Information reporting has become a growing part of IRS’s enforcement and compliance strategy. Data matching, or even the inference that the IRS has the data to do so, statistically has increased overall income reporting nine-fold. Use of information returns, either in the form of Forms W-2, 1098s or 1099s, is here to stay, and growing.
Each year, new information compliance requirements arrive at the start of another filing season. The filing season coming up will be no exception, with or without tax reform. Developing rules for the “sharing economy” as well as relatively new deadlines imposed under the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), all get vetted again this January. Preparing for those deadlines, especially those rapidly coming up at the end of January, needs to start soon.
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 January 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 (for more, 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.
“Gig” or “Sharing” Economy
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 (for example, for ride sharing applications) 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 (TPSOs) are eligible for de minimis rules that eliminate reporting on otherwise reportable amounts if either the amount paid to any service provider 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.
When read with the current Instructions for Form 1099-K, the de minimis rules are being interpreted by some taxpayers as eliminating any further obligation on the part of a TSPO to report at all, including issuing a Form 1099-MISC. Payments for 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 simply say that TPSOs are required to report on service providers only if the $20,000-or-200-transactions level is reached.
Employee versus Independent Contractor
Generally, employers must withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to employees. Information reporting to the IRS differs depending upon whether the service provider is an employee or a contractor. Whether a worker is an employee or an independent contractordepends on a number of factors.
The IRS has a Voluntary Classification Settlement Program (VCSP), 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
Expect More to Come
Former IRS Commissioner Koskinen, who left the IRS this past November, underscored the importance of third-party information reporting recently in discussing the tax gap: “when there is information reporting, such as 1099s, income is only underreported about 7 percent of the time…but that number jumps to 63% for income not subject to any third-party reporting or withholding.” With that kind of return on investment, increasing levels of information reporting seem to be here to stay.