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 reagarding 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.

Still, U.S. Representatives such as Frank A. LoBiondo are hoping the new legislation will go through, “[Owners] should be focused on running their businesses that help grow our economy and create jobs, not wasting time and resources to cross-reference and reconcile their own internal numbers with those reported by third parties.”

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

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.

Previously, the services paid to H-2A workers were recorded on the 1099-MISC forms. As of 2011, any compensation over $600 must be reported by the employer on the W-2 form. The employer can withhold federal income tax from the H-2A worker only if both the employer and employee agree to this stipulation.  H-2A workers are still exempt from U.S. social security and Medicare taxes; although, the employee may end up owing federal income tax when they file individual tax returns.

There are several stakeholders affected by this change in policy, including the H-2A worker, H-2A advocates, growers, grower associations, and their agents. It is a change that has caused some confusion among H-2A employers as well. According to the IRS, if an employer has already mistakenly submitted compensation paid on the 1099-MISC form, they are not required to submit a voided form or report the compensation correctly on the W-2 for 2011. The compensation may also be subject to state or local taxes, so the IRS suggests checking with your local tax authorities to verify.

We gave you our perspective on the 2^nd public meeting concerning the Real-Time Tax System meeting attended by Convey last week. In this follow-up post, we want to share the comments made by other key stakeholder panelists at the meeting. Although there was an overall support for the IRS vision to improve matching of third party data with tax returns using more of an “upfront” strategy, many of the panelists raised questions and concerns over how best to implement the vision.

The IRS published an average correction rate of 1% on third party forms (meaning 1% of total forms are amended, duplicate, or corrected tax returns). However, several panelists have indicated that this figure may be misleading, citing that the 1% is more likely amendments to transmitted third party forms, not the original filing to the taxpayer.  The Securities Industry and Financial Markets Association said an informal study they conducted indicated that their members experience a 12%+ correction rate against the original filing to the taxpayer. Rather than accelerating the filing date, as the American Payroll Association suggested, SIFMA claims they need those extra 1-2 months to correct original forms before sending them to the IRS.  The main challenge they see with Real-Time Tax System is the task of phasing in different forms’ filing deadlines based on the fact that SIFMA members issue a “tax package” to their customers which include several different form types.

Various panelists cited other obstacles and additional steps the IRS would have to think through before implementation of the Real-Time Tax System. Three main challenges were identified by the Wolters Kluwer panelist – the first being timing. They believe tax preparers will have great difficulty assisting with filing and resolution in the same time period. (Drake Software, who also seemed worried about this extra burden on tax preparation professionals, recommended the IRS construct a very clear resolution process for taxpayers’ incorrect information.) The second challenge Wolters Kluwer identified is the impact delaying tax refunds may have - economically distressed filers may be unduly burdened with delays in refunds due to matching process delays. Lastly, they saw educating all impacted stakeholders about the new Real-Time Tax System processes as a major challenge the IRS will face.

Going forward, the Federal government may learn from the “upfront” matching approach that other states have already implemented in their tax systems to improve their own implementation. For example, Delaware has been conducting upfront matching for over several years – the result: tax refunds are issued quickly and clear resolution processes have been developed. Commissioner Shulman expressed gratitude for the comments and seemed receptive to the recommendations of all panelists. Next steps will be to see the IRS put forward an implementation strategy for this progressive vision.

To start, new 1099-K and 1099-B requirements have pushed the IRS to update their projections from just two years ago. New IRS forecasts state they are due to receive approximately 2.855 billion information reports in 2012, an addition of nearly 700 million more forms than previously predicted in 2010.

The depth of the constant fluctuation in reporting requirements goes deeper than just the 1099-K and 1099-B forms.

“[...] the last two to three years has seen a significant increase in the amount of third-party reporting that’s taking place,” explains Thibodeau in the article.

His reasoning? The United States Congress has passed, and afterwards repealed, two recent pieces of 1099 information reporting legislation within the last two years, and there’s more to come. Currently, additional legislation is proposing expanded 1099 reporting on all types of interest income. At the same time, “B” Notice fines for incorrect taxpayer data are increasing.

For all these reasons, Convey maintains a finger on the pulse of the tax reporting industry and incorporates the evermore changing landscape into our Web-based software to make things easier for you.

Want to know more? Our upcoming webinar “Ensuring Accurate Taxpayer Information” will address the current best practices surrounding proactive TIN and legal-name remediation. Plus, you can read the entire Accounting Today article here.

But first, some background on proactive TIN remediation, a crucial part of tax information reporting. Proactive TIN remediation is the process of validating the name and TIN (taxpayer identification number) information you have on file. This is usually done through the IRS TIN matching program – a service offered by the IRS that allows taxpayers to match their information with what the IRS has on file. Therefore, they can determine how many invalid recipient/vendor matches they have, correct them, and then transmit their information to the IRS. Ultimately, this reduces penalty notices and the amount of corrections the taxpayer needs to file.

The key is to collect the information before the IRS issues you a B-notice, helping to avoid the risk of penalties and going through the process of withholding. There’s flexibility with TIN remediation too, in that there are several options for your company to collect the needed information. Overall, correct information on forms leads to happy clients and vendors!

To learn more about the importance of proactive TIN remediation, make sure to attend our Webinar on February 9^th. Use the link above to register, and then follow us on Twitter, @Convey_1099news, for updates.

According to Morgan Housel, writer at The Motley Fool, there’s been roughly $3 to $5 trillion in lost tax revenue over the last decade due to tax evasion. “Tax evasion in the last decade cost an amount roughly equivalent to the Bush tax cuts, the Obama stimulus, and the wars in Iraq and Afghanistan..combined,” he writes. It’s interesting to note that people seem to be more concerned about these topics rather than the large amounts of money people illegally avoid paying in tax returns.

The problem we face now is exactly how to lower this tax gap. Will IRS budget cuts do the trick? According to David Cray Johnston, who recently wrote in Reuters, the IRS budget cuts will likely increase tax evasion because of fewer enforcement officers. He explained that the auditors assigned to the approximately 14,000 largest corporations found $9,354 of additional tax owed for every hour they spent testing tax returns in 2009, according to IRS data. Extrapolate that out to a typical work year – 2,080 hours – and that’s about $19 million of lost revenue annually for every auditor position cut from the IRS payroll. Housel claims, “As long as there are taxes, there will be tax evasion. It will never be eradicated. The question is whether the tax gap can reasonably be reduced from current levels.”

Join us for a live 30-minute webinar to learn more about proactively cleansing your TIN and legal-name data, eliminating unnecessary penalties and improving your current system.

Thursday, February 9 / 12:00 pm Pacific / 2:00 pm Central / 3:00 pm Eastern

Click here to register.

Here are some key thoughts we took away from the meeting:

-It was discussed that  the internet has changed consumer expectations around the availability of information in realt-time; for example, consumers have come to expect financial transactions with third parties to happen in real-time. However, the US tax system has not stayed current with real-time transparency causing many negative taxpayer experiences with the U.S. tax system – which is why the Real-Time Tax System has been proposed. The IRS claims that, today, they are in a better position, with technology modernization, to accelerate processing cycles and improve taxpayer experiences.

-IRS Commissioner Shulman, stated that the the purpose of matching forms instantaneously with third party information was not to “reject” mismatched returns, (and ultimately delaying refunds to taxpayers), but rather to help taxpayers improve the accuracy of their returns. It was addressed that most mismatches between tax returns and information reporting results from four different forms, the W-2, 1099R, 1099B, and the 1099Misc.

-The American Payroll Association suggested that filing dates could be accelerated. However, the Small Business Legislative Council voiced their concern over the potential for increased burden and little positive impact from the change. Additionally, they’re worried that, given the tendency for inaccuracies in third party information, more communication will be needed with their tax professionals, resulting in additional costs to their organizations.

Overall, most panelists were receptive to the Real-Time Tax System vision. However, several of them indicated that the IRS should expand the mandate around electronic information forms; for example, lowering the threshold, from the current 250 limit, to 10 paper forms or less. Shulman was ultimately encouraged to receive the support, so we will be following this topic closely to see how additional progress takes place.

Tax Reporting & Withholding Conference – May 6-8, 2012
The Ritz-Carlton, Pentagon City
1250 South Hayes Street
Arlington, VA