QUESTIONS FROM A CLIENT

A client recently emailed me some questions that I think are often asked of tax preparers, especially now with the changes made by the GOP Tax Act.  The answer to these questions, and the debunking of some common misconceptions the answer includes, are important to understand.

Robert -

1. Just wanted to ask you how do you report taxes at end of year on a 1099?  I imagine in this case you report less than if your employer was reporting on a W-2. Please explain what is advantage AND disadvantage?

2. I hear is that when you are working on your own or providing home care you can report whatever you want, but I still want to accumulate for my Social Security.  Am sure in this case you don’t have to pay city taxes or Medicare, etc.

Madame X

My response:

Madame X -

1. Income from a Form 1099 is reported based on the source of the income.  If it is a Form 1099-MISC reporting “non-employee compensation” it is reported on a Schedule C or C-EZ of Form 1040, with deductions for directly related out of pocket expenses allowed.  The net amount is subject to federal and state, and if applicable city, income tax and federal “self-employment” tax, which is the equivalent of both halves of Social Security and Medicare.  A new special tax deduction of 20% of the net income may be allowed.  However, this new deduction does not reduce net income subject to the self-employment tax.

The amount that is reported by the payee on a Form 1099-MISC for non-employee compensation is the same as the amount of gross wages reported for an employee – the gross amount of the payment to you for services provided.  Less income may be actually subject to tax because of the deduction of direct out of pocket expenses related to earning the income.

The advantage of receiving income as a “sub-contractor” on a Form 1099-MISC vs receiving income as an employee on W-2 is the availability of the deduction for directly related out of pocket expenses and the new 20% deduction for “pass-through” business income.  The disadvantage is that you pay both halves of the Social Security and Medicare tax – as an employee you pay half and your employer pays half - although the amount of income on which the self-employment tax is paid may be less than the gross wages reported on a W-2 that are subject to these payroll taxes.

2. It is NOT true that if you are working on your own you can report “whatever you want”.  By law you MUST report WHATEVER YOU RECEIVE in full, whether or not you actually receive a Form 1099-MISC. 

A person being paid for providing home care is a “household employee” of the person who is being cared for.  The person being cared for would need to withhold income and Social Security and Medicare taxes, as any other employer would, and issue the person providing the home care a Form W-2.

As a self-employed person, you would continue to pay into Social Security via the “self-employment tax” and your net income would count toward the determination of Social Security benefits.

RDF

Do you have any questions?

TTFN

WHAT A DISRUPTIVE DEVELOPMENT THIS IS!

I recently initiated discussions, via THE TAX PROFESSIONAL, among tax preparers about how the excessive Earned Income Tax Credit due diligence requirements and the Obamacare health insurance coverage requirement have affected their practices and policies.  The bottom line appears to be that these developments turned out to be not as bad as expected, while still unnecessary inconveniences.

The one development of this millennium that has been the most disruptive to the tax filing season is not the EITC due diligence or Obamacare.  It is the consistent late arriving multiple corrected copies of brokerage Consolidated Form 1099 Tax Statements, which began with the inception of “qualified” dividends in 2004.

I just finished reviewing a corrected brokerage tax statement that was generated on March 31^st.  It was actually the second corrected statement for this account – the first was generated on March 24^th, and was received by the taxpayer two days after the completed 2014 Form 1040 had been mailed out to Uncles Sam and Chris.

It appears from my review that the client would owe the IRS an additional $22.00 based on the multiple up and down changes to the numbers on the statement.  My advice to the client – it is not worth spending the money, and my time, to prepare an amended return.  If the IRS questions the return based on the corrected statement in the future we will worry about it then.

Clients who would normally send me their “stuff” in early or mid-February – allowing for a much smoother work flow during the season - now must wait until mid-March because of the need to “wait and see” if corrected brokerage reports arrive.  This results in a very hectic and stressful “back-end” of the season and additional GD extensions.

Even if no corrected brokerage statements are ultimately issued client must wait until almost mid-March just in case corrections may be issued – hence the necessity for “wait and see”.

Why is there a need for these delayed corrected statements?  Brokerage firms have had a decade to develop and fine-tune their internal software so as to be able to promptly issue correct statements.  Does the fault lie with the brokerage houses, or with the individual mutual fund houses (most corrections involve mutual funds and similar investments) who report corrections to the brokerage houses late?

There is also a problem with late K-1s – but this can be easily avoided by simply not investing in limited partnerships (it is my firm belief that there are mutual funds that would provide the same return or benefits as any limited partnership investment).  But investors cannot avoid using brokers, nor should they avoid mutual funds

I invite any “higher-up” at any brokerage house to explain to me the reason why multiple late corrected copies are necessary.  You can respond in a comment to this post or email me at rdftaxpro@gmail.com with “Late Brokerage Statements” in the subject line.

Would things change if the IRS fined brokerage houses $50.00 per day per client for corrected statements issued after February 15^th?

As always, I welcome comments and emails from fellow tax professionals on this issue.

TTFN

FINE WHINE: WHY MUST WE PUT UP WITH LATE ARRIVING CORRECTED 1099-DIVs EACH TAX SEASON?

Something must be done about late arriving corrected, sometimes twice, brokerage house Consolidated 1099 Tax Reporting Statements!

Clients who historically had their tax returns prepared in mid-February, when my time was not so tight, are now forced to wait until often the end of March, and risk GD extension, before getting me their “stuff”.

This serious tax-season disrupting problem has been around since 2004 – when the concept of “qualified” dividends was first introduced.  I do not recall corrected 1099 reports being issued to my clients prior to this - and if there were any they were truly few and far between so as not to be memorable.

 

What is corrected is the mix of ordinary dividends, qualified dividends, and, occasionally, capital gain distributions and “nondividend distributions”.  The gross proceeds number is never changed, nor is the cost basis (on both “covered” and “non-covered” transactions).  It seems to me that in most cases the dividends that are corrected are those issued by mutual funds.

I am surprised that the reporting software of the various mutual fund and brokerage houses has not been revised by now so that late annual multiple corrected information returns are no longer necessary.  They have had almost ten years!  Why does it take an extra month or more for the software to properly identify the correct status of dividends?  What information is not completely available by the third week of January - or, for that matter, when the dividends are actually issued?

Do you think if the IRS went back to requiring 1099-DIV forms, whether issued separately or in a consolidated report, to be delivered to taxpayers by January 31^st, and strictly enforced this deadline by penalizing firms for issuing late or corrected returns, that they would make sure the software was fixed so that correct information was available on a timely basis?

I would appreciate some guidance from anyone "in the know" why corrected 1099-DIVs must be a necessity of the tax-filing season.

TTFN

THE NATP YEAR-END TAX UPDATE SEMINAR

As mentioned in Wednesday’s BUZZ, this week I attended the National Association of Tax Professionals’ annual year-end tax update seminar “The Essential 1040” (it was formerly “Famous”, but is now “Essential”) in New Jersey.

While the day was basically an update of what is new for 2012 tax returns, with nothing really new for me, there were a few items of interest.

(1)  The draft version of the 2012 Form 1040 (and 1040A) is available for viewing.  They are the same as their 2011 counterparts, with the same number of lines.  However certain Lines are marked “Reserved” – for the popular tax extenders that expired on December 31, 2011, and have not yet been extended for 2012 by the idiots in Congress, but which the IRS is thinking probably will be.

They include Lines 23 and 34 on Page 1 of the 2012 Form 1040, and Lines 16 and 18 on the 1040A, are “reserved” for the deductions for educator expenses and tuition and fees respectively. 

On Page 2 of the 2012 Form 1040 Line 67 and item b. on Line 71 is also “Reserved”.  Line 67 on the 2011 form was used for the First-Time Homebuyer Creditfrom Form 5405, and item b on Line 71 referenced Form 8839, used for Qualified Adoption Expenses (which was refundable).

The draft of the 2012 Schedule A, for Itemized Deductions, is also available.  Item b of Line 5 (under “Taxes You Paid”) is “Reserved” for the possible extension of the option to deduct state and local sales taxes instead of state and local income taxes.

(2)  The IRS has said that because of the delay by the idiots in Congress in dealing with the extenders, including the annual AMT patch, and more detailed checking to prevent fraudulent returns, refunds from electronically filed 2012 income tax returns will no longer be issued in 2 weeks.  It will not take 4 to 6 weeks to process the refunds. 

This sounds like the processing time we had been used to with manually filed returns.  So it looks like filing electronically will not get your refund to you any faster than filing manually.

(3)  FYI – the “incidental only” (no meals) per diem allowance for business travel is $5.00.  It is the same as 2011. 

This covers fees and tips to airport, train station, and hotel personnel.  It is generally used by business travelers who do not incur meal expenses while “on the road” – i.e. they stay with relatives who feed them, or all meals are included in the price of an event or activity. 

And the special Meals and Incidental Expenses per diem for transportation workers (like over-the-road truck drivers) also remains the same as 2011 - $59.00 per day for travel within CONUS (continental US) and $65.00 per day for OCONUS (outside the continental US) travel.

(4)  The IRS is getting better at matching 1099 information returns to amounts reported on the Form 1040 (or 1040A), and will continue to issue CP-2000 notices when discrepancies are identified – so be sure to report all 1099 items somewhere on your return.

And, of course, just because you do not receive a Form 1099 in the mail does not mean that one was not issued and sent to the IRS. 

(5)  This, I will admit, was new to me.  The interest that has accrued on US Savings Bonds is taxable in the year that the individual bond matures, and not necessarily in the year the bond is cashed in (i.e. a bond matures in 2010, but is not cashed in until 2012).

I verified this via TREASURY DIRECT - 

“The interest earned on your savings bonds is subject to federal income tax, which can be deferred until redemption, final maturity, or other taxable disposition, whichever occurs first.”  

(6)  Another FYI, especially for tax pros - 43 inmates on death row were issued PTINs (Preparer Tax Identification Numbers) - the number issued by the Internal Revenue Service to paid tax return preparers who have registered with the IRS.

(7)  The seminar leaders, both very good (while some are obviously more better than others -my buddy Beanna Whitlock will have you in stitches while learning something important about tax law – I do not recall ever coming across a bad or unsatisfactory NATP seminar leader), both discussed the “back-ended ROTH” strategy.

A taxpayer wants to contribute to a ROTH IRA for 2012, but has too much income to be able to do so (MAGI of more than $183,000 if married filing joint, $10,000 if married filing separately, or $125,000 for all others).

So the taxpayer puts the maximum $5,000 or $6,000 (depending on age) in a non-deductible “traditional” IRA.  Once this contribution has been processed the taxpayer converts the $5,000 or $6,000 in the traditional IRA account to a ROTH account.  There is no longer an income threshold for converting a traditional IRA to a ROTH IRA. 

As the taxpayer’s basis in the IRA is $5,000 or $6,000, his 2012 non-deductible contribution, there is no taxable income to report.  If the money deposited in the non-deductible traditional IRA account earns $5.00 in interest prior to the conversion, then the taxpayer reports $5.00 as taxable income.

(8)  Be sure to read my THE TAX PROFESSIONAL post for my commentary on items discussed at the seminar that apply to taxpros.

 

I have now completed my CPE for the year.  While the IRS requires 15 hours per year, in 2012 I took 24 hours in federal taxation and 8 hours in state taxation (actually all NATP or NJ-NATP classes).  And there were some federal courses offered recently that I would have taken if not for cash flow issues.  First up in 2013 is the excellent NJ-NATP famous State Tax Seminar in mid-January.

TTFN

1099-K PROBLEMS HAVE NOT GONE AWAY

MISSOURI TAXGUY Bruce McFarland’s recent “McTax Hangout” online “tv show” discussed the issue of Form 1099-K.

Bruce reported that the IRS just sent out 20,000 letters to small business taxpayers regarding the issue of 1099-K income.

IRS Form 1099-K reports “gross” receipts that were “run through” a credit card.  This would include sales tax and, for restaurants, tips for waitpersons – and could also include “cash back” requested by customers using debit cards. 

So it is obvious that the “gross” receipts reported on a Form 1099-K by a third-party credit card provider is NOT the same as gross receipts from sales or services received by the taxpayer.

The problem is that, while I do not think that the 1099-K numbers are to be entered separately on the IRS tax forms (1040 Schedule C and E and 1120, 1120-S and 1065), the IRS will use the numbers reported on 1099-Ks for audit purposes, and possibly also for CP-2000 purposes.

What to do?

One solution, which is technically not correct, is to include the gross amounts reported on Form 1099Ks in the line for “gross” receipts, and deduct out customer “cash backs” perhaps in the line for “returns and allowances” or along with sales tax remitted and employee tips in the Cost of Goods Sold section on the line for “other costs”, with a statement attached to the return identifying the specifics of these “other costs”.  

Of course with the Form 1099K rules it is more important than ever for the small business owner to keep super-detailed records of all receipts and disbursements.

TTFN

TO 1099 OR NOT TO 1099 - THAT IS THE QUESTION!

A long-time friend and client, the Executive Director of a membership organization for artists, recently asked me to whom does she have to issue Form 1099-MISC for tax year 2011.

First of all -

Section 9006 of the “Patient Protection and Affordable Care Act” had expanded the 1099 reporting requirements to include all payments from businesses for goods and services aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation), starting with payments in 2012. 

In April of 2011, the President signed into law the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011”, which repealed the expanded Form 1099 information reporting requirements.

The expanded excessive 1099 reporting requirements NO LONGER EXIST.

Here are some excerpts from the IRS instructions for Form 1099-MISC on the reporting of “nonemployee compensation” for 2011 -

“Enter nonemployee compensation of $600 or more. Include fees, commissions, prizes and awards for services performed as a nonemployee, other forms of compensation for services performed for your trade or business by an individual who is not your employee.

If the following four conditions are met, you must generally report a payment as nonemployee compensation.

•  You made the payment to someone who is not your employee;

•  You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);

•  You made the payment to an individual, partnership, estate, or, in some cases, a corporation; and

•  You made payments to the payee of at least $600 during the year.”

What should you include on for Form 1099?

Report only payments for services provided, and not for the reimbursement of expenses submitted to you.

If an independent contractor, like the private detectives on tv, charges “$200 a day plus expenses” (that $200 a day would now probably be $500 a day) for his/her services, and you were presented with a detailed list of specific expenses for travel, informant fees, research, supplies, etc for which you reimburse the contractor, the amount of this reimbursement should not be included in the amount you report on the Form 1099 you give to the contractor. The 1099 should only include the “$200 a day”.

If he/she worked 5 days and submitted a detailed expense report to you for $527.36 the Form 1099 you provide should be for $1,000 only ($200 x 5 days), and not the $1,527.36 that you actually paid.  If the fee was $200 a day plus a flat $50 a day for expenses then the Form 1099 would be for $1,250.  

Generally you do not have to issue a Form 1099-MISC for nonemployee compensation paid to a corporation.  Payments to corporations are reported only if they are for medical, health care, legal or fishing activities.

At one point I was a one-member LLC (Robert D Flach LLC) opting for the default filing as a sole proprietor on Schedule C.  Business clients who paid me $600.00 or more during the year had to issue me a Form 1099-MISC for my accounting and tax preparation fees.  I now operate as a corporation (Taxpro Services Corporation), so my business clients no longer have to give me a Form 1099 for my fees.

If a business paid a self-employed photographer, Wilson Photography, an unincorporated sole proprietor who filed a Schedule C (or if a partnership a Form 1065), $750.00 for taking publicity photos or photos used in a catalog it would have to issue a Form 1099-MISC.  If the photographer was Wilson Photography, Inc. no Form 1099 would be required.

You must include the payee’s Social Security Number or Employer Identification Number on the Form 1099.  If you do not have it call the payee or send him/her a Form W-9 to fill out and return to you.

TTFN

RANDOM THOUGHTS ON THE 1099-K REPORTING REQUIREMENTS

The reason behind the creation of the new 1099-K reporting requirements was clearly to raise revenue.  The IRS says – “Third-party information reporting has been shown to increase voluntary tax compliance, improve collections and assessments within IRS, and thereby reduce the tax gap”.

I do not think that reporting payments made by credit and debit cards will result in substantially increased gross proceeds, and therefore also increased net taxable income, reported by small businesses.

It is a general rule among small businesses that you report as income to Uncle Sam what you deposit into the business checking account.  Of course this rule is only valid if you also deposit all receipts - all cash, checks and credit/debit card payments – to the business checking account.  But, also of course, this does not always happen – though it is usually cash that does not make its way to the checking account.

Credit and debit card payments made by customers are deposited, directly or otherwise, into the business checking account.  So these payments are, I expect, already being included in gross proceeds.  

Where I see the benefit of the reporting requirements involves the “Third Party Network Payments” from PayPal and similar services.  This should help to identify those small businesses that are truly “off the grid” and operate within the underground economy – especially those that involve selling products or collectibles on eBay and similar sites or via websites – and force them into reporting their income.

Unfortunately the IRS “exempts the reporting of transactions settled by a third-party settlement organization of a payee in a third-party payment network if the aggregate payments to the payee do not exceed $20,000 or if the aggregate number of transactions does not exceed 200 within the calendar year”.  This threshold, correctly, does not apply to credit and debit card payments.

This leaves out the true hobbyists and those who are selling used personal items similar to a garage sale – where no real taxable business activity exists.  But it also exempts many of the smaller underground businesses whose transaction activities fall under the minimums.  I would think the threshold for total payments should be $5,000 and the number of transactions should be 50 or even less.

WTF?

I am confused. 

According to the IRS “e-News for Tax Professionals” Issue 2011-42 that I just received via email (highlight is mine)-

“The IRS is providing special transitional relief to banks and other payment settlement entities required to begin reporting payment card and third-party network transactions to the IRS on new Form 1099-K.

By law, reporting is scheduled to begin in early 2012 for payment card and third-party network transactions that occurred in 2011. But under new guidance, they will not have to begin reporting until 2013.  Details on the special transitional relief and reporting requirements are in these FAQs, and more information on this relief is in Notice 2011-88 and Notice 2011-89.”

I have not found anything in a quick review of the referenced FAQs or Notices that reporting is postponed until 2013.

Under the FAQs it states–

“Information reporting for payment card and third party network transactions are due to the IRS by Feb. 28 (March 31, if filed electronically), of the year following the transactions. The first Forms 1099-K will be due for calendar year 2011, and must be submitted to the IRS by Feb. 28, 2012 (March 31, 2012 if filed electronically).” 

And the notices involve relief from back-up withholding and penalties for reporting incorrect information.

I have found nothing else to suggest that the requirement has been postponed.  So it seems the IRS “misspoke”.

YOUR W-2s AND 1099s

You should start to receive your 2010 information returns (W-2, 1099, 1098) within the next few weeks. Most of these forms must be mailed out to you by January 31, 2011, although some 1099 forms have until mid-February to get them in the mail.

If you have not received all your W-2s, 1098 and 1099s for bank interest and non-employee compensation by February 6th, or other information returns by February 20th, contact the employer, bank, broker, or whoever and arrange to receive a duplicate copy.

And, to repeat what I tell you each year at this time, taxpayers with brokerage accounts will probably receive at least one “Corrected” 1099 statement. These corrected statements often do not arrive until March. It would be a good idea to wait a few weeks after receiving the original 1099 information before having your return prepared. You may want to contact your broker and ask him or her if and when any corrected statements will be sent out.

When you receive your W-2s for 2010 you should carefully compare the gross federal and state wages, federal, state and local income tax withheld, and Social Security and Medicare taxes withheld numbers on your W-2s to the amounts on your pay stubs or other records. Also verify that the Social Security numbers on the forms are correct. If you find an error or discrepancy, contact the appropriate employer or financial institution for an explanation or a corrected copy.

If the federal and state wages are not the same I always attempt to reconcile the numbers. My home state of New Jersey does not allow a deduction from state wages for contributions to pension or deferred compensation plans other than a 401(k), or for employee contributions to flexible spending accounts for insurance premiums, medical expenses and dependent care. Third-party disability pay, which is usually at least partially taxable for federal purposes, is exempt from NJ state income tax and will not be included in the state wages amount.

You should also check to see if the box for “Retirement Plan” in Box 13 is “x-ed”. If it is, and you were NOT an active participant in an “employer plan” during 2010, you should contact the employer immediately and request that a corrected copy be issued to both you and the Social Security Administration. Your participation in an employer plan can affect the deductibility of any traditional IRA contributions you may make for the year.

This advice is especially important for trade union employees. I refer you to the situation discussed in my post A TRUE STORY. This issue was eventually resolved when the taxpayer was able to get the “offending” employers to reissue a corrected W-2 (via W-3c and W-2c).

If you do not receive a W-2 from a job you had in 2010 and you cannot contact the employer because it has gone out of business or disappeared all is not lost. You can use your pay stubs or other records to reconstruct the various items of income and withholding and file Form 4852 “Substitute for Form W-2 Wage and Tax Statement” with your federal and state tax returns. In such a situation I recommend that you consult a tax professional.

You should do the same with 1099s you receive. Check the income reported on these returns to your own records, and make sure that, if interest for several accounts are included on one Form 1099-INT, all the accounts listed actually belong to you.

A word to the wise – just because you have not received a Form 1099 does not mean that you do not have to report the income. If income is taxable it is taxable whether or not you receive a Form 1099. And just because you have not received a Form 1099 does not mean that one has not been issued. The form could have gotten lost in the mail or sent to an old or wrong address. But while your copy was lost chances are that the one sent to the IRS made it.

Here is another heads up - Insurance and telephone company dividend checks mailed out in December or January often have a Form 1099-DIV attached. Do not separate the check and throw out the 1099-DIV by mistake thinking it is merely a check stub. Also check any 1099-DIV you receive from an insurance or telephone company to see if there is a dividend check attached. I can’t tell you how many times I have found checks attached to 1099s given to me by clients at tax time.

And finally, according to Internal Revenue Service Revenue Ruling 69-184 you cannot be both a partner in and an employee of the same partnership. A partner cannot receive a salary from the partnership, and should not be given a W-2. If you are a partner who received “guaranteed payments” in 2010 but you receive a 2008 Form W-2 from the partnership you should go to the partnership’s accounting firm and tell them that they goofed.

TTFN

MY WANDERING MIND

I have been thinking about the new 1099 reporting requirements that will take effect in 2012.

I am not worried about anything yet. As I said, they do not take effect until calendar year 2012, for Form 1099s issued in January of 2013. And, considering recent developments, for all we know Congress will either repeal or revise these requirements before then.

I have no problem with issuing 1099s to corporations, which is new. And, although I am not thrilled about having to issue a Form 1099 to those who are paid $600 or more for the purchase of “property” (i.e. supplies and equipment, raw materials and merchandise), also new, it does not bother me. It means more work at year-end and in January – but also more billable hours.

Commissioner Shulman appears to be doing us a favor by exempting payments made by credit or debit card from the 1099 reporting requirements, as these payments will already be reported to the IRS by the banks and credit card companies. While this may actually result in additional work for some small businesses it is not an issue for me.

I use a general ledger software (no longer in available) to record cash disbursements for the very few businesses I do on a year-round basis. I enter payments made via check by vendor name, so the software can easily prepare a report of all payments made during the year to each individual vendor, which I would use to type my 1099s.

Checks to pay for credit card charges are entered using the credit card company (i.e. American Express) as the vendor. I do not record credit card payments by individual vendor name – but thanks to Doug I would not need to do so. Debit card payments are treated as if they were checks written and use the individual vendor name – but DEBIT is entered in the system as the check number, so these payments are easily identifiable on the vendor print-out. Payments made from “petty cash” are also treated the same as checks (with petty cash treated as a separate “checking account” in the system) and include a vendor name when available.

While my general ledger software program is out of print, I expect that most all GL programs operate in basically the same manner. So I do not see a problem for businesses that keep their books using GL software. Those who keep their books by hand, especially very small part-time and sideline businesses, will be the ones who will have an increased burden.

{Hey, just because I do not use tax preparation software to prepare tax returns, and at this point expect that I never will, does not mean that I do not take advantage of general ledger and payroll software – that is something altogether different.}

The only problem I anticipate in my particular situation is in getting the Employer Identification Numbers of each and every vendor that is used by my clients. The best practice is to get the numbers up front early in the year and not wait until December to see who is paid $600 or more and chase after the numbers.

If Congress is sincere about keeping the new requirements in place the easiest thing to do is to require by federal law all businesses to clearly identify their EIN on all invoices and statements beginning in January of 2012, if such a law is at all possible.

These new requirements will change the current situation regarding EINs for sole proprietorships and one-person LLCs that do not have employees. Under current law these businesses do not require an EIN – they can use their Social Security number. However with the need to give the majority of customers and clients a number for potential 1099 filings every one-person business will need to get an EIN.

I expect that I will prepare a standard form letter to vendors requesting their Employer Identification Number that I will send out with the first check payment of the year. The letter will state that subsequent payments for invoices will be delayed until a valid EIN has been provided. I have no intention of dealing with “back-up” withholding on payments to vendors - especially if I am not yet certain I will need to issue a Form 1099.

So, while I do hope that Congress will either repeal or ease the requirements, if they do not – so be it.

My final comment on the issue is a repeat. The fact that Congress now wants to repeal these new requirements is a sad but clear indication of the fact that the cafones in Washington either (1) do not take into consideration, or care about, the added burdens that specific legislation will put on affected parties, or (2) do not actually read the legislation they are voting on. I expect it is a little of both.

TTFN

THE CAFONES!

I have been thinking about the new IRS requirement, as per Section 9006 of the health care “reform” bill, for sending out 1099s to everyone and their brother, and about how it will affect me.

As CNNMoney’s article “Health Care Law's Massive, Hidden Tax Change” tells us (highlight is mine) - “beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year”.

The article goes on to explain –

“Right now, the IRS Form 1099 is used to document income for individual workers other than wages and salaries. Freelancers receive them each year from their clients, and businesses issue them to the independent contractors they hire.

But under the new rules, if a freelance designer buys a new iMac from the Apple Store, they'll have to send Apple a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases.”

So first, corporations are no longer exempt from receiving 1099s. And second, 1099s must now be issued for the purchase of goods as well as services. The filing threshold, which has historically been more than $600, remains unchanged. So if payments to any vendor or contractor exceed $600 a Form 1099 must be issued.

I have no problem with having to issue corporations a Form 1099 for services provided. I am a corporation, so this would mean my business clients would need to issue me a Form 1099-MISC each year. I report all my income, so this would not increase my tax burden. I would just have to add Taxpro Services Corporation to the list of 1099s I must type for each business client along with W-2s on Christmas and New Years Eve. I can count my business clients on the fingers of one hand, so my workload would not increase materially because of this change.

The problem will arise if I must issue 1099s to Staples, Office Depot, and other vendors for my own business and for all my business clients. Here is where Congress, in its wisdom (or, as is more often the case, lack of wisdom), has once again overreacted to an issue rather than responding to a problem, something they are famous for doing.

One of my clients is a tavern. So I expect they will have to issue to each and every liquor supplier a Form 1099. On the way into work the bartender will regularly stop at a local Shop Rite and purchase food and other items for the bar. Does that mean that it must also issue a Form 1099 to Shop Rite?

In my case I personally record the business checking account activity, including individual check payments, for each of my business clients on a general ledger computer program. This program not only keeps track of payments by expense type, but also by individual vendor. So in January I can print-out a report of payments by vendor, making it easy for me to determine which ones will need to be issued 1099s.

But what of businesses who keep their own books, such as they are, and do so manually? This will certainly create more work for them and their accountants, bookkeepers and/or tax professionals.

But the actual issuing of 1099s is not the real problem. The CNNMoney article quotes Marianne Couch, a principal with the Cokala Tax Group in Michigan and former chair of a citizen advisory group to the IRS on small business and self-employed tax issues, who “thinks the bigger headache will be data collection: gathering names and taxpayer identification numbers for every payee and vendor that you do business with”.

Getting EINs from Staples, Office Depot, and, in the case of the tavern, regular liquor suppliers should not be a problem. But what of local independent vendors and contractors? I expect many will be reluctant to provide such information. So W-9s will need to be issued and back-up withholding will need to occur. This will cause much more “agita” for small business than the mere need to issue 1099s.

As a long-time tax professional I can tell you, and I expect most of my colleagues will agree, that many truly small business clients do not have any contact with us during the year, and we are only given a list of expenses by category at tax time for transfer to a Schedule C. So we will have to waste valuable time during the filing season to determine if any 1099s are required and track down the necessary information well after the fact.

Luckily these new requirements will not begin until tax year 2012. So when these clients come in to have their 2011 returns prepared we will have to tell them, and remind them again several times before the end of 2012, that they need to get EINs from all vendors and contractors to whom they will pay more than $600 during the year, and that they need to get the necessary information to us as early as possible in January of 2013.

While the new rules apply only to businesses – what of the owner of rental property? Is renting not a business? Will Schedule E filers, as well as Schedule C filers, need to get this information and issue 1099s also?

I hate to say this, but members of Congress are at the very least lazy and at most idiots. They more often then not don’t fully understand all, if any, of the implications of what they are passing. I doubt they actually read any of the bills they vote on. Either that or they have absolutely no regard for the additional burden their oft ridiculous laws puts on various classes of taxpayers.

TTFN

SOME LAST MINUTE ADVICE

Most of you should have received all of your 2007 Form W-2s by now – though employers still have three days to get them to you.

If you don’t have all your W-2s in your hand by “end of business” on Friday you should call the Payroll or “Human Resources” Department of the employer and ask for a duplicate.

If you do not receive a W-2 from an employer and you cannot contact the employer because it has gone out of business or disappeared all is not lost. You can use your paystubs or other records to reconstruct the various items of income and withholding and file Form 4852 “Substitute for Form W-2 Wage and Tax Statement” with your federal and state tax returns. In such a situation I recommend that you consult a tax professional.

You also should receive all 1099s for bank interest, stock dividends, and non-employee compensation by Friday. A word to the wise – just because you have not received a Form 1099 does not mean that you do not have to report the income. If income is taxable it is taxable whether or not you receive a Form 1099. And just because you have not received a Form 1099 does not mean that the “payee” has not issued one. The form could have gotten lost in the mails. But while your copy was lost chances are that the one sent to the IRS made it.