Multiple attempts to repeal 1099 information return requirements, which were included in the 2010 Patient Protection and Affordable Care Act (Health Care Act) and the Small Business Jobs Act (Jobs Act), have failed but more attempts are still circulating. On Feb. 2, the Senate approved repeal of the reporting requirements that were part of last year’s Health Care Act as an amendment to a transportation bill. Until the repeal of the 1099 requirements is official, businesses have to be prepared to take action to comply with the new provisions made within the Health Care Act and Jobs Act. Also, it is important to recognize that repeal of new reporting requirements from the Health Care Act may not include repeal of provisions from the Jobs Act. I want to share information with you to prepare you for action if the repeal efforts are unsuccessful.
Under the new laws, businesses will report aggregated payments of $600 or more to all vendors, including corporations – but not tax exempt organizations – for goods, as well as services. Purchases affected could range from inventory, hotel and travel expenses to electricity bills. Presumably, they could even include multiple business meals at the same restaurant, office supplies, equipment and payments to foreign vendors. The new provisions will require businesses to track all payments made directly or through their employees or owners.
For the first time, taxpayers receiving income from renting real estate should be aware of their new information-reporting responsibilities for 2011. For this purpose only, rental income recipients are subject to the same requirements as a trade or business, even if they are not otherwise treated as engaged in the trade or business of renting real estate.
Under a proposed regulation, many business purchases made with credit or debit cards would be exempt from the new reporting requirements, because they are already reported by banks and other payment processors.
Action plans should identify all reportable transactions, characterize the type of payment, and develop a process to aggregate payments by reportable entity.
Implementing this change may require collaboration among businesses, software vendors or other consultants and CPAs. Businesses routinely collect name, address and taxpayer identification numbers (TIN) of payees for performance of services. However, businesses probably don’t routinely obtain a TIN and W-9 from every party with whom they make a purchase, including those payments reimbursed to an employee.
Action plans should identify the appropriate modifications to payment voucher or expense recording software, and to systems for sorting and reporting payment transactions. Also, if you expect the new requirements to increase required information returns to be 250 or greater, electronic filing will be mandatory.
Penalties for failure to file information returns correctly, and by the prescribed filing date, double and maximum penalties allowed increase three to five times previous limits. For each information return required to be filed on or after Jan. 1, 2011, the first-tier penalty increases from $15 to $30; the second-tier penalty from $30 to $60; and the third-tier penalty from $50 to $100. For small business filers (those with average annual gross receipts under $5 million), the calendar-year maximum increases from $25,000 to $75,000 for the first-tier penalty; from $50,000 to $200,000 for the second-tier penalty; and from $100,000 to $500,000 for the third-tier penalty. Higher amounts apply to taxpayers that do not qualify as small businesses. The minimum penalty for each failure due to intentional disregard increases from $100 to $250. The increased penalties apply to information returns required to be filed on or after Jan. 1, 2011.
Action plans should identify a compliance project timeline for implementing new reporting requirements to avoid compliance penalties.
Businesses will not only provide information returns to their vendors, but will be receiving these returns for their own reportable gross income. Currently, the IRS presumes all information returns to be correct and it is the responsibility of the taxpayer to report those payments received as income. Businesses with fiscal year ends will have the added challenge of reconciling 1099 returns received based on calendar year transactions to fiscal year gross income.
Action plans should include a process to reconcile 1099 reported transactions to the income reported on the appropriate tax return.
We will continue to update you as this issue develops through email and articles on our website.