Oct 26th 2010
For nearly 20 years, a group known as the Information Reporting Program Advisory Committee (IRPAC) has been providing counsel and recommendations to the Internal Revenue Service Commissioner.
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This month, IRPAC released its report for 2010 outlining recommendations to the IRS regarding several key issues that have recently become law, or are soon to take effect, such as the controversial 1099 requirement.
IRPAC was formed in 1991 and, according to an October 2010 letter from the group’s chairperson, it is made up of “representatives of the payer community and practitioners interested in the information reporting program to discuss improvements to the system.” Congress believed a group was needed for the purpose of discussing “problems and the feasibility of complying with, or the economic impact of, rules and regulations affecting the reporting industry.”
A goal of IRPAC always has been to discover how to improve the information reporting program, an area of weakness for the IRS. With the recent flood of legislation, Congress continues to require that taxpayers provide more and more documentation. IRPAC is evaluating how useful that information is, compared with the usefulness to the IRS and the growing burden it places on the parties who must supply the information.
While IRPAC supports the IRS’s need for accurate taxpayer data to promote compliance and reduce the agency’s audit burden, the committee recognizes the need for balance.
In recent years, Congress has passed numerous provisions that have added greatly to volume and complexity of information that taxpayers must submit and the IRS must process. Following are a few of the bigger concerns addressed in the 2010 IRPAC report.
The Patient Protection and Accountability Act (PPACA) passed in March requires businesses to begin issuing 1099s for goods purchased after 2011. PPACA also will expand that requirement to include corporate vendors. Previously, 1099 reporting has been for services; and corporate service vendors have been exempt. After extensive analysis, IRPAC proposed various ways to reduce the added burden the legislation places on taxpayers and the IRS that must receive and process the 1099s.
“The changes enacted by the Patient Protection and Affordable Care Act of 2010 raise numerous issues about the utility of the data to be reported and the ability of the IRS to process it,” states the IRPAC report. “The expected exponential increase in the number of returns filed, especially paper returns, and the hurdles the IRS must overcome in actually utilizing the return information in any matching program between information returns and tax returns, cry out for a series of exceptions where the utility of the data is small relative to the cost to produce and process it."
What do CPAs think of the 1099 rules?
Neil Schloss of Castle Consulting in Hightstown, New Jersey, has serious concerns about this change in the law.
“The health care reform act and its requirement for all business to file a 1099 for every vendor of theirs will be overbearing, and small business will again be put against the ropes for compliance and cost,” Schloss told AccountingWEB.
He explained that the idea behind 1099s makes sense. If everyone is reporting accurately, the government will be able to simply “tie out the numbers back to a tax return,” he said. “For example, W-2s get sent by the company to the IRS and the employer fills out a 1040 which matches the W-2 the government has to the 1040 form. If it all ties out, there’s no need to audit or send out a notice to the taxpayer.”
However, it’s not that easy for businesses, according to Schloss. He predicts the onerous 1099 burden could lead to several scenarios.
“Companies may deal in cash to avoid tax reporting…or businesses that took liberties on deductions will no longer have that liberty, leading to a higher tax bill for the taxpayer," Schloss said. "Remember, you do not have to raise tax rates to get more tax revenue. You just need to eliminate expenses or increase the income of the taxpayer.”
He also foresees mounting problems in areas such as worker classification (employee vs. independent contractor), the need to get vendors to fill out W-9s, and the obligation to do backup withholding if they don’t.
“For small businesses that are trying to just survive as a business, the burden to comply with these additional rules might put the nail into their coffin resulting in another mistake of government regulations,” Schloss said.
Health valuation reported on W-2 forms
Another area of concern is the requirement to report the value of employer-sponsored health insurance on W-2 forms for 2011. Realizing the enormous burden placed on employers, IRPAC suggested drastic change.
“Based on the lack of guidance and time necessary to implement system-wide W-2 changes, IRPAC recommends that the IRS make health care reporting optional for 2011 or waive penalties for failure to comply,” according to the report.
IRPAC seemed most concerned that there had been inadequate communication to make the public understand that the health care value that will appear on their W-2 forms will not represent taxable income. Consequently, the IRS has issued a ruling that the reporting of the value of health care coverage will be optional for 2011, and mandatory beginning with W-2s issued for 2012.
In addition, IRPAC recommended that more detailed guidance needs to be provided to employers concerning the types of health coverage that must be included in the W-2 health reporting (e.g., what coverage is required to be aggregated beyond major medical, dental, and vision, and whether administrative costs are included in the reported amount).
Among other things, IRPAC also urged the IRS to provide guidance for how employers should prepare W-2s for retirees who no longer receive W-2 forms, but are still covered under the employer’s health plan.
Here are three other areas IRPAC evaluated in an effort to ensure clarity and balance for all parties:
Cost basis reporting. In 2008, a law was enacted which would require financial institutions to report the customer cost basis in securities transactions. Soon after the law was passed, IRPAC entered into discussions with the IRS regarding the challenges financial institutions would face in the implementation of these rules. As a result of these discussions, in 2010 the committee issued three comment letters to the IRS Chief Counsel, noting its concerns and recommendations. IRPAC stated that because cost basis regulations were not released on a timely basis, there might not be adequate time required for system development and testing of system changes. Many of the details of implementation remain ambiguous, according to IRPAC, or are impossible to implement in the remaining time frame. IRPAC suggested delaying implementation to 2012, particularly as the implementation details apply to transfer statements. IRPAC also suggests deferring enforcement of provisions affecting gifts and inheritances to 2013.
Section 6050W reporting. Section 6050W requires the reporting of payments in settlement of third-party network and payment card transactions. IRPAC asked the IRS to clarify many points. One recommendation was that the existing electronic payee statement standards need to reflect the differences between “reporting in a paper-based consumer world of the past decade and the electronic-based business world of today.” Filers need to be able to notify merchants electronically of their right to opt out of electronic payee statements, said IRPAC. And paper-based merchants need to be able to opt in to electronic payee statements by registering on the filer’s Web site.
Foreign Account Tax Compliance Act (FATCA). FATCA was part of the Hiring Incentives to Restore Employment Act (HIRE) passed in March. It addresses the expanded withholding and tax information reporting rules impacting payments of U.S. source income to foreign financial institutions, and on financial foreign entities. IRPAC has been in discussions with the IRS concerning FATCA from the beginning. Currently the IRS is in a comment period concerning this area of compliance.
IRPAC’s last meeting was before the beginning of the comment period; therefore it has not issued final recommendations. However, some key areas of discussion included:
- The need for withholding agents to perform due diligence, and the details that define due diligence. For example, withholding agents need to provide an explanation of the processes that financial intermediaries and other payers currently use to collect and preserve customer and payee information.
- IRPAC also looked at the definition of foreign financial institution, and how the rules apply to particular types of institutions.