The Green Sheet Online Edition
December 10, 2012 • Issue 12:12:01
How to handle your new 1099-K tax responsibility
In 2011, the Internal Revenue Service implemented Section 6050W of the tax code. As of Jan. 1, 2012, and starting with tax year 2011, payment processors are required to submit information via 1099-K forms on all electronic transactions they handle in a given year on behalf of individual merchants.
In 2012, the first year the reporting requirement was officially active, the IRS allowed an extra year for systems to be put into place and did not penalize processors for misinformation or noncompliance in their 2011 reporting.
In January 2012, the IRS received around 9 million 1099-K forms, a sixth of the 54 million it predicts it should collect annually. In January 2013, the requirement to file 1099-K forms will become mandatory, and penalties for noncompliance will be enforced.
So, in January 2013, the IRS expects an additional 45 million 1099-K forms. This means there is little room for error, and internal processes must be set up as soon as possible to handle this new influx of tax information.
For processors that filed 1099-K forms in January 2012, valuable lessons were learned as they were able to implement information collection and filing processes without fear of receiving an active B-Notice.
A B-Notice, or a CP2000, is a note sent by the IRS to inform an acquirer that the information submitted on the 1099-K form was incorrect or missing. It asks the acquirer to begin the process of obtaining the correct information from the merchant.
Last year, B-Notices sent out for incorrectly filed 1099-Ks were tests; they were a good indicator of which merchants were missing what information.
Now that 1099-K regulation is fully enforced, any incorrectly filed 1099-Ks will be returned with a B-Notice, a $100 fine (up from $50) and a maximum penalty of $1.5 million. That means processors must focus on collecting as much correct information from merchant clients now.
More importantly, a merchant who does not file the correct information is subject to backup withholding; the acquirer that filed the 1099-K must withhold 28 percent (which will rise to 30 percent if the Bush era tax cuts are allowed to expire) of that merchant's income until a time when the tax information is amended.
Best practice for TIN collection, matching
Organizations should be collating all their merchant clients' Taxpayer Identification Numbers (TINs) and accurate business names now. Those processors that did file last year experienced a high number of incorrectly filed 1099-K forms, so we predict that this will be an industrywide problem this tax season.
By focusing on missing or incorrect TINs, processors can better pinpoint where they may be receiving B-Notices. There are some great online TIN matching programs on the market that can help a business instantly corroborate the information they have on file, so finding where there are holes should be relatively painless.
I recommend that correct TIN and name collection be done via a cost-effective, three-tiered strategy. First, emails should be sent to all merchants with missing information. Then, a postcard should be mailed to those who do not respond electronically.
Finally, those who continue to not provide correct information should be called. It's crucial that organizations collect all the data they can before a B-Notice is sent. After that, an outbound mailing packet must be sent to every merchant subject to a B-Notice in order to officially collect the missing data.
I have found that this approach, which includes a variety of engagement methods, is the most inexpensive and efficient route to compliance.
Prepare internal systems
All payment processors must establish both internal systems and client-facing procedures for handling the IRS reporting requirements. That means making sure you have an electronic system in place that allows you to populate and correct 1099-K forms.
An organization must also do print-tests to ensure that its mailing systems work, as well as transmission tests to the IRS to make sure the organization is able to submit its information in a timely manner.
Equally important, processors should incorporate internal systems for managing their withholding responsibilities. I know from experience that the practice of reconciling, balancing and investigating backup withholding is extremely tricky.
Firms need to establish parameters now to allow adequate time to develop proper systems for managing withholding, which may require outside professional assistance to assure compliance.
In my opinion, B-Notices will be a huge issue for processors this tax season. My experience indicates that around 40 percent of filers incur a B-Notice the first time a new 1099 regulation is enforced on an industry. This means processors must be prepared to withhold many millions of dollars of income.
Prove your value
Processors' customer service departments must also be prepared to handle incoming tax reporting questions and educate merchants. Last year, processors found that merchants were generally confused about their responsibilities and very much appreciated having informed customer service agents on hand to guide them through the process. This is an opportunity to offer a value-added service to your merchant customers.
Most importantly, customer service agents must be able to adequately warn merchants about withholding. For many small merchants, not receiving 28 percent of their income may be the difference between profit and loss, or possibly losing their business. It's important they understand the risks.
Electronic filing wins
Section 6050W specifically prohibits processors from passing the costs of 1099-K filing onto merchant clients. Some organizations were considering adding a "compliance fee" to their costs last season, but that is strictly prohibited. The cost of this regulation must be borne by the payment processing industry, so those firms that best handle the financial burden of this new regulation will win in the long run.
One cost-effective measure is to make the 1099-K process electronic. Printing and mailing forms is a costly endeavor, but electronic filing converts a delayed process into a real-time one.
Amendments can be made instantaneously, and collected data can be populated in moments. Paperwork is no friend to business, and eliminating it helps acquirers and merchants make this process much easier.
Turn a burden into an opportunity
Section 6050W is now law, and the IRS has publicly stated that real-time, information-led filing is its long-
This means that 1099-K filing is now a part of the payment processing business and must be treated as such. Looking at the process as a year-round endeavor - from information collection to filing - will create better, more cost-efficient processes and happier clients.
Some businesses will treat 1099-K regulation as a burden and will do all they can to avoid spending time and money on getting it right. Those businesses will lose customers and end up spending more time and money on penalties and withholding in the long run.
The businesses that look upon 1099-K filing as an opportunity to serve as an information resource and assist merchants with hassle-free filing will collect more clients and become market leaders.
Troy Thibodeau, Executive Vice President of Convey Compliance Systems Inc., began his 20-plus year career as a CPA at Price Waterhouse and has spent the past 12 years helping organizations automate regulatory and financial processes. With Convey, he ensures the company provides its clients the best possible tax information reporting experience. For more information, visit www.convey.com, call 800-334-1099 or email Thibodeau at email@example.com.
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