessment and balance due notice will be issued
► Penalty abatement
► Notice 972CG will include a list of the information returns filed with
missing or incorrect name/TIN combinations. Penalty can be
abated if “reasonable cause” is shown
► If “reasonable cause” is not established, a balance due notice
(CP15 or CP215) including appeal rights will be sent
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29. Page 29 State information reporting and withholding
+ =
Significant mitigating
factors or events
beyond the filer’s
control
Acted in a responsible
manner
Reasonable
cause
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Federal and state penalty abatement is generally based on this rule. State rules
may vary somewhat.
Penalty abatement and
reasonable cause
30. Page 30 State information reporting and withholding
Polling question #4
Would you like someone to reach out to you to talk more
about your information reporting and withholding needs
and potential areas of improvement?
A. Yes
B. No
C. Does not apply (EY, faculty, other)
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31. Page 31 State information reporting and withholding
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Gap analysis and leading practices
32. Page 32 State information reporting and withholding
Requirements review and gap
analysis
Now that I
know, what do
I do?
Don‘t
forget the
basics
Focus on
obligations,
people, process
and technology
Be prepared to
pursue a multitude
of issues
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33. Page 33 State information reporting and withholding
Withholding Reporting
What tools
and people
are available
to do the
work?
Are you able
to track
where
services are
performed?
How do you
track tax
payment
schedules?
What tools
and people
are available
to do the
work?
Do you
know your
obligations
and how to
track them?
Do you
have the
resources
to close
any gaps?
Process
improvement
Risk assessment
Ongoing compliance
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Technology and operations
considerations
34. Page 34 State information reporting and withholding
Leading practice approach to
information reporting and withholding
Taxpayer
identification
number
solicitation and
matching
B Notice management and solicitations
Recipient
communication
support
IRS/state
controversy;
penalty
abatements
Form 1099
reporting
Gap analysis
recommendations and
remediation
People
2
4
3
56
7
Technical requirements
review and gap analysis 1
Process
Technology
Information
reporting and
withholding
Federal
Combined federal and state
Direct state, local, and
municipal
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35. Page 35 State information reporting and withholding
Polling question #5
Will you require an RCH certificate for today’s webcast?
Those with Certified Payroll Professionals (CPP) and Fundamental Payroll
Certification (FPC) professional designations check “yes” to this question. All
others check “no.”
A. Yes
B. No
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36. Page 36 State information reporting and withholding
One-minute recap
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37. Page 37 Multistate payroll tax compliance
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38. Ernst & Young LLP
Putting inform
into Information
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EY get on board
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