Form 1099 Update for Controllers. Marianne Couch, J.D. COKALA Tax Information Reporting, LLC September 15, 2014

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1 Form 1099 Update for Controllers Marianne Couch, J.D. COKALA Tax Information Reporting, LLC September 15, 2014

2 Agenda Form W-9 TINs and Treaties ACA Treasury Green Book Proposals New Forms W-8 Form 1099-K EIN Requests National Taxpayer Advocate Recommendations Information Reporting Proposals in S

3 Form W-9 Revised August, 2013, so not so new anymore. Includes space for payee to include 1099 exemption code. We believe completing this section is optional and exemption can still be honored even if no code is provided. Codes 1 (tax-exempts); 2 (federal govt); 3 (state government); and 5 (corporations) likely to be most popular. Includes space for FATCA exemption code. Alpha codes. These codes apply to persons submitting this form for accounts maintained outside of the United States by certain foreign financial institutions. Therefore, if you are only submitting this form for an account you hold in the United States, you may leave this field blank. Consult with the person requesting this form if you are uncertain if the financial institution is subject to these requirements. Additional statement included in certification section: The FATCA code(s) entered on this form (if any) indicating that I am exempt from FATCA reporting is correct. 3

4 Need Documentation from U.S. Corps. Beginning 1/1/15, to avoid 30% FATCA withholding on certain payments to U.S. corporations, those corporations must provide documentation of U.S. status. Articles of Incorporation or other allowed documentation, including a Form W-9. Obtaining Form W-9 is probably easiest approach. No longer exempt corps. from Form W-9 solicitation using the eyeball test. 4

5 TINs and Treaties A foreign TIN can now be used on Form W-BEN or W-8BEN-E claiming treaty benefits. U.S. source income paid to non-u.s. persons is subject to 30% withholding and is reportable on Form 1042-S. Income tax treaty benefits may reduce or eliminate the tax withholding obligation. The treaty must exist and apply to the person making the claim and the transaction for which the benefit is claimed. Tax treaty claims are made on the applicable Form W-8 (BEN or BEN-E) or Form

6 TINs and Treaties Form 8233 Still Requires a U.S. TIN Form W-8ECI Also Requires U.S. TIN Form 8233 is used by non-resident aliens (individuals) to claim treaty benefits on U.S. source services income. Foreign TINs cannot be used on the 8233 to claim a treaty benefit; a U.S. TIN is still required. U.S. TIN also required on Form W-8ECI. ECI is exempt from withholding but subject to U.S. income tax at graduated rates, the same as for U.S. entities. Requires filing of U.S. income tax returns, so U.S. TIN required. Not a treaty issue. 6

7 ACA New Forms 1095 Under the ACA, Applicable Large Employers (ALEs) are going to be subject to assessment of shared responsibility payments if the employer does not offer healthcare minimum essential coverage to its full-time employees and their dependents, or if the employer offers minimum essential coverage and at least one full-time employee instead gets a premium tax credit for obtaining coverage on an insurance Exchange. The new information reporting will provide data needed to determine whether an ALE owes a shared responsibility payment. ALEs are generally employers with 50 or more full-time equivalent employees. Regulations under IRC section 6056 cover reporting by ALEs on new Form C. 7

8 ACA New Forms 1095 Regulations under IRC section 6055 cover reporting by health insurers, selfinsured plan sponsors, administrators of government-sponsored health insurance, and other entities that provide minimum essential coverage. A new information return, Form 1095-B, is being developed for section 6055 reporting. Providers will report information about minimum essential coverage they provide. Reporting for 2014 is optional, but reporting for 2015 (forms filed to the IRS in 2016) is required. If an ALE is also a self-insuring plan sponsor, the employer won t have to file both of the new forms. The new Form 1095-C will accommodate combined reporting to the IRS, so these self-insured ALEs will fill out two parts of the 1095-C instead of filing both a C and a 1095-B. 8

9 ACA New Forms 1095 Due dates and filing requirements will be the same as for most other Forms

10 New Procedure for Second Appearance on IRS B Notice list Payees who have appeared on an IRS B Notice list twice in three calendar years must receive IRS Second B Notice Letter from the payer and must provide specific documentation to the payer to document the correct name/tin combination. If a payee has provided an EIN, the payee must write to the IRS where the tax return is filed and request a Letter 147C, a copy of which it is to provide to the payer once received. If a payee has provided an SSN, the payee must obtain a copy is his or her social security card from an SSA office and provide a copy of it to the payer. This procedure is new this year. SSA is no longer providing print outs to payee s requesting them for B Notice purposes. IRS B Notice letter and Pub have been updated to reflect this change. 10

11 Proposals in the Treasury Green Book for 2015 Information Return Filing Date: Change the Form 1099, 1098, etc. IRS filing date to January 31, except for Form 1099-B which would remain due February 15. The same deadline would apply to electronic and paper filing. (The proposal does not address the current procedure for automatic 30-day extensions.) In line with the former Commissioners comments on moving to a real-time tax system in an effort to diminish or prohibit the filing of fraudulent tax returns. IRAs: Provide for automatic enrollment in Individual Retirement Accounts or Annuities, including a small employer tax credit, and double the tax credit for small employer plan start-up costs. 11

12 Proposals in the Treasury Green Book for 2015 FATCA Reciprocal Reporting: Require certain U.S. financial institutions to report information that will support the U.S. side in reciprocal exchanges of information, including account balances (including, cash or surrender value of cash value insurance or annuity contract) for all financial accounts maintained at a U.S. office and held by foreign persons. Would expand the current reporting required with respect to U.S. source income paid to accounts held by foreign persons to include similar non-u.s. source payments. 12

13 Proposals in the Treasury Green Book for 2015 Reporting Independent Contractors: Require a certified TIN from independent contractors and allow withholding on contractor payments at 15, 15, 30 or 25 percent (mandatory for payer to withhold upon request of contractor). This proposal recurs in the Green Book with regularity. Form 1098-T: Require the reportable amount to be the amount paid (not the amount billed). 13

14 Proposals in the Treasury Green Book for 2015 TIN Truncation: Specifically permit the truncation of social security numbers on Forms W-2. Truncation of SSNs, ITINs and EINs on the 1099 series of forms is permitted (on payee statements whether on paper or electronic). Worker Classification: Permit the IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification has been prohibited under current law. At nearly 300 pages, the Green Book includes a number of other proposals: Explanations-FY2015.pdf 14

15 Focus on Backup Withholding and Other IRS Concerns IRS says a recurring concern showing up in employment return tax audits is a failure of payers to backup withhold on 1099 reportable payments without TINs. This is one of the top concerns turned up by the IRS National Research Program (NRP), an audit program that selected 6,000 employment tax returns for a thorough audit. The audits were intended to help the IRS gain a better understanding of employment tax issues. As a result of this finding in the NRP, we can expect to see a sharper audit focus on this issue over the next few years. Other concerns that keep coming up are: understated tip reporting, misclassified employees, and executive perks the most common of which is a company car made available to an executive and no wage imputed for the personal use of the vehicle. IRS has also noted concerns about documentation compliance regarding foreign workers in the U.S. and their visa status and related tax treaty claims. 15

16 New Forms W-8 New Forms W-8 (BEN, BEN-E, IMY, EXP) have been finalized and their instructions released. Withholding agents may continue to use 2006 version of Form W-8BEN through 12/31/14. If the older version is provided to a withholding agent for purposes of chapter 3 of the Internal Revenue Code before January 1, 2015, it will retain its validity until it expires. Usually the earlier of the last day of the third calendar year following the year in which the withholding certificate is signed or the day that a change in circumstances occurs that makes any information on the certificate incorrect. If paying U.S. source income to an individual, rather than an entity, might be easier to use new (2014) Form W-8BEN, which is shorter than the 2006 version. Use 2006 version of Form W-8BEN rather than new Form W-8BEN-E for non- FATCA U.S. source income payments to non-u.s. entities. Note next slide for some potential difficulty here. 16

17 2006 Version W-8-BEN and Validity under FATCA If the 2006 version of the Form W-8BEN is provided before January 1, 2015, for chapter 4 (FATCA) purposes, it will remain valid to the extent permitted in fairly complex FATCA regulations that apply to the use of a pre-fatca Form W-8 and that for the most part will require supplemental documentary evidence for most statuses as well as require a GIIN if the entity is required to be registered on the IRS FATCA registration website. GIINs will also need to be matched on the IRS website, but special rules preclude receiving and matching a Model 1 Reporting FFI s GIIN until Remember that all accounts on your books until the end of 2014 are considered pre-existing under IRS Notice released May 2, 2014, and are subject to a delay in FATCA withholding until July 1, 2016, unless the account is for an undocumented prima facie FFI where withholding begins in See the instructions to line 5 of the W-8BEN-E for more on prima facie FFIs. 17

18 Form W-8BEN-E and Prima Facie FFIs TIP If you are facing FATCA withholding on a prima facie FFI, the easier avenue is to request the new Form W-8BEN-E, where all of the required data is solicited and the related instructions are available. Note for a prima facie FFI to submit a W-8BEN-E, the business relationship must be on a proprietary basis with the bank, brokerage firm or other financial institution. If that is not the case, but instead the FFI is acting as an agent or intermediary for others or is merely servicing the business transaction, or is a fiscally transparent entity like a partnership that is not a hybrid entity, a Form W-8IMY will be required and not a W-8BEN-E. If you would like a copy of our paper on the Form W-8IMY, please contact us at office@cokala.com. 18

19 Pre-Existing Payees IMPORTANT For other pre-existing payees (those not considered prima facie FFIs), consider obtaining a new FATCA version of the appropriate W-8 form by July 1, 2016 (the date when FATCA withholding begins for these accounts) rather than waiting until the end of the 2016 when new versions are mandated from all payees receiving FATCA withholdable income. Acquiring a new FATCA W-8 form by July 1, 2016, will let you avoid having to collect the cumbersome FATCA documentary evidence needed to support an exempt FATCA status when you only hold an old W-8BEN on file. 19

20 Pre-Existing Payees Remember that the pre-existing payee rules are merely transitional and will fully expire after December 31, At which point, a new FATCA version W-8 will be necessary from all payees receiving FATCA withholdable income that have not yet provided one. Getting a new FATCA version W-8 is mandated even if you have an older version of the W-8BEN on file that has not yet expired for chapter 3 purposes. If are not paying FATCA withholdable income, note that a W-8BEN (Rev. 2006) acquired in 2014 will not expire until December 31, Only pre-existing payees receiving FATCA withholdable income will need to have a FATCA version of a W-8 form on file by January 1,

21 Form 1099-K Reporting Transactions When Card Not Present IRS has issued a new TY 2014 form. For some 1099-K filers it presents an additional data tracking requirement, to report a subset of card not present transaction totals as well as the total of all reportable transactions including card swipes together with card not present transactions. New box 1b on the 2014 Form 1099-K will report Card Not Present Transactions. The dollar amount reportable here is the gross amount of reportable card transactions or thirdparty network transactions for which no card was present at the time of the transaction, or the card number was keyed into a terminal. The reportable dollar amount of each transaction is the amount determined on the date of the transaction. Transactions reportable in box 1b typically will be for online sales, phone sales, or catalogue sales. For 2014, 1b is an optional box; the payer or payment settlement entity reporting the Form 1099-K may choose not to enter an amount in box 1b. Box 1a on the 2014 Form 1099-K will serve the same function as box 1 on the 2013 form: reporting the gross amount of the total reportable transactions for the calendar year. 21

22 EIN Requests By and For Domestic Entities Must Now Be Made Online The IRS is now handling all EIN requests from domestic U.S. taxpayers through the EIN Online Assistant which leads the applicant through on-screen data entry and validation at or through the APPLY ONLINE NOW link at the bottom of the webpage Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-%28EIN%29- Online. Domestic EIN requesters who call the IRS toll-free number for EINs will be referred to the Internet to use the EIN Online Assistant. Information about applying by phone at an IRS toll-free number still appears in the current Instructions for Form SS-4 but will be removed when the form is next revised. 22

23 EIN Requests By and For Domestic Entities Must Now Be Made Online The online application process is available for all entities whose principal business, office or agency, or legal residence (in the case of an individual), is located in the United States or U.S. Territories. The principal officer, general partner, grantor, owner, trustor etc. must have a valid Taxpayer Identification Number (Social Security Number, Employer Identification Number, or Individual Taxpayer Identification Number) in order to use the online application. The EIN Online Assistant is available only on weekdays between 7 a.m. and 10 p.m. Eastern time. 23

24 EIN Requests By and For Foreign Entities EIN applications from entities that have no legal residence, principal place of business, or principal office or agency in any U.S. state or the District of Columbia are made by mailing or faxing a Form SS-4. These applications are now being processed at the Cincinnati Internal Revenue Service Center, instead of the Philadelphia Service Center. The new address and fax number are: Internal Revenue Service Center Attn: EIN International Operation Cincinnati OH Fax

25 National Taxpayer Advocate Annual Report to Congress and Legislative Recommendations Inadequate Budget The IRS desperately needs more funding to serve taxpayers and increase voluntary compliance. Since fiscal year 2010, the IRS budget has been cut by nearly eight percent. Over the same period, inflation has risen by about six percent, further eroding the IRS s resources. Because of these budget reductions, the IRS has been significantly hampered in its ability to provide top quality service and maintain effective enforcement programs that minimize noncompliance. The IRS workforce has been reduced from nearly 95,000 full-time equivalent employees in FY 2010 to about 87,000 in FY 2013, a decrease of eight percent. The IRS training budget has been slashed from about $172 million in FY 2010 to about $22 million, a staggering 87 percent reduction. Thus, the IRS not only has fewer employees than four years ago, but those who remain are less equipped to perform their jobs. 25

26 National Taxpayer Advocate Annual Report to Congress and Legislative Recommendations Inadequate Budget Recent cuts to the IRS budget are shortsighted and counterproductive, the Taxpayer Advocate believes, for two reasons. First, the government has a practical and a moral obligation to make compliance as simple and painless as possible. Second, each dollar appropriated for the IRS generates substantially more than one dollar in federal revenue (in FY 2013, an average return-oninvestment of 255:1). 26

27 National Taxpayer Advocate Annual Report to Congress and Legislative Recommendations TIN Matching Program Recommendation for legislation permitting Form 1098-T filers to use the IRS TIN Matching Program to verify the TINs they have solicited for reporting on Form 1098-T, Tuition Statement. Currently, the tax law authorizes the IRS TIN Matching program only for payers of reportable payments subject to backup withholding. Forms 1099-B, -DIV, -INT, -K, -MISC, -OID, and -PATR Industry has also argued for the need for TIN Matching Program expansion beyond the Form 1098-T to include additional Forms 1098, 1099, 5498 and 1042-S. 27

28 National Taxpayer Advocate Annual Report to Congress and Legislative Recommendations Worker Classification The current Form SS-8 review procedures within the IRS cause delays and hardships for businesses and workers. The delay in classification of workers as employees or independent contractors by the IRS SS-8 Unit has significant tax consequences for businesses and individuals. Affects employment tax liabilities, income tax withholding obligations, information reporting, the allowance of expenses that may be derived from a trade or business, and eligibility for employee benefit or pension plans. The enactment of the Affordable Care Act magnifies the tax consequences of worker classification. 28

29 National Taxpayer Advocate Annual Report to Congress and Legislative Recommendations Worker Classification The National Taxpayer Advocate has previously recommended that the IRS simplify its worker classification criteria, and has offered legislative and administrative remedies to alleviate the burden on applicants. These proposals include the development of a free online self-help tool that would give employers a preliminary determination of employment status based on their responses to specific questions. As of fiscal year 2013, 81 percent of cases in the IRS SS-8 Worker classification program are overage which means that applicants must wait an average of a year before receiving a determination. Other concerns are that the SS-8 Program uses new Internal Revenue Manual (IRM) guidance that results in premature rejection of legitimate applications without giving applicants an opportunity to respond and cure minor defects, and applicants who receive adverse determinations from this unit do not automatically receive administrative appeal options. 29

30 National Taxpayer Advocate Annual Report to Congress and Legislative Recommendations ITINs (Individual Taxpayer Identification Numbers) ITINs are assigned to individuals who have a U.S. tax need for a TIN but who do not qualify for SSNs (e.g., a non-resident alien individual claiming tax treaty benefits). The current ITIN application procedures are a burden to taxpayers and create a barrier to tax return filing. Since new IRS ITIN procedures were put into place in 2012, the number of ITIN applications and attendant tax returns has plummeted, while rejection levels have soared. The Taxpayer Advocate believes the new procedures created barriers that prevent applicants from declaring income, filing returns, receiving refunds they are due under the law, and participating in the global economy. Absent necessary changes to the program, recommended by the National Taxpayer Advocate for several years, the ITIN program will continue to suffer in terms of facilitating compliance by ITIN taxpayers and preventing fraud. In addition, the IRS announced that ITINs issued before 2013 will be deactivated after certain periods of time, but is still exploring options for doing this. There is concern that the IRS may deactivate ITINS or let them expire without notifying taxpayers. 30

31 In S a joint bill of the Democratic chair and Republican ranking member of the Senate Finance Committee (These are proposals; they may never be enacted into law.) Amend sections 6721 and 6722 to create a safe harbor for no correction filing or corrected statement and no penalties for the originals when there is a de minimis change in dollar amount reported, up to $25 (not applicable to interest reporting) R and 5498 reporting threshold would go from $10 to $25 to make comparable to the 6721 and 6722 amendments. On-line free fill-in 1099 filing of up to 50 forms and printing of recipient statements, starting with the 1099-MISC to be ready a year after the bill becomes law. Language says "batches" of 50, which could mean a payer doing more than 50 but in batches. Other forms to be added by three years after the bill becomes law. Reduce IRS paper filing threshold to 100 for 2015 forms filed in 2016; 50 for 2016 forms filed in 2017; 20 for 2017 and later forms. 31

32 Questions? Questions? Questions? Q uestions? 32