Compass Newsletter - Articles

New Year Rings in Increased Form 1099 Reporting Requirements

By Tricia M. Olson
(Winter 2011)

The Internal Revenue Service uses third-party information returns (Form 1099s) to detect unreported taxable income by comparing the income reported on information returns with the income reported on payees’ income tax returns. Recent legislation increased the information reporting requirements for various Form 1099s. Businesses should be aware of the changes below:

Debit and Credit Card Transactions

Starting January 1, 2011, debit and credit card transactions, as well as third-party network (e.g. PayPal) transactions, are subject to information reporting if they meet certain thresholds. Pursuant to this requirement, banks and other payment entities must report payments remitted to parties by debit card, credit card, or third-party networks if (a) the total amount exceeds $20,000, and (b) the aggregate number of individual transactions exceeds 200.1 Both conditions must be met. Businesses that receive payments that satisfy these conditions will receive a Form 1099-K in 2012 reporting gross receipts from such transactions. It is important to note that the 1099-K will report the gross amount received, rather than net amounts reflecting any charge backs, discounts, fees or other adjustments for individual transactions. The 1099-K, therefore, may not be an exact match with actual receipts.

Stock Basis

Brokers currently provide customers with a Form 1099-B reporting the proceeds from security sales. For securities acquired after 2010, brokers must also report the customer’s adjusted basis in the securities sold and whether the gain (or loss) was long-term or short-term. Adjusted basis is generally determined on an account-by-account basis, with the “first-in first-out” method applied to groups of securities.2 Brokers will furnish the expanded 1099-B to the IRS and investors in early 2012.

Rental Property

Pursuant to the Small Business Jobs Act of 2010, property owners who receive rental income must issue a Form 1099-MISC to service providers for aggregate payments of $600 or more made during a year in the course of earning rental income. Examples include payments made to plumbers or painters for repairs to the property, or accountants for preparation of relevant tax returns. This requirement applies to payments made after December 31, 2010. There are exceptions for individuals who derive “substantially all” of their rental income from renting their principal residence on a “temporary basis,” and for individuals who receive rental income of “not more than the minimal amount.”3 The IRS has not yet issued regulations to define “substantially all,” “temporary basis,” or “not more than a minimal amount.”

Payments for Goods and Services

The Patient Protection and Affordable Care Act of 2010 further increases 1099-MISC reporting for payments made after December 31, 2011. Under that legislation, all businesses must report payments totaling $600 or more in a calendar year to a single payee (including corporations) for services or goods.4 Under current law, payments for goods are excepted from this information reporting requirement, as are payments to corporations. There have already been several attempts to repeal this increase to 1099-MISC reporting. Businesses should stay tuned for further repeal efforts by Congress in 2011, or possible refining through regulations. One source of mitigation already exists in the regulations: to the extent that such payments are made by debit or credit card and reportable on 1099-K, they do not have to be double-reported on a 1099-MISC.5

Penalties for Non-Compliance

Non-compliance with the new information reporting requirements can be costly. For small businesses (meaning those with average annual gross receipts under $5 million), the penalties for failure to provide timely and correct information returns after January 1, 2011 are as follows:

  • Tier One: If a person files a correct information return within 30 days after the required filing date, the penalty is $30 per return with a maximum penalty of $75,000 per calendar year.
  • Tier Two: If a person files a correct information return more than 30 days after the required filing date but before August 1 of the calendar year in which filing was required, the penalty is $60 per return with a maximum penalty of $200,000 per calendar year.
  • Tier Three: If a person files a correct information return after August 1 of the calendar year in which filing was required, the penalty is $100 per return with a maximum penalty of $500,000 per calendar year.6

To comply with the information reporting requirements, businesses will need to obtain the name, address and taxpayer identification number of payees. They should also make sure that their accounting system can easily sort payments by vendor to identify those to which aggregate payments of $600 or more were made. Gearing up to meet these requirements now will be a lot easier than trying to gather the information after the fact at the time of the reporting deadlines.

1 IRC §6050W(e).
2 IRC §1012(c)(1); IRC §6045(g)(2)(B)(i)(I).
3 IRC §6041(h)(2).
4 IRC §6041(a), §6041(i).
5 Reg. §1.6041-1(a)(1)(iv).
6 IRC §6721.