The Internal Revenue Service plans to take extra steps to enforce the rules requiring information reporting of payment card transactions, such as those made through credit and debit cards.
A new report from the Treasury Inspector General for Tax Administration noted that Congress enacted legislation in an effort to narrow the Tax Gap (the estimated difference between the amount of tax that taxpayers should pay and the amount that is paid voluntarily and on time) and increase voluntary compliance of businesses through information reporting. The legislation required information returns to be filed for reportable payment card transactions starting in calendar year 2012. The Treasury Department estimated the new law would lead to the additional collection of almost $10 billion over 10 years.
In 2012, the IRS committed to a multiyear, multi-treatment stream compliance pilot initiative leveraging Form 1099 K, Payment Card and Third Party Network Transactions, information to reduce the Tax Gap.
In the report, TIGTA noted that the IRS recognizes the challenges associated with using Forms 1099 K to identify noncompliance with income reporting. To address these challenges, the IRS implemented pilot initiatives to identify payment card noncompliance. These initiatives include new processes and changes to existing processes, treatment streams, and capabilities. The IRS is continuing to use the results from these pilot initiatives to refine the criteria used to identify underreporting of payment card income.
However, TIGTA found an ongoing problem from substantial noncompliance with the rules. Payers are often not complying with the backup withholding requirements directing a payer to immediately withhold 28 percent of the amounts reported on Forms 1099-K for payees that failed to provide a valid Taxpayer Identification Number, or TIN. For example, TIGTA’s review of calendar year 2013 Forms 1099-K identified 10,216 Forms 1099 K with a missing TIN. These Forms 1099 K reported gross transactions totaling over $10.6 billion.
“Payers were required to withhold almost $3 billion from these payees, but no backup withholding was taken,” said TIGTA Inspector General J. Russell George in a statement. “This has a direct impact on the IRS’s ability to reduce the Tax Gap.”
In addition, TIGTA found the TIN Matching Program available to payers to verify a payee TIN does not alert the payer when a TIN of a deceased individual is being used. TIGTA’s review of calendar year 2013 Forms 1099 K found the IRS received 2,933 Forms 1099-K with gross transactions totaling $543.9 million for which the payee TIN was that of a deceased individual.
TIGTA suggested Form 1099-K information should be included in the IRS’s nonfiler identification efforts. Its review of calendar year 2013 Forms 1099-K identified 84,107 individuals for whom payers reported gross transactions on Forms 1099-K totaling nearly $9.1 billion and 443,528 businesses for which payers reported gross transactions on Forms 1099-K totaling over $164.5 billion that did not file a tax return.
TIGTA recommended that the commissioner of the IRS’s Small Business/Self-Employed Division ensure that a business case analysis is performed when making decisions to grant transitional relief. The commissioner should also assess penalties on certain payers that do not comply with reporting requirements, and use Form 1099-K information as part of the IRS’s nonfiler program, TIGTA suggested.
The IRS agreed with six of the seven recommendations and plans to take action on them. The IRS did not agree with one of the recommendations, to implement a computer programming change, because it could not guarantee that changes will be implemented due to budgetary constraints and limited resources. However, TIGTA said it believes this change should be a priority.
“Our approach to implementation of the payment card reporting requirements allowed IRS to design a program, with significant external stakeholder input, ensuring balance between taxpayer burden and compliance risk,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “For instance, while payers were accustomed to information reporting requirements, 6050W [Section 6050W of the Tax Code] introduced the first reporting requirements on these types of payments. Payers shared the challenges they faced in trying to obtain valid TINs and requested a delay in implementing backup withholding on these payments to allow them to better prepare. Recognizing that withholding of 28 percent of the gross payments would have a significant impact on the working capital of small businesses, transitional relief was provided and backup withholding on 6050W transactions was delayed. We assisted payers with the use of eServices TIN Matching, provided a ‘stuffer’ that the payers could include in subsequent mailings to try to obtain valid TINs and sent interim soft notices to payers to assist with obtaining accurate TINs and names.”
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