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IRPAC’s annual report makes multiple info reporting recommendations

IR 2014-103

The Information Reporting Program Advisory Committee (IRPAC), a federal advisory committee that provides an organized public forum for discussion of information reporting issues, has issued its annual report for 2014. The report includes numerous recommendations to IRS on new and continuing tax administration issues, many of which would simplify reporting burdens for taxpayers.

RIA observation: IRPAC’s recommendations carry a lot of weight with IRS. For example, IRS’s recent release of Notice 2014-54, 2014-41 IRB (see Weekly Alert ¶  31  09/25/2014), providing consistent basis allocations for direct and indirect rollovers from qualified retirement plans, was in response to an IRPAC recommendation.

IRPAC’s 2014 report includes numerous recommendations. Here are some of the more widely applicable ones.

De minimis threshold for Form 1099 corrections. Current regs require a payer to issue a corrected information return if the reported amount is incorrect in “any monetary amount” or “any dollar amount,” depending on the regulatory language used. Up to 10 corrected forms (or 1.5% of the filer’s total information returns for the year) can be filed without penalty. Above that number, each corrected information return triggers a penalty under Code Sec. 6721(a)(2)(B) for having included incorrect information on the original return. The penalty under Code Sec. 6721(a)(1) (failure to file correct information returns) is $100 for each such return, up to $1.5 million for any calendar year. When corrected information returns are filed with IRS, corrected recipient statements must be furnished, and under Code Sec. 6722 (failure to furnish correct payee statements), each triggers a separate $100 penalty, up to $1.5 million for any calendar year, for having included incorrect information on the original statement. Reg. § 301.6721-1(c) and Reg. § 301.6722-1(b) provide for penalty exceptions for inconsequential errors.

IRPAC recommends the creation of a regulatory de minimis dollar threshold for corrections to original information returns and original recipient statements. The safe harbor would provide that no penalty will apply for failure to correct net changes of $50 or less in the reported amount. This will relieve significant burdens on taxpayers and IRS for the cost and use of resources to report and process corrections that generally are not the result of payer error and do not increase taxable income of the recipients.

Expand use of TIN matching program to improve information reporting accuracy recommendations. IRPAC’s recommendations in this area include the following:

  • Expand the TIN Matching Program to include filers of all nonwage information returns to which incorrect-TIN penalties under Code Sec. 6721 or Code Sec. 6722 apply.
  • Add a checkbox to Form W-9 (Request for Taxpayer Identification Number and Certification) and Form W-4P (Withholding Certificate for Pension or Annuity Payments) which can be checked by the payee to indicate that the payee gives the payer permission to submit the payee’s name and TIN to the IRS TIN Matching Program for validation.
  • Develop and offer a new premium-level TIN matching service (in addition to maintaining the current basic TIN Matching Program), which would require an enrollment fee to be paid to IRS and process bulk files submitted through the information return filer’s account on IRS’s secure site for information return filing.

1099 MISC (Miscellaneous Income) simplification for small business. IRPAC recommends the establishment of a free e-service on IRS’s website for small-business payers to manually enter on-screen, and electronically file with IRS, up to 100 Forms 1099-MISC and up to 50 corrected Forms 1099-MISC. This would increase accuracy and reduce costs for all parties concerned.

Aggregate reporting of sales on Form 1099-B (Proceeds from Broker and Barter Exchange Transactions). Clients who place large orders to sell, or sell securities that are thinly traded, may have one trade order broken up into multiple transactions at different times and prices to fulfill their order. This usually happens on the same day but can take place on subsequent trading days. The instructions for Form 1099-B require brokers to issue multiple forms for a single sale order unless the “transactions are reported on a single confirmation that lists an aggregate price or an average price per share.” Despite this provision, brokers are still issuing multiple 1099-Bs for same day orders because their system does not provide for single confirmations for the same order with an aggregate or average price. This creates unnecessary records and leads to increased postage and print costs for broker dealers.

IRPAC recommends that IRS permit brokers to aggregate sales for the same order that take place on the same trade date for the same CUSIP (Committee on Uniform Securities Identification) or security identifier. Allowing aggregation would materially reduce the number of Forms 1099-B issued to the taxpayer without changing income reported to IRS.

Important clarification for Form 8889, Health Savings Account. Distributions from an HSA used exclusively to pay for qualified medical expenses of the account beneficiary, spouse, or dependents are excludable from gross income. Such distributions are reported on Part II of Form 8889. In general, on Line 14, the taxpayer enters the amount that is reported by the HSA administrator on Form 1099-SA (Distributions From an HSA, Archer MSA, or Medicare Advantage MSA) as distributed from the HSA plan in the tax year. Line 15 asks the taxpayer to enter “unreimbursed qualified medical expenses.” At Line 16, the taxpayer subtracts Line 15 from Line 14 to find taxable HSA distributions.

IRPAC reports that taxpayers often have interpreted Line 15 to mean that they are to enter only the amounts for which they have not been reimbursed; then, when they subtract this figure from the amount on Line 14, it often results in taxable income and penalties.

For example, a taxpayer incurred $1,000 in qualified medical expenses and submitted $1,000 to be reimbursed during 2013. As of 12/31/2013, only $800 had been received from the HSA and $200 was not yet distributed to the taxpayer. Taxpayer enters the $800 reported on the Form 1099-SA on Line 14 and enters $200 on Line 15. This results in the taxpayer reporting $600 in taxable income (Line 14 minus Line 15). The intended and correct entries for these lines are $800 for Line 14 and also $800 for Line 15, for a net result of no taxable income as the taxpayer did not receive any distributions from HSA in excess of medical expenses incurred and paid for by the HSA provider.

To avoid this type of error, IRPAC recommended changing the Line 15 description. It notes that on the draft of Form 8889 dated June 20, 2014, IRS has already changed the line description to read, “Qualified medical expenses paid using HSA distributions (see instructions).”

Carve-out to FATCA definition of financial account. Under the Foreign Account Tax Compliance Act (FATCA) rules, participating foreign financial institutions must perform FATCA processing on the “financial accounts” they maintain. In addition to depository and custodial accounts (and insurance/annuity contracts), the term “financial account” is defined to include certain equity or debt interests. IRPAC recommends that an addition be made to the list of exceptions (provided in Reg. § 1.1471-5(b)(2)) to the definition of “financial account” under FATCA for debt interests in investment entities described in Reg. § 1.1471-5(e)(4)(i)(B) or Reg. § 1.1471-5(e)(4)(i)(C) (in general, an investment fund), that result from ordinary course of business transactions rather than from true financial investments in such entities.