Tax Strategy: What's new with information return compliance
The Internal Revenue Service and Congress have been turning to data collection — and information returns in particular — for quite some time as a solution to improving tax compliance and increasing tax revenues.
While “big data” undeniably has potential benefits to IRS examination efforts, whether they are yet to be realized remains to be seen. Reports of aging IRS IT infrastructure and reduced IRS budgets in general are not encouraging. Nevertheless, information reporting is here to stay, and is growing.
Each year, new information compliance requirements arrive at the start of another filing season. Each year, new questions and problems seem to arrive on schedule, too. This column takes a look at some of what’s in store for information reporting during the upcoming 2018 filing season.
PATH ACT CHANGES
The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) changed some return deadlines, including some for information returns. Although this will be the second filing season in which the new deadlines will apply, the likelihood is that some deadlines will still be missed. Whether the IRS will be as forgiving after the fact remains to be seen. For example, over the last filing season, the IRS in effect gave partnerships a one-month extension to file or apply for an extension: from March 15 to April 17 (with the weekend rule).
- Earlier W-2s and 1099s. Under the PATH Act, employers are now required to file their copies of Form W-2, submitted to the Social Security Administration, by Jan. 31. This deadline also applies to certain Forms 1099-MISC reporting nonemployee compensation, such as payments to independent contractors, regardless of whether the returns are filed on paper or electronically. Further, only one 30-day extension to file Form W-2 is now available, and this extension is not automatic (see the instructions to Form 8809). Having these Forms W-2 and 1099 in hand earlier at least theoretically makes it easier for the IRS to verify the legitimacy of tax returns and properly issue refunds to eligible taxpayers. But they do make for a busy January in many accounting and compliance departments.
- Truncated SSNs/TINs. The PATH Act replaced the requirement that employers include employees’ Social Security numbers on copies of Forms W-2 furnished to employees, with use of an “identifying number” for the employee. Among other things, proposed regulations issued this September provide that employers will be able to truncate employees’ Social Security numbers on copies of Forms W-2 that are furnished to employees, but not on a copy that is filed with the Social Security Administration. Due to the request of several state tax administrators for more time to develop systems to process Forms W-2 with truncated Social Security numbers that are filed with state income tax returns, however, the proposed regulations will not apply to Forms W-2 required to be furnished before Jan. 1, 2019. Truncation is now also allowed on Form 1099-K payee statements. Existing regulations, however, currently continue to prohibit using ITINs on any return, statement or other document required to be filed with or furnished to the IRS, or if a statute or IRS guidance (e.g., regulations, forms, instructions) specifically requires use of a Social Security number.
One major area in need of clarification involves reporting under Code Sec. 6050W, “Returns Relating to Payments Made in Settlement of Payment Card and Third-Party Network Transaction.” In particular, a tighter definition of a third-party payment network is being called for as necessary to prevent abuse, especially since the de minimis threshold for Form 1099-K reporting under Code Sec. 6050W is high.
Entities that qualify as third-party service organizations, or TPSOs, are eligible for the de minimis rules that eliminate reporting on otherwise reportable amounts if either the amount paid within a year does not exceed $20,000 or the aggregate number of such transactions does not exceed 200. This exception can completely eliminate the obligation on the part of a TPSO to issue Forms 1099-K to many “part-time” payees in such areas as rideshare.
What’s more, when read with the current instructions for Form 1099-K, the de minimis rules can be interpreted as eliminating any further obligation on the part of a TPSO to report at all, including issuing a Form 1099-MISC. Payments of more than $600 for services provided by nonemployees are generally reported to the IRS on a Form 1099-MISC by a payor, with a copy provided to the service provider. However, the instructions to Form 1099-K state, “A TPSO is required to report any information concerning third-party network transactions of any participating payee only if [emphasis added] for the calendar year: the gross amount of total reportable payment transactions exceeds $20,000, and the total number of such transactions exceeds 200.”
Some platforms that process customers’ credit cards are not submitting any information returns to service providers operating below the $20,000/200 unit limit … while some out of an overabundance of caution are issuing Forms 1099-K to all service providers, irrespective of limits, and others are issuing Forms 1099-MISC for those coming under the 1099-K limits. As a result, ride-share drivers who split their work among several TPSOs, for example, can receive a Form 1099-MISC from one, a Form 1099-K from another, and no information return from a third. Also reportedly in a state of confusion among ride-share service providers is whether a particular platform is reporting gross income or net-of-platform expenses. In any case, failure to receive a Form 1099 does not exempt a taxpayer from reporting the income on their tax return and paying the appropriate income and employment taxes.
The IRS recently issued still another fact sheet reminding employers of the importance of correctly classifying workers for purposes of federal employment taxes. Generally, employers must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to employees. Whether a worker is an employee or an independent contractor depends on a number of factors.
The IRS has a Voluntary Classification Settlement Program, which operates as an amnesty program for employers that want to reclassify previously misclassified workers. Many employees who have been incorrectly classified as independent contractors by their employers can file Form 8919, “Uncollected Social Security and Medicare Tax on Wages,” to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation.
These procedures, however, often beg the underlying question of how to correctly classify a worker. One recent effort in trying to clarify the situation involves the introduction of the New Economy Works to Guarantee Independence and Growth, or NEW GIG, Act at the end of October. Introduced by Rep. Tom Rice, R-S.C., this bill would create a safe harbor that allows freelance-style workers to apply a set of objective facts peculiar to the gig economy in determining status.
The objective tests would involve analyzing the relationship between the parties (exclusivity, who pays for expenses); the location of the services (does the service provider provide their own workplace, tools, etc.); and the presence of a written contract (that states the independent-contractor relationship and obligations). Also, for gig economy, three-party transactions, Form 1099-K reporting would be mandatory for payments over $1,000. For traditional independent-contractor relationships, Form 1099-MISC would be required for payments totaling $1,000 or more in a year.
In January 2016, filing Forms 1094/1095-B and Forms 1094/1095-C for reporting health coverage became mandatory. The IRS will begin accepting TY2017 Forms 1094/1095-B and Forms 1094/1095-C, as well as original prior-year forms and corrections, in January 2018 (see page 16).
Consensus is growing that, despite going into this requirement’s third year, the IRS once again should give applicable large employers and other filers more time to furnish 2017 ACA information returns to individuals. Without the blanket relief for additional time, the IRS Information Reporting Program Advisory Committee and other groups predict that the IRS will receive many requests for extensions. In Notice 2016-70, the IRS extended the date for furnishing to individuals 2016 Form 1095-B, “Health Coverage,” and 2016 Form 1095-C, “Employer-Provided Health Insurance Offer and Coverage,” from Jan. 31, 2017, to March 2, 2017. At the same time, the IRS provided temporary penalty relief.
IRPAC’s latest report also recognized the burden on filers: “It is often burdensome to get the necessary data for the final months of the calendar year in time to populate a form due January 31.” Further, according to IRPAC, most errors on these ACA forms are name/TIN mismatches. “In light of the number of these name/TIN errors, filers are understandably nervous about the potential imposition of penalties,” IRPAC cautioned.
Form 1098-T, “Tuition Statement,” needs streamlining. Current recommendations, which also highlight what’s currently wrong with Form 1098-T, include the removal of the requirement to report the number of months a student was a full-time student, truncating Social Security numbers, and allowing payment reporting based on the institution’s student account system. Note, also, that one accommodation by the IRS will be ending: For calendar year 2018 to be reported in 2019, institutions will no longer be given the option of reporting the aggregate amount billed for qualified tuition and related expenses or the aggregate amount of payments received for qualified tuition and related expenses.
IRPAC, in its 2017 annual report, includes many recommendations to the IRS to streamline and improve upon information reporting requirements. These recommendations, which have been echoed by others, include among others:
- Allowing withholding agents for Forms W-9 the same efficiencies as are permitted for Forms W-8, under which a withholding agent can accept Forms W-8 with electronic signature, as reliance when acquired via a third-party repository;
- Improving the reporting requirements under the Foreign Account Tax Compliance Act;
- Applying a reasonable-cause, “good faith efforts” penalty relief approach to penalties where a payer’s inability to capture certain data and documents from payees despite best efforts can be shown; and,
- Reinstating the use of substitute Form 1042-S payee statements, as well as better coordination and penalty delay while the IRS is still in the process of verifying the deposit of withhold taxes reported on Form 1042-S.
Former IRS Commissioner John Koskinen underscored the importance of third-party information reporting in discussing the tax gap during his tenure: “When there is information reporting, such as 1099s, income is only underreported about 7 percent of the time … but that number jumps to 63 percent for income not subject to any third-party reporting or withholding.”
With that kind of return on investment, albeit on the backs of those doing the reporting irrespective of technological advances, ever-increasing levels of information reporting seem here to stay.