The requirement was meant to “increase voluntary tax compliance, improve collections and assessments within the IRS, and thereby reduce the tax gap” according to the IRS statement on its website. However, the increased burden on businesses was thought to be unnecessary and excessive . The NFIB was adamant in protesting the rule, believing there would rarely be matches between the businesses’ internal records and the figures reported to the IRS by payment processors (such as banks and online businesses like PayPal). According to Chris Walters, senior manager of legislative affairs at NFIB, the 1099-K figure would include cash refunds, sales tax, tips, and other fees that merchants would not consider as part of their gross receipts. For example, businesses that sell lottery tickets would not report the entire revenue amount (that which is charged onto a credit card), because they only receive a portion of the ticket’s sale price – the other portion going to the government. Obviously, this would lead to discrepancies with the 1099-K and would require companies to invest more time and capital into a better accounting system.

Businesses may not be out of the clear yet though. Because payment processors are still required to submit 1099-K forms with monthly transaction totals to the IRS, businesses may have to start keeping more complete records than they’re used to. If the IRS notices a large enough discrepancy between their tax return and the 1099-K, they may decide to audit the business. Submitted 1099-K forms will also alert the IRS as to businesses who are not filing tax returns at all. Again, the only exemption is for small businesses with fewer than 200 transactions amounting to less than $200,000; payment processors are not required to file 1099-K forms for these instances.

Ultimately, the removal of the reconciliation requirements was a sigh of relief for businesses, yet there may be added responsibilities in maintaining complete records to avoid an audit - an issue that many are still figuring out how to address.

Here are some of the “Dirty Dozen” to look out for:

Identity Theft

These are the most complex cases that the IRS handles. They are actively working to combat identity theft through extensive internal reviews and helping victims, in addition to the law-enforcement crackdown. The initial tip-off to the taxpayer would most likely be an IRS notice informing them that more than one return was filed in their name or that the taxpayer received wages from an unkown unemployer. Any individual who believes their personal information has been stolen for tax purposes should contact the IRS Identity Protection Specialized Unit immediately.

Phishing

This scam happens on the internet, via unsolicited email or a fake website. Criminals try to lure in the taxpayer and then obtain their personal or financial information, with which they can commit identity theft. The IRS does not contact taxpayers by email, so if you do receive an email that appears to be from the IRS, you should report it by sending it to phishing@irs.gov.

Return Preparer Fraud

These are instances in which tax preparers skim off a portion of their client’s refunds, charge inflated fees for tax preparation services, or attract new clients by promising guaranteed inflated refunds. Because every tax preparer needs to have a PTIN (Preparer Tax Identification Number) for 2012, look out for those who don’t. Follow this link for tips on choosing a tax preparer.

Hiding Income Offshore

Individuals sometimes evade U.S. taxes by hiding income in offshore banks, or brokerage accounts and use debit/credit cards to wire transfers and access the funds. While there are legitimate reasons for having foreign financial accounts, there are also accompanying reporting requirements for doing so. With the recent FATCA requirements, the IRS is hoping hiding offshore accounts will become increasingly difficult.

Disguised Corporate Ownership

The true ownership of businesses can be disguised if false corporations are created. This can be done by misuing third parties to request employee identification numbers. Then, these false entities can be used to underreport income, claim fictitious deductions, or avoid filing tax returns altogether. To regain compliance from these entities, the IRS works with state authorities.

For the complete list of “Dirty Dozen” tax scams, click here.

Joe Kristan, writer of Tax Update Blog at Roth & Company writes, “The real use of the 1099-Ks will be to identify people in the eBay/Amazon economy who aren’t reporting their income.” As we’ve mentioned, payment providers are still required to send the 1099-K form to taxpayers and file with the IRS for the tax year 2011.

Because of these hard economic times, the number of 1099-C forms has more than tripled from 2003 to 2010, according to the IRS, increasing from 1 million to 3.9 million forms. It is projected that for the year 2011, figures will reach 6.3 million.  A 2008 study conducted by the National Taxpayer Advocate Service cited credit card debt as the source for 47% of 1099-C forms in the sample of reviewed tax returns. Additionally, mortgage related debt was responsible for 15 percent.

There are a few instances in which taxpayers don’t have to pay the full amount, but they must first file for an exclusion or exception via Form 982. Examples of exclusions may include: debts discharged during bankruptcy and debts of consumers whose liabilities exceeded their assets prior to the cancellation of their debts. Thanks to the Mortgage Forgiveness Debt Relief Act passed in 2007, homeowners who default on their mortgage loans may also be exempt.

To try and avoid 1099-C forms altogether, experts recommend not seeking advice from debt buyers on how to settle your debts. Barbara Sinsley, general counsel for Debt Buyers Association International would encourage consumers to seek the consul of a tax advisor, stating that debt buyers are not financial planners, especially when everyone has a unique financial situation. Ultimately, if you receive a 1099-C form, seek expert help from a tax advisor; if the 1099-C is avoided, you are at risk for IRS audits, penalties, and fines. Eric Green, tax attorney with a Connecticut law firm says, “Be aware and prepare for it. When you receive that form, go immediately to a tax adviser. Don’t ignore it. That has real dollars and cents consequences.”

To verify compliance, the IRS matches what is reported on individuals’ 1040 forms with the information reported to the IRS by the taxpayer’s employer or financial institution. From 2008 to 2009, the IRS reported $293 billion of retirement income from 21 million tax returns and 52.2 million returns with pension income totaling $1 trillion. However, in a 2001 tax gap study the IRS estimated that underreporting of retirement income amounts to $4.2 billion of lost tax revenue.

Discrepancies in reporting could have resulted from several issues TIGTA found with the 1099-R forms. For instance, there were forms sent to taxpayers totaling $107.5 billion in taxable mounts that also contained a checked box reading: “taxable amount not determined”. This box, when checked, means that the taxpayer is ultimately responsible for determining the taxable amount, however many individuals were confused by this aspect. Also, current IRS guidelines do not require the taxpayer to always include the taxable income amount if it cannot be determined, further complicating the issue.

In response to the TIGTA report, the IRS agreed to clarify and improve the “taxable amount not determined” instructions. They dismissed other suggestions made by TIGTA, but agreed to study whether compliance could be increased by requiring taxpayers to file a worksheet with their return or by including any additional forms with information reporting.

Predictions are a tricky thing to do. Take Super Bowl XLVI for example. Scores of fans got their pick wrong, and that’s with a minimum 50-50 chance. On the flip side, many predicted the New York Giants would win, but was it for the right reasons? Most of these fortune tellers probably didn’t have a team of sports analysts on their side (besides myriad sessions of ESPN watching), or know that Tom Brady would have a referee-called safety in the early minutes of the first quarter.

In the same vein, you can look at a football game like a year in tax compliance. It is constantly changing. Successful forecasting requires evermore enhanced analysis and insight. And ultimately you need the right tools to play when it comes down to the wire.

A good example is when the IRS recently updated their 2010 predictions, increasing the amount of information and withholding documents expected in 2012 from 2.175 billion to 2.855 billion. Where are these 700 million additional documents coming from? Businesses like you. The result is an increased chance of errors in your TIN and name information for all of the new 1099s you are filing.

This year in particular there were a variety of notable regulatory changes. For one, the IRS has shifted its focus on closing a newly announced $450 billion tax gap. In addition, “B” Notice fines for incorrect 1099 forms are increasing and new 1099-K and 1099-B forms are now required.

All things considered, some companies still look at the tax year as a compressed three-month sprint. The smart ones however look at it holistically, creating a game plan. They clean their TIN and name data the moment they get it. They are prepared to send out 1099s at a click of a button. All year long these companies stay on top of the ever-changing tax law. They don’t just look at compliance like it is a fourth quarter two-minute drill. These companies will be rewarded for their diligence at tax time. They came prepared, but they don’t need to go it alone.

Even with a plan, not every company has time or the resources to do everything necessary. Most that do could be more efficient at it. As a leader in the compliance industry, Convey keeps a close eye on the constantly changing pulse of the IRS and the legislation that governs it.  Even so, begetting the risk that comes with the many changes in compliance every year isn’t easy. It requires a lot of time without the right tools.

All of these factors make compliance more complex and necessary to plan for. They also provide a chance to take the spotlight. Convey provides the no-hassle tools to do this with our Web-based software and in-house experts, but every situation is different. If we haven’t already, we’d love to discuss your tax-time game plan sometime soon.

Photo by AngieSix on Flickr.

Due to the passing of the Emergency Economic Stabilization Act in 2008, there are now cost-basis reporting rules for Form 8949. Some financial entities are exempt from this requirement, now having to report only one number from Form 1099 onto Form 6781. However, many others must also report cost-basis information on Form 1099-B for “covered securities” (referring to investments such as stocks, real estate investment trusts, mutual funds, etc). This is in efforts to reduce the burden on individual taxpayers, but now that burden and confusion is merely shifting to financial institutions. Therefore, many 1099-Bs are arriving late or with several revisions to individual taxpayers, making it extremely difficult for them to file by the April 17 deadline.

There are three parts to the new Form 8949 (Parts A, B, and C). Part A is used for cost-basis reporting, matching up with Form 1099-B. However, the rule is being phased-in, so cost-basis items won’t be included in 1099-B until 2012 or 2013. Part B is utilized just for this reason – for “transactions reported on Form 1099-B but basis not reported to the IRS,” such as stocks purchased prior to 2011. Lastly, if no Form 1099-B is issued for certain transactions, then those are reported in Part C.

The IRS is focusing more on individual taxpayers (who they think are more prone to errors), so in some instances, filing an 8949 can be avoided by forming a trading entity – recognized as an organization (rather than an individual) by the IRS. However, because of the upgrade in technology, there’s a large expected increase of computer tax notices from matching Form 1099-B, individual tax returns, and Form 8949.

FATCA rules are also being issued by the IRS to not only ensure proper tax reporting by Americans, but also to pressure foreign banks to issue American clients’ information. This way, either the taxpayer or the bank could be penalized for non-compliance. Although, the European Union has been reluctantly following FATCA rules thus far. The use of foreign brokers is an additional way to avoid Form 8949 reporting, but those tedious FATCA requirements would still remain.

Because of these additional hurdles in tax reporting, it’s recommended institutions and taxpayers file as soon as possible. For issues with compliance, Convey is always available with solutions.

Representative Aaron Schock introduced legislation this past week titled the 1099-K Overreach Prevention Act. Ultimately it would “simplify” the 1099-K tax form by eliminating the IRS requirement for businesses to reconcile the gross revenue reported by payment providers with the figure they report on their own tax returns. According to Schock, “[It’s] an unnecessary IRS requirement that will only lead to more accounting headaches for businesses.”

So far, there has been much confusion around the  forms, mostly regarding reporting discrepancies. A number of factors contribute to the different figures reported by the payment provider and the businesses’ own totals: fraud, cash received by the consumer for returns, or fees that would get subtracted from a net total but would still count in gross revenue. “That’s the fear. No one quite knows what will happen if the numbers don’t match,” Schock stated.

This new legislative initiative seems to suggest that we will likely see some changes to the information that is required to be reported on the 1099-K to make it easier for Merchants to marry up their tax returns with 3^rd party reported 1099-K data.

Although 1099Ks have now gone out the door for Tax Year 2011, it appears that we may only be at the beginning of a new chapter of rules around the 1099K.  Convey will be monitoring the situation to make sure that clients and readers alike are ready for whatever may settle out.

You can view the actual bill at: http://thomas.loc.gov/cgi-bin/query/z?c112:H.R.3877.IH:/

[Updated 2/8/2012]

This is a relatively new issue as banks have only recently been stepping up their level of incentives. In these difficult economic times, banks are competing for customers; some, such as Citibank, felt the need to up the ante for incentives during 2011. Citibank was offering 25,000 frequent flier miles for anyone who opened a new checking or savings account. They have been valuing each frequent flier mile at roughly 2.5 cents each, which amounted to a $645 “income” value on the 1099 statement. According to the IRS, any value more than $600 requires banks to send 1099 forms to both the IRS and the gift recipient.  In the past, rewards that would be considered taxable income have rarely come close to the $600 threshold.

Overall, those that took advantage of the 2011 incentive represented a very small portion of Citibank’s customers. Other banks claim they haven’t wanted to bother with large incentives. Wells Fargo spokeswoman, Lisa B. Westermann said, “Our giveaway for opening a checking account is usually a plush pony,” which obviously wouldn’t require 1099 reporting. Discover customers earn rewards -redeemable for gift cards, merchandise, or mileage points – considered rebates as cash back bonuses for credit card use.

It’s recommended that anyone who receives a 1099-MISC form for rewards do not ignore them. That would ultimately result in contact and penalties from the IRS. Additionally, underreporting of income was cited as the largest contributor to our $450 billion tax gap, something we obviously want to improve for the future.