IRS Sees Need for More Tax Information Reporting

IRS Commissioner Douglas Shulman defended the increased amount of information reporting that the agency will be expecting from businesses in the next few years.

“The technology revolution changed information reporting for both business and the IRS and creates opportunities and challenges for both of us,” he said during a speech Thursday before the American Payroll Association and the American Accounts Payable Association. “The better use of technology translates into better use of data – extracting knowledge and intelligence. So, we must invest in technology to keep up with new legislation, regulations and strategies in a more complex and interrelated global tax system.”

Businesses that accept credit or debit cards, or other electronic payments, will be subject to new information reporting requirements, he noted (see Get Ready for a Blizzard of 1099 Forms).

“Beginning in 2012, payment processors will be required to make an annual information report to the merchant and the IRS stating the gross amount paid to the merchant during a calendar year,” said Shulman. “This will help improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.”

Shulman explained that at the end of the year, banks will begin sending businesses a 1099 form reporting the dollar figure from credit and debit card purchases made by customers at their establishment. An identical information document will also be sent to the IRS. When the business owner or tax practitioner fills out the business’s tax return, they have to segregate the credit and debit card sales from cash sales, and the new report will make it easier to do so, according to Shulman.  The IRS will be able to see if the credit card dollar figure reported on the tax return matches the bank’s information return, and also see if the amount of revenue from credit cards makes sense in the context of firm's overall business.

“The information we receive is an important window into underreporting,” Shulman noted. “It can also help us better understand tax compliance and trends in different industry sectors.”

Congress also recently imposed basis reporting requirements for publicly traded securities, he noted. Under current law, a broker is required to file with the IRS annual information returns generally showing only a customer’s gross proceeds from certain transactions. The same information is furnished to taxpayers to help them file accurate and complete returns.

However, the Government Accountability Office estimates that as many as 7 million taxpayers – more than one in three who sold securities – may have misreported capital gains and losses, and approximately half of them did so because they misreported their basis.

“This new provision – effective Jan. 1, 2011 – will go a long way to reducing this problem and making things easier for investors,” said Shulman. “I don’t know about you, but I have spent far too much time digging through old records, trying to find the basis for securities I sold.  I think investors…and I count myself one …will welcome getting this new, easy-to-understand information from their brokers.  Basis reporting can also help us work smarter. As the GAO points out, knowing the basis for taxpayers’ security sales will allow us to get a better bead on taxpayers’ income for security sales through our document matching program. In other words, basis reporting creates knowledge.”

Congress also recently passed another new information reporting provision, he added, requiring expanded information reporting on payments made from businesses to corporations, and on payments businesses make for goods. The new information reporting requirement applies if businesses pay a single entity $600 or more per year in aggregate for these types of transactions, starting in 2012.

“While businesses do not need to file information returns on these payments until January of 2013, business groups – particularly those that represent small businesses - have raised concerns about the burden that this new provision may impose,” said Shulman. “I want to assure the business community that the IRS will look for opportunities to minimize burden and avoid duplicative reporting. That is why we will be spending the next several months soliciting input from businesses of all types and sizes before proposing regulations to implement the law. We will also look to service providers who help those businesses understand and adapt to new laws and regulations, to help us craft a process that is as efficient as possible. We know that there is no ‘one-size-fits-all,’ so we want to hear your ideas."

To streamline implementation and minimize the burden, the IRS plans to use its administrative authority to exempt from this new requirement business transactions conducted using payment cards such as credit and debit cards, Shulman added.  “These transactions will already be covered by reporting requirements on payment card processors, so there is no need for businesses to report them as well,” he said.  “So, whenever a business uses a credit or debit card, there will be no new burden under the new law."

However, Shulman argued that the IRS needs enhanced information reporting tools to combat tax evasion and abusive tax avoidance, especially among banks, wealthy individuals and offshore activities in bank secrecy jurisdictions. He noted that one of the most important developments in international information reporting was the enactment this year of the Foreign Account Tax Compliance Act, which creates more transparency in the offshore financial market.

Some of the key elements include encouraging the reporting of U.S. citizens’ worldwide income by withholding 30 percent on payments for foreign financial institutions, unless they identify and report the U.S. citizens who own the accounts. U.S.-owned accounts would have to include accounts beneficially owned through shell foreign entities. In addition, U.S. taxpayers will be required to report on their tax returns offshore assets worth an aggregate of $50,000 or more. “This is in addition to existing law that requires the filing of a so-called FBAR form if the aggregate of their foreign accounts is over $10,000,” Shulman noted. “As you can see, this is a significant and meaningful step towards combating U.S. tax evasion, bank secrecy and other illicit financial practices.”

Separately, the Treasury Department announced Thursday that the U.S. and 16 other countries in the Organization for Economic Cooperation and Development signed a protocol to the Convention on Mutual Administrative Assistance on Tax Matters, in order to bring the existing Convention into conformity with current international standards for the exchange of information for tax purposes between national revenue authorities.

The protocol provides for the full exchange of information on request in tax matters without regard to a domestic tax interest requirement or bank secrecy laws, such as those that have delayed the sharing of information on UBS’s bank customers with U.S. authorities. The proposed protocol also provides updated rules regarding the confidentiality and permitted uses of exchanged information as well as the level of detail that countries must provide when making a request for information. In addition, the Protocol permits countries that are not members of the OECD or of the Council of Europe to become parties to the Convention, subject to unanimous consent by the existing parties.

The final English version of the unsigned protocol can be viewed here.

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