Vavrinek, Trine, Day & Co., LLP Certified Public Accountants VALUE THE DIFFERENCE November 8, 2016 Dear Client: Information reporting has been around for a long time, but the IRS is scrutinizing this area closer and enforcing penalties for failure to timely file correct information returns. Given the increased interest in this area it is important to ensure that your bank is in full compliance in this area. The most common information reporting occurs in the 1099 form series. These forms are often prepared and filed by another entity on behalf of the bank, so there is a temptation to assume no bank oversight is needed, but this could be a costly assumption. These forms are also prepared and filed by different individuals within the bank from accounting to administration to loans, etc, so it is important to review this information with all key employees. The penalty for not filling a correct 1099 form timely varies from $50 to $260 depending on when the correct information return is filed. If you can prove the late or incorrect filing was due to reasonable cause the IRS will waive the penalty, however this is not as easy to explain to the IRS as it used to be. Below is a partial list of common 1099 forms that the bank may need to file annually. 1095-C Employer Provided Health Insurance Coverage Offer and Coverage If an employer is an Applicable Large Employer, they must prepare a form 1095-C for each employee that was a full time employee for any month of the calendar year. An Applicable Large Employer is defined as having at least 50 full time employees, including full time equivalents, in the previous year. The form reports the offers of health coverage and enrollments in health coverage for their employees for the year. The transmittal form for this form is 1094-C. 1099-A Acquisition or Abandonment of Secured Property If the bank forecloses on property secured by a loan or accepts a deed-in lieu, a form 1099-A should be filed with the IRS in the beginning of the year following the acquisition. Reporting on form 1099-A is required even if no portion of the sale proceeds are made available to satisfy the bank s loan. If a charge-off occurs in the same year as the acquisition of property, a 1099-C can be filed and if boxes 4, 5 and 7 are completed on the 1099-C form, the filing requirements for the 1099-A are considered met. 25231 Paseo De Alicia, Suite 100 Laguna Hills, CA 92653 Tel: 949.768.0833 www.vtdcpa.com Fax: 949.768.8408
1099-B Proceeds from Broker and Barter Exchange Transactions A 1099-B is issued to report the sale or exchange of stock and is required to be filed if the bank regularly issues and retires its own debt obligations or if the bank regularly redeems its own stock. The 1099-B reporting requirement is not only the sale or exchange information, but if the item reported is a covered security there are additional reporting requirements. The additional information reported includes: the date of the acquisition, the cost basis, the amount of loss disallowed due to a wash sale and whether the gain or loss is short-term or longterm. A covered security is any share of stock of a corporation acquired in exchange for cash after 2010. If the Bank contracts with an outside firm to manage stock transactions, the bank should verify with the transfer agent that they take care of all information filing requirements. If the bank serves as its own transfer agent for their common and preferred stock, the bank needs to keep up on all possible filing requirements related to the exchange or sale of stock and should put procedures in place to track the purchase or exchange of shares to ensure that if a sale is required to be reported in a later year, the bank has the prior information regarding the acquisition to enable them to report the acquisition date, costs basis and other required information. The reported basis of the stock can, but is not required to, be increased for the income recognized upon the exercise of a compensatory option granted or acquired before 2014. The initial basis reported may not be increased for income recognized upon the exercise of an option granted or acquired on or after January 1, 2014. 1099-C Cancellation of Debt If the bank cancels the debt of a borrower, a 1099-C may be required to be filed. The 1099-C filing requirement occurs in the year that an IRS defined identifiable event occurs. An IRS identifiable event includes: 1) A discharge in bankruptcy under Title 11of the U.S Code. 2) A cancellation or extinguishment making the debt unenforceable in a receivership, foreclosure or similar federal or state court proceeding. 3) A cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. 4) A cancellation or extinguishment when the creditor elects foreclosure remedies that by law end or bar the creditor s right to collect the debt. This event applies to a mortgage lender or holder who is barred by local law from pursuing debt collection after a power of sale in the mortgage or deed of trust is exercised. 5) A cancellation or extinguishment due to a probate or similar proceeding. 6) A discharge of indebtedness under an agreement between the creditor and the debtor to cancel the debt at less than full consideration. 7) A discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. A creditor s defined policy can be in writing or an established business practice of the creditor. A creditor s practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy. 8) The expiration of nonpayment testing period. This event occurs when the creditor has not received a payment on the debt during the testing period. The testing period is a 36 month period ending on December 31 plus any time when the creditor was precluded from collection activity by a stay in bankruptcy or similar bar under state or local law. The identifiable event code needs to be included in box 6 for years beginning in 2013. The filing requirements for this form can be complicated, so it is encouraged that the bank review the form instructions and contact our office with any filing questions. Page 2 of 7
There are proposed regulations to eliminate event #8 above, the 36 month testing period. These regulations cannot be relied upon, existing rules should continue to be followed until final regulations are issued. 1099-DIV Dividends and Distributions If the bank has paid dividends or other distributions on stock of $10 or more or paid $600 or more as part of a liquidation, the bank may be required to file a form 1099-DIV. As with the 1099-B filing, if the bank contracts with an outside transfer agent, the bank should confirm with the outside transfer agent that all the required filing is performed on behalf of the bank. If the bank acts as their own transfer agent, the bank should prepare the required forms. Dividend payments to nonresident aliens should be reported on form 1042-S and the proper amount of withholding withheld and remitted to the IRS. 1099-INT Interest Income This is probably the most common 1099 form filed by banks. The form is required to be filed if the bank pays interest of at least $10 during the calendar year to a qualified recipient. Generally this filing requirement is fulfilled by the bank s core processor, but it is the bank s responsibility to ensure that when accounts are opened the correct information is entered so that accurate reporting takes place. Recipients exempt from the filing requirement include corporations, tax-exempt organizations, government agencies or an IRA or HSA. Interest excluded from reporting includes interest payments made to foreign beneficial owner or foreign payee. However, deposit interest aggregating $10 or more paid to certain nonresident alien individuals is reportable on form 1042-S. The IRS is placing increased scrutiny on the exemption for foreign payees, so the bank should make sure that all W-8BEN forms are accurately completed and current. Generally a W-8BEN expires after 3 years, so a tickler system should be implemented to follow up on collecting new forms as they expire. W-8BEN forms were updated by the IRS in 2014 to meet new guidelines. Please make sure you are having customers complete the latest W-8BEN forms. W-8BEN is now used exclusively for individuals and there is a new W-8BEN-E form to be completed by entities. 1099-K Merchant Card and Third-Party Payments The 1099-K is the form that is required to be filed by a payment settlement entity (PSE) to report payments made in settlement of reportable payment transactions for the calendar year. A PSE is a bank that has the contractual obligation to make payments to participating payees in settlement of payment card transactions. In simpler terms, if a bank enrolls a business client to accept credit cards and contracts with the business client to make payments on credit card transactions the bank will be required to report to the IRS the business client s gross credit card transactions for each calendar year. The IRS has established a de minimis rule that requires reporting only if the gross amount of total reportable payment transactions exceeds $20,000 and the total number of transactions exceeds 200. If the bank contracts with an outside firm to process client credit card transactions, the bank should consult with the outside firm regarding the filing requirements. Page 3 of 7
1099-MISC Miscellaneous Income The bank needs to prepare a 1099-MISC to report payments of at least $600 in rents, services, prizes, awards and other income payments. There are various exemptions from reporting, such as payments made to a corporation, payments for merchandise and payments to a tax exempt organization. An exception to the corporate reporting exemption is payments of attorney fees are reportable, even if paid to a corporation. It is important that the information is reported in the correct boxes. Box 1 is used to report rent paid, both for office space rental and machine and equipment rental. Box 3 is used to report other income that is not subject to FICA taxation, examples are prizes and awards. Payments for services rendered are not reported in this box and should be reported in box 7. Box 4 is used to report any tax withheld from payments reported on the form. Box 7 is used to report payments for services rendered and will be the most common box utilized. Box 14 is used to report gross proceeds paid to an attorney in connection with a settlement payment. Payments for regular attorney services are not reported in this box and should be reported in box 7. An important change for 1099-Misc forms prepared in 2017 to report 2016 payments is that the IRS filing date for 1099-Misc forms reporting Nonemployee Compensation in Box 7 are due on or before January 31, 2017. 1098 Mortgage Interest Statement Form 1098 should be prepared to report mortgage interest (including points paid for the purchase of the payer of record s principal residence) of $600 or more received from an individual, including a sole proprietor. Also use form 1098 to report mortgage insurance premiums of $600 or more received from an individual. If the obligation was incurred after 1987, it is a mortgage if real property that is located inside or outside the United States secures all or part of the obligation. 1042-S Foreign Person s US Source Income Subject to Withholding Beginning January 1, 2013, deposit interest aggregating $10 or more paid to certain nonresident alien individuals with respect to a deposit maintained within the United States must be reported on form 1042-S. The IRS has published a list of countries in Revenue Procedure 2012-24. If the bank pays deposit interest to a nonresident alien that resides in a country on the IRS list, a 1042-S must be prepared and filed. The 1042-S reporting the deposit interest will list income code 29 in box 1 and exemption code 02 in box 3a. The deposit interest payments are exempt from the backup withholding rules. Form 1042-S is also used to report the payment of corporate dividends to a nonresident alien. Corporate dividend payments to nonresident aliens are subject to the backup withholding rules of 30%, unless the country of residence has entered into an income tax treaty with the United States resulting in a lower withholding rate. 3921 Exercise of an Incentive Stock Option Form 3921 should be filed by a corporation which transfers to an employee a share of stock pursuant to that employee s exercise of an incentive stock option. 3922 Transfer of Stock Acquired Through an Employee Stock Purchase Plan Form 3922 should be filed by a corporation which has a transfer of the legal title of a share of stock acquired by the employee pursuant to the employee s exercise of an option granted under an employee stock purchase plan. The filing requirement is triggered when the exercise price is less than 100% of the value of the stock on the date of grant, or is not fixed or determinable on the date of the grant. Page 4 of 7
8937 Report of Organizational Actions Affecting Basis of Securities Form 8937 should be filed if you are an issuer of a security that takes an organizational action that affects the basis of that security. Form 8937 is required to be filed with the IRS and a copy given to each security holder. The IRS has established an exception to this filing requirement. The bank is not required to report this information with the IRS if the bank posts the required information in a readily accessible format in an area of your primary public website dedicated to this purpose and you keep it accessible to the public on this website or the primary website of any successor organization for 10 years. This filing requirement is for transactions that occurred in 2010 and after. The filing date with the IRS is within 45 days of the transaction or, if earlier, January 15 of the year following the calendar year of the organization action. With the exception of the form 8937 all the forms listed above are annual forms that are required to be sent to the IRS and recipient at the beginning of the following year. The 1042-S is required to be filed with the IRS and distributed to the recipient by March 15 of the year following the transaction. All other annual forms listed above are required to be distributed to the recipient by January 31 of the year following the transaction and filed with the IRS by February 28 of the year following the transaction if filing on paper and March 31 of the year following the transaction if filing the form electronically. Please note the exception to these deadlines under 1099-Misc. The above list is a summary of the reporting forms that banks might encounter. The information is designed to supply an overview of the reports and the events that trigger filing. For specific filing requirements and exemptions, please refer to the IRS forms instructions or contact our office. Sincerely, Vavrinek, Trine, Day & Co., LLP Page 5 of 7
Countries on the IRS Reporting List for 1042-S Interest Reporting Antigua & Barbuda Japan Aruba Jersey Australia Kazakhstan Austria Korea (South) Azerbaijan Latvia Bangladesh Liechtenstein Barbados Lithuania Belgium Luxembourg Bermuda Malta Brazil Marshall Islands British Virgin Islands Mauritius Bulgaria Mexico Canada Monaco Cayman Islands Morocco China Netherlands Columbia Netherlands island territories: Costa Rica Croatia Curacao Cyprus Bonaire Saba St. Eustatius Czech Republic New Zealand Denmark Norway Dominica Pakistan Dominican Republic Panama Egypt Peru Estonia Philippines Finland Poland France Portugal Page 6 of 7
Countries on the IRS Reporting List for 1042-S Interest Reporting (Continued) Germany Romania Gibraltar Russian Federation Greece Slovak Republic Grenada Slovenia Guernsey South Africa Guyana Spain Honduras Sri Lanka Hong Kong St. Maarten (Dutch part) Hungary Sweden Iceland Switzerland India Thailand Indonesia Trinidad & Tobago Ireland Tunisia Isle of Man Turkey Israel Ukraine Italy United Kingdom Jamaica Venezuela Page 7 of 7