Tax IRW Ops Quick Tips & Updates

May 9, 2024 | By: Martin L. Mueller Jr. and Cyrus Daftary

The recently issued Green Book reintroduced a proposal to accelerate Form 1099 deadlines by two months. Per the Green Book, the proposal would help the IRS detect fraud and foster taxpayer compliance. However, the new deadlines will require taxpayers to update due diligence processes to avoid drowning in year-end filing obligations. In Accelerating 1099 Deadlines, Prioritizing Taxpayer Efficiency, we discuss the reasons for the change and administrative issues that payors will need to address in further detail.

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Announcement 2023-2: Transitional Guidance for Broker Reporting on Digital Assets

December 23, 2022 | TaxNewsFlash No. 2022-396

The IRS published Announcement 2023-2 to provide transitional guidance under sections 6045 and 6045A with respect to the reporting of information on digital assets.

The Infrastructure Investment and Jobs Act (Infrastructure Act), enacted in 2021, amended provisions in sections 6045 and 6045A to clarify and expand the rules regarding the reporting of information on digital assets by brokers.

Announcement 2023-2 states that the Treasury Department and the IRS intend to implement those amendments by issuing new regulations specifically addressing the application of sections 6045 and 6045A to digital assets and providing forms and instructions for broker reporting. Until such new regulations are finalized,

• Brokers may report gross proceeds and basis as required by the existing law and regulations under section 6045 as of December 23, 2022.
• Broker may furnish statements on transfers of covered securities as required by the existing law and regulations under section 6045A as of December 23, 2022.
• Brokers will not be required to report or furnish additional information with respect to dispositions of digital assets under section 6045, or issue additional statements under section 6045A, or file any returns with the IRS on transfers of digital assets under section 6045A(d) until those new final regulations under sections 6045 and 6045A are issued.

However, as explained in the accompanying IRS release—IR-2022-227 (December 23, 2022), this transitional guidance applies only to information returns filed or furnished by brokers. In contrast, taxpayers are still required to report any income they receive from transactions involving digital assets. They are also required to answer the digital asset question on page 1 of either Form 1040 or Form 1040-SR.

Year-End Tax Topics for Cryptocurrency Investors

December 2022| by Hubert Raglan, Pete Ritter, Nelson Suit, and Joshua Tompkins,

This article discusses IRS guidance on classifying cryptocurrencies for U.S. federal income tax purposes; describes lot relief methodologies available to cryptocurrency investors and best practices for tracking and documenting tax basis; provides an overview of the tax considerations related to cryptocurrency losses; considers the tax consequences of updates to the Ethereum blockchain; and provides an update on the information reporting provisions in the Infrastructure Act.

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Year-End Tax Topics for Cryptocurrency Investors

November 2, 2022| by Pete Ritter, Nelson Suit, Joshua Tompkins, and Hubert Raglan

Now is the time for investors in cryptocurrencies to recognize approaching year-end considerations and possible planning opportunities. Pete Ritter, Nelson Suit, Joshua Tompkins, and Hubert Raglan discuss potential considerations, including the recent Ethereum “Merge” and the taxation of staking rewards, tax loss planning, and expected information reporting regulations in Year-End Tax Topics for Cryptocurrency Investors. 

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Early Signs from Treasury on the Scope of Digital Asset Cost Basis Reporting

June 01, 2022| by Hubert Raglan, Pete Ritter, and Joshua Tompkins

Congress recently expanded the cost basis reporting rules of Sec. 6045 as part of the Infrastructure Investment and Jobs Act, P.L. 117-58 to require "brokers" to provide cost basis reporting for "digital assets." This article discusses some issues that Treasury will have to grapple with when providing cost basis reporting guidance.

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Public Comments Received on the Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard

May 2, 2022 | OECD

On 22 March 2022, the Organisation for Economic Co-operation and Developmen (OECD) invited interested parties to provide comments on the Crypto-Asset Reporting Framework (CARF) and Amendments to the Common Reporting Standard. Click here to access the CARF comment letters available on the OECD site, including input from KPMG.

Proof of Stake—What’s Really at Stake on the Tax Front?

April 2022 | by Peter Ritter and Joshua Tompkins

Growing investment and recent tax developments have generated increased interest in cryptocurrency staking. In this Journal of Taxation of Financial Products article, the authors provide a general overview of staking and consider the different potential tax characterizations of staking and the general U.S. income characterizations. They then provide several considerations for special classes of investors, such as foreign and U.S. tax-exempt investors.

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Cryptocurrency for Banks

January 21, 2022 | by Nelson Suit and Joshua Tompkins

Joshua Tompkins and Nelson suit share their insights on existing and emerging income tax and tax information reporting issues for banks as they approach the crypto sector during this episode of In the Vault with KPMG banking podcast. 

New Crypto Reporting Rules

November 16, 2021 | by Nelson Suit

On this episode of IRW Coffee Break, Danielle Nishida and Nelson Suit discuss the new requirements for reporting of digital assets in the Infrastructure Investment and Jobs Act that was signed into law. 

Cryptocurrencies and the Definition of a Security for Code Sec. 1091

October 2021 | by Joshua Tompkins and Paul Kunkel

Although a number of cryptocurrencies have seen significant long term price appreciation, the volatility of these assets, their boom and bust market cycles, and taxpayers’ ability to specifically identify the units of cryptocurrency sold could result in some cryptocurrency investors realizing significant tax losses upon sale. In this article, which appeared in the Journal of Taxation of Financial Products, the authors consider whether the wash sale rules place limits on the deductibility of cryptocurrency losses and present a case for why cryptocurrencies are most likely outside the scope of the wash sales rules as they currently stand today.

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Year-End Tax Topics for Cryptocurrency Investors

October 20, 2021 | by Pete Ritter, Nelson Suit, Joshua Tompkins, and Hubert Raglan

Now is the time for investors in cryptocurrencies to recognize approaching year-end considerations and possible planning opportunities. Potential legislative developments that might affect cryptocurrency transactions and the cryptocurrency ecosystem more broadly should also be considered. In this KPMG What's News in Tax article, the authors review the classification of cryptocurrencies, issues concerning specific lot identification and tax loss harvesting, and current legislative proposals that may impact information reporting, wash sale rules, and constructive sale rules.

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Broker Crypto Tax Information Reporting Is Here, But It May Not Be Just for Brokers Anymore

October 12, 2021 | by Nelson Suit, Cyrus Daftary, and Phil Garlett

In this article, which appeared in the Journal of Taxation of Financial Products, the authors from the KPMG Information Reporting and Withholding Tax Services practice consider the cryptocurrency information reporting provisions in the Senate Infrastructure Bill and the broader implications of tax information reporting for crypto transactions. The proposed legislation would require “brokers” to provide Code Sec. 6045 cost basis reporting for sales of digital assets and Code Sec. 6045A transfer reporting on transfers of such assets.

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Wrapped Bitcoin—Two Sides of the Same (Bit)coin?

October 2021 | by Peter Ritter, Joshua Tompkins, and Grant Dalbey

In this Journal of Taxation of Financial Products article, the KPMG authors consider he tax characterization of wrapped bitcoin and conclude that there are good arguments for treating minting wrapped bitcoin, burning wrapped bitcoin, and exchanging bitcoin and wrapped bitcoin on third-party exchanges as nontaxable transactions. 

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Cryptocurrency Loans—Taxable or Not?

October 2020 | by Joshua Tompkins and Hubert Raglan

In this article, which appeared in the Journal of Taxation of Financial Products, the KPMG authors examine the proper tax treatment of cryptocurrency loans, a financial product that has recently emerged in the budding cryptocurrency industry. 

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Notice 2023-10: Delay of Implementation of $600 Reporting Threshold for Forms 1099-K

December 23, 2022 

IRS Notice 2023-10 announced delay of implementation of $600 reporting threshold for third-party settlement organizations’ Forms 1099-K

The IRS Notice 2023-10 announced that calendar year 2022 will be regarded as a transition period for purposes of IRS enforcement and administration with respect to the lowering, under the American Rescue Plan Act of 2021, of the de minimis threshold for reporting on third party settlement organizations (TPSOs) under section 6050W(e), from $20,000 on 200 or more transactions to any qualifying transaction over $600.

According to the IRS transmittal message:

• As a result of this delay, TPSOs will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower $600 threshold amount enacted as part of the American Rescue Plan of 2021.
• The IRS also noted that the existing 1099-K reporting threshold of $20,000 in payments from over 200 transactions will remain in effect.

Back to Basics: Periodic and Nonperiodic Withholding Certificates

December 12, 2022 | by Martin L. Mueller, Jr. and Cyrus Daftary

In early 2022, the IRS issued a new withholding certificate, Form W-4R, which decoupled nonperiodic payments from the prior version of Form W-4P. Beginning January 1, 2023, payors will be required to collect updated forms that are specific to periodic and nonperiodic payments. Though the IRS granted a phase-in year, many payors are still updating their software and processes for this change while others may not yet be aware of the requirement. In Back to Basics: Periodic and Nonperiodic Withholding Certificates, we discuss the basics of periodic and nonperiodic withholding certificates, the reason for the new forms, and steps that businesses should be taking now to ensure that they are compliant in the new year.

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Back to Basics: The Combined Federal State Filing Program

October 29, 2022 | by Martin L. Mueller and Kelli Wooten

As taxpayers work to become compliant with state information reporting requirements, many businesses increasingly rely on the Combined Federal State Filing Program (CFSFP). However, many taxpayers are quickly becoming aware that their filings do not satisfy state reporting requirements due to a number of reasons, including updated state filing requirements that disallow use of the CFSFP or even state reporting nuances that taxpayers may be unaware of. Despite their best efforts to comply via the CFSFP, many taxpayers are receiving state notices, an issue that will only escalate as state agencies shift focus to issues such as unreported gig economy income. In Back to Basics: The Combined Federal State Filing Program, we discuss the purpose of the CFSFP, how to participate, and common misconceptions experienced by taxpayers.

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Is Forgiveness Free? Student Loans and State Reporting

September 15, 2022 | by Martin L. Mueller and Kelli Wooten

President Biden recently announced a plan that will provide student loan forgiveness, up to $20,000, for certain borrowers. As an added benefit, borrowers will not be subject to federal taxation on amounts forgiven under this plan. Although a handful of states have not indicated whether state taxation will be required, one has stated that it will. However, due to a recent IRS notice, federal reporting is not required by entities granting the relief, nor will state reporting be required due to tack-on laws in place for most states. Thus, it is unclear how states will identify the amounts forgiven, raising the issue of potential state penalties for taxpayers which do not self-report, even if they are unaware that self-reporting is required.

Background

The first federal student loan program was not established until 1958, four years after discharge of indebtedness was officially codified as gross income in the Internal Revenue Code of 1954 (amendments to the Internal Revenue Code of 1939 previously carved out gross income exclusions for specific types of discharge of indebtedness). However, the IRS generally held the view that cancelation of student loans was non-taxable, as a form of scholarship. As college costs increased, lending rose through the 1970s, leading to more delinquent payments and more public scrutiny. Although defaults remained low, public pressure forced the IRS to reevaluate its stance. In 1973, under Rev. Rul. 73-256, the IRS ruled that loan scholarship payments conditioned upon a student practicing medicine in a state-selected area constituted taxable income, as the payments were designed to accomplish the state’s objective in boosting the number of doctors in rural areas.

In 1976, Congress enacted the Tax Reform Act of 1976, here, excluding certain discharge of indebtedness on student loans made before January 1, 1979, from being including in gross income. Specifically, the act excluded amounts discharged when the “discharge was pursuant to a provision of such loan under which all or a part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain geographical areas or for certain classes of employers.” As noted in the Joint Committee of Taxation Blue Book, here, this provision was made in part to reverse the former IRS ruling. The Revenue Act of 1978, here, extended this treatment through 1982. Thus, the earlier versions of gross income exclusions for student loan forgiveness focused on prior, unofficial forms of the Public Service Loan Forgiveness (PSFL) program. Blanket exclusion for forgiveness would not come until much later.

The American Rescue Plan Act of 2021 (ARPA), here, was enacted on March 11, 2021, as a way to provide further relief to Americans impacted by COVID-19. The $1.9 trillion stimulus package extended relief previously provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 and the Consolidated Appropriations Act of 2021, and included several new provisions designed to speed up the economic recovery from the pandemic. In particular, one provision modified the treatment of student loan forgiveness under section 108(f), excluding from gross income discharges occurring during calendar years 2021 through 2025 for certain educational expenses. On December 21, 2021, the IRS issued an advance version of Notice 2022-1, here, notifying lenders of student loans that they “should not file information returns or furnish payee statements…to report the discharge of student loans when the discharge is excluded from gross income under section 108(f)(5).” Thus, Form 1099-C is not required for student loan forgiveness occurring under ARPA for calendar years 2021 through 2025.

On August 24, 2022, President Biden announced a three-part plan aimed at providing student loan relief to low- to middle-income taxpayers (see the White House Fact Sheet, here), including forgiveness of student loans for certain borrowers. Specifically, borrowers with individual income lower than $125,000 ($250,000 for married couples) are eligible for forgiveness up to $10,000, and Pell Grant recipients are eligible for forgiveness up to $20,000. Under the current plan, eligible borrowers may apply for one time forgiveness through December 31, 2023. The announcement was a welcome relief to borrowers but caused immediate questions on taxation and reporting at the state level.

State Taxation and Reporting Issues

At a high level, states determine how much of the Internal Revenue Code (IRC) to adopt in order to carry out state functions and are generally labeled as rolling or static conformity states. However, rolling conformity states are not required to adopt all provisions, and static conformity states may adopt specific provisions even if they have not updated to the current version of the IRC. The Tax Foundation provides a great summary of the nuanced issues this presents, here.

The initial issue is whether states will adopt the ARPA amendments to section 108(f), rendering discharge of indebtedness non-taxable at the state level. The Tax Foundation article above has tracked down each state’s position, updating as states have provided confirmation whether they will tax student loan forgiveness. As of the writing of this article, the following states are currently silent on the issue, but are posed to tax loan forgiveness unless subsequent guidance is issued: Arkansas, Minnesota, Mississippi, North Carolina, and Wisconsin. California is also listed, but bicameral members of the state legislature have since issued an informal release stating that they will work to ensure California does not tax student debt relief.

Conversely, Indiana has definitively stated that it will tax student loan relief. As noted by the Indiana Department of Revenue (DOR), here, the Indiana General Assembly updated its IRC conformity date to the post-ARPA version in effect on March 31, 2021, but decoupled from the student loan forgiveness provision and will require the relief to be added back for state tax purposes. Due to Indiana’s flat 3.23% rate, this means up to $323 in state taxation ($646 for Pell grant recipients) for borrowers, potentially more depending on the county they live in. Indiana has indicated that it will include a line on Schedule 1: Add-Backs of the individual income tax return for federal student loan forgiveness to be included to state income. The trickier issue is how Indiana will gather this information, and how compliance will be enforced. Even if federal reporting was required, Indiana does not require lenders to submit Form 1099-C to the state. Thus, Indiana is relying on individuals to self-report, which is problematic in the absence of recipient statements. This raises the question whether Indiana will assess penalties for borrowers who may not fully understand their state tax obligations, or how Indiana would even determine which borrowers took advantage of the forgiveness.

Similarly, many of the states that are currently silent on the issue do not require Form 1099-C, or only require it when the payor is required to submit for federal purposes. Thus, the same issue is presented across the spectrum, that payees will not necessarily know what to report, and state agencies will not have access to information in order to determine noncompliance. Perhaps with additional consideration, the remaining states will determine that the burden imposed on borrowers, and indeed the burden imposed on its own state agents, is not worth the negative public backlash. This is particularly true if state agencies turn to public audits to enforce collection of the minimal tax amounts that would be due. In either case, this is certainly an issue worth monitoring for those involved.

A Primer on Wash Sale Reporting in a Volatile Market

September 2022 | by Martin Mueller and Nelson Suit

On the cusp of a potential recession, investors in stocks or securities need to be cautious about advice they utilize for harvesting losses, if they plan on, or happen to repurchase substantially identical stock or securities close to a loss sale. Such tax loss harvesting strategies could trigger wash sale rules, even if the “repurchase” occurs before the sale. This is particularly problematic for unwary investors, since the information that brokers are required to report may be different from what investors need when determining whether they have run afoul of the rules. Born under recession era policy, both wash sale rules and wash sale reporting issues will likely rise in prominence again as investors face a volatile market. But what are the rules, why do they matter, and how can investors avoid inadvertently subjecting themselves to the impact of these rules?

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No Income Tax, No Worries? Form 1099-K State Reporting Issues

August 22, 2022 | by Martin Mueller and Kelli Wooten

Reduced Form 1099-K thresholds for the 2022 tax year will result in increased information reporting. Unfortunately, the challenges extend beyond federal reporting, as state Form 1099 reporting requirements can be much more complex to navigate. 

Some states do not require Forms 1099-K, particularly those states with no state income tax – e.g., Texas, Alaska, etc. However, state legislatures in Florida and Tennessee have created two outliers, both for non-income tax reasons. 

Background

As discussed in a prior article, Form 1099-K reporting thresholds were lowered under the American Rescue Plan Act of 2021, found here, as a revenue raiser to help provide funding for Covid-19 relief. The legislation amended section 6050W, dropping the de minimis threshold for reporting on third party settlement organizations (TPSOs) from $20,000 on 200 or more transactions to any qualifying transaction over $600. The legislation went into effect beginning with payments made after December 31, 2021, meaning that all payments that occur throughout 2022 are subject to the lower requirement.

Roughly half of the states require Form 1099-K reporting in some capacity, with a number of these exempting reporting where withholding has not been required. In most cases, Form 1099-K can be submitted through the Combined Federal/State Filing (CF/SF) Program, making it much easier for taxpayers to comply. Although there are a few states that have set their own thresholds (such as New Jersey at $1,000 and Arkansas at $2,500), these would be captured under the new federal thresholds. Thus, taxpayers with no withholding that are utilizing the CF/SF Program are largely covered for state purposes.

While many states tie their reporting requirements to section 6050W, others tie their Form 1099-K requirement to section 6041 (see Virginia, here) or have specifically set their threshold at $600 (see Massachusetts, here). Practically speaking, this difference is inconsequential under current law, as most taxpayers’ due diligence processes will capture all required reporting. Note that any changes to the law (a proposed bill, here, would raise federal thresholds to $5,000) would result in state reporting disparities.

Far more impactful to taxpayers is those states which require direct reporting. For example, Connecticut permits filing under the CF/SF Program where there is no withholding to report, but specifically states that Forms 1099-K must be filed directly with the state. Similarly, Alabama permits filing of most Form 1099 through the CF/SF Program, but specifically excludes Forms 1099-K. Thus, taxpayers need to be aware of each state’s individual requirements, as states listed as participating in the CF/SF Program, and even permitting other Forms 1099 to be filed through the CF/SF Program, is not necessarily indicative of the state’s filing requirements for Form 1099-K.

Tougher still, it would seem that states which do not assess income tax, and do not require Form 1099 reporting, would bypass Form 1099-K reporting. At its root, Form 1099-K reporting is essentially designed to capture taxable transactions which would otherwise not be caught because they occur through a third-party intermediary. Thus, no state income tax typically means that there is no reason to require taxpayers to report in those states. This is true for seven of the states with no income tax. However, Florida and Tennessee prove to be the exception, for similar reasons – sales tax.

Tennessee

Due in part to the lack of income tax revenue, and one of the lowest property tax rates in the US, Tennessee is tied for the second highest sales tax rate (7.0%), behind only California. In 2015, Tennessee sought to improve on a successful three-year old sales tax compliance program, which primarily targeted tobacco and alcohol sales, through the introduction of SB 0107, found here. The bill expanded on the program by extending reporting to a wider range of wholesalers, specifically listing candy and cola wholesalers in the House Session. In addition, the bill sponsors were worried that some payors were cheating the system under the prior sales tax compliance program and sought a way to even the playing field. Informally referred to as the “Trust, but Verify” Act by co-sponsor Senator Watson, the bill included language requiring state reporting under section 6050W. Essentially, Tennessee wanted to leverage the federal reporting system in order to verify that sales reported, and sales tax remitted, by certain wholesalers were accurate. The bill was passed with near unanimous consent in both chambers.

Although the Tennessee legislature passed the bill specifically to capture certain wholesalers of goods, the legislation requires that all payments subject to section 6050W reporting, which are made to a payee with a Tennessee address, be reported for state purposes. Unfortunately, section 6050W requires reporting on a fairly wide range of payments, including payments for services. This leads to an interesting result, as Tennessee does not require sales tax on most types of service payments, but payors may still be penalized for failure to report. This can be particularly burdensome, as Tennessee does not permit filing through the CF/SF Program and imposes a $1,000 penalty for each month that the payor fails to file the return (capped at $10,000 per entity). Thus, taxpayers may incur significant information reporting penalties if they are not aware of the rules.

Florida

Similar to Tennessee, Florida has a disproportionally high sales tax rate (6%), tied at 16th highest in the US, as a way to help offset the lack of income tax and ultimately fund state expenditures. However, the Florida Department of Revenue found that not all sales were being reported and taxed. To enforce reporting, Florida also decided to leverage the federal reporting system, particularly for the purpose of enforcing reporting on purchases being made with credit cards.

In early 2020, the Florida House introduced HB 7097, found here. Versions of the bill varied widely, and contained a number of sales tax cut provisions, ranging from back-to-school tax holidays to tax cuts on Formula 1 Grand Prix races. An early version of the bill was estimated to reduce revenue by $126 million in the first year and up to $160 million on a recurring basis, (see here). Ultimately the legislature settled on a version with a revenue impact of $47.7 million in the first year and no recurring losses (see here). No revenue raisers were ever included in the various versions of the bill. Interestingly, Form 1099-K reporting was included in all versions, but appears to have never been intended as a funding offset, as the Ways and Means Committee and Appropriations Committee merely listed the provision as having an indeterminate impact. The bill was enacted in April, with an effective date of July 1, 2020.

Similar to Tennessee, Florida mirrored the federal language, and instituted a $1,000 per month penalty for each failure to report, up to $10,000 per entity. In its analysis, the Florida legislature specifically waived off the option to file through the CF/SF Program, noting that information from the IRS may be delayed, which would impact the ability for Florida to audit taxpayers within the three-year statute of limitations. Thus, direct reporting of the federal information return was established for the second no income tax state.

Conclusion

State reporting can be complex, particularly as states adjust their provisions to align with (or differentiate from) federal reporting requirements. The recent Form 1099-K federal threshold modification, and ongoing reconciliation across the states, proves that taxpayers must be ever vigilant in their due diligence processes to recognize and adhere to reporting requirements. While the addition of no income tax states to the list of those requiring reporting is an outlier, it is likely other states will join in the future to meet state objectives. In a future article, we will consider certain state information reporting, such as Florida’s nonemployee compensation reporting, which is unrelated to taxes altogether, but impactful, nonetheless. 

Proposed Changes to the Qualified Intermediary (QI) Agreement

June 15, 2022| by Laurie Hatten-Boyd, and Carson Le

On May 3, Treasury and the IRS released an ad-vanced copy of Notice 2022-23 (Notice), setting forth the proposed changes to the QI agreement. The pro-posed changes will permit a QI to act in that capacity when receiving certain amounts from a publicly traded partnership (PTP) that are subject to withhold-ing under §1446(a) and §1446(f). In this Bloomberg Tax Management Real Estate Journal article , the authors provide an overview of the IRS Notice proposing changes to the qualified intermediary agreement, as well as some observations. 

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Backup Withholding – IRS Notices and Payor Responsibilities

May 20, 2022 | by Martin Mueller and Kelli Wooten

The IRS celebrated Tax Day by announcing on April 15th that backup withholding notices were on the way. Specifically, the IRS issued IRS Newswire IR-2022-87, stating that it will be issuing CP2100 and CP2100A Notices to taxpayers that filed certain information returns with missing Taxpayer Identification Numbers (TINs), incorrect names, or a combination of both. The following information provides details about what these notices are and what taxpayers need to do if they receive one.

Note that the information below is focused on backup withholding requirements under § 3406(a)(1)(B), also known as the IRS Backup Withholding “B” Program. For further information on backup withholding under § 3406(a)(1)(C), dealing with payees that fail to fully report the correct amount of interest and dividend income on their federal income tax return, see the IRS Backup Withholding “C” Program webpage.

Background

In the turbulent days of the early 1980s, the US experienced a whiplash effect on tax withholding, particularly dividends and interest, as numerous bills were passed in a short period to attempt to head off the eventual recession caused by the 1979 energy crisis. To counteract rising oil costs, and subsequent inflationary concerns, Congress first passed the Economic Recovery Act of 1981 (ERTA). ERTA contained a number of income tax reduction amendments, including a provision reducing the highest marginal tax rate on all types of income from 70% to 50%, as a way to encourage economic growth. However, tax revenue quickly plunged and deficits began to grow, causing concern within Congress, as the economy fell into the second dip of the early 1980s recession. To counter this issue, Congress passed the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which contained revenue raisers, including tax rate raises and closed tax loopholes, to help reduce the budget gap. Notably, TEFRA instituted a 10% withholding requirement on payments of interest, dividends, and patronage dividends, with certain exceptions.

Less than a year later, Congress passed the Interest and Dividend Tax Compliance Act of 1983, which repealed the interest and dividend withholding provisions introduced under TEFRA and instituted a new backup withholding system in its place. Under the new act, payors were required to withhold 20% on payments of dividends and interest paid to payees which had underreported dividend and interest income, or failed to provide accurate taxpayer information, essentially the current IRS Backup Withholding “C” Program. In addition, the new act contained a provision requiring payors to backup withhold on payees when the Secretary notifies the payor that the TIN furnished by the payee is incorrect, effectively the IRS Backup Withholding “B” Program.

The withholding rate was apparently not settled at the time the IRS was redesigning its Forms 1099 series, as evidenced by the 1983 Form 1099-MISC. The form contained a new placeholder Box 4, with instructions noting that it was to be used the following year for backup withholding at a 15% rate. Ultimately, the Act passed with a statutory withholding rate of 20% that remained in place until 1992. Under the Energy Policy Act of 1992, the rate jumped to 31%, matching the highest individual income tax rate at the time. Although two new brackets were added the following year, the backup withholding rate remained 31% until 2001, when the Economic Growth and Tax Relief Reconciliation Act of 2001, tied the backup withholding rate to the fourth lowest income rate under § 1(c), the provision for unmarried individuals. The rate ranged from 25% to 28% over the following 15 years. Due to temporary amendments arising under the Tax Cuts and Jobs Act of 2017 (TCJA), the rate will remain at 24% through the 2025 tax year.

B Notices and Backup Withholding

Payors must generally request a TIN when a payee initially opens an account or conducts a transaction with the payor. For interest, dividends, and amounts subject to broker reporting, the payee must furnish a certified TIN on a Form W-9; however, the TIN may be furnished in any manner for other payments. If the TIN is not provided at this time, backup withholding is required immediately. Payors must then request a TIN by December 31 of the year the account is opened (the first annual solicitation) and again by December 31 of the following year (the second annual reconciliation). If the payee provided an incorrect TIN at account opening, the payor must make two annual solicitations following receipt of a CP2100 or CP2100A Notice, discussed below.

Each year, the IRS reviews information in its own records, including the TIN, against information provided by payors reporting payments to payees. The IRS specifically looks for the name and TIN reported on Forms 1099-B, DIV, G, INT, K, MISC, NEC, OID, PATR, and Form W-2G. When a mismatch occurs, the IRS notifies payors through either a CP2100 or CP2100A Notice. Typically, payors classified as large filers, those with 250 or more error documents, receive a CP2100 Notice via a CD or DVD data file while midsized filers, those with between 50 and 249 documents, receive a paper CP2100 Notice. The CP2100A Notice is reserved for small filers, those with less than 50 error documents. Collectively, these notices are commonly, though incorrectly, referred to as B Notices (which is actually the name of the notice that the payor must sent to the payee as a result of the CP2100) The IRS sends out an initial round of these notices in September and October, and a second round in April of the following year. The notices identify the payee (or payees, if there are multiple issues) where the information reported included a missing or incorrect TIN, an incorrect name, or a combination of both. The notice also informs the payor that it is responsible for backup withholding.

When a payor receives a CP2100 or CP2100A, it should first review the payee information that it has in its system against the information that it provided to the IRS to ensure that the mismatch wasn’t the result of a simple mistake or unintentional omission. Note that the IRS also provides a TIN matching service, which allows the payor to determine whether the name and TIN combination that it has on file matches that in the IRS’s records. Once the payor has received the notice of the incorrect information return, it has 15 business days from the date of the notice, or the date it was received, whichever is later, to send a B Notice to the payee(s) of the name/TIN mismatch and to solicit curing documentation. The payor should include Form W-9 for the payee to fill out and may, but is not required to, send a self-addressed stamped envelope. The IRS also specifies that the outside envelope must be clearly marked “IMPORTANT TAX INFORMATION ENCLOSED” or “IMPORTANT TAX RETURN DOCUMENT ENCLOSED.” If the IRS notice was triggered by an error on the part of the payor, then the payor is not required to issue a B Notice to the payee.

To the extent a valid Form W-9 is not provided as a result of the B Notice solicitation, payors are instructed to begin backup withholding no later than 30 days after receiving the CP2100 Notice, though they may begin withholding at any point within that 30-day period. If the attempted delivery of the B Notice comes back as undeliverable, then the payor must immediately begin withholding. If the payee provides an updated Form W-9 after backup withholding has begun, the payor has 30 days to update its processes to stop backup withholding, but may cease withholding at any point within that 30-day period.

Payors that have deducted and withheld under the backup withholding rules are responsible for remitting these amounts to the IRS. Taxpayers are typically required to remit via EFPTS, though there are threshold exemptions. See section 11 of Publication 15, for additional information on remitting federal tax payments. On an annual basis, payors must report this information to the IRS on Form 945, Annual Return of Withheld Federal Income Tax. 

If the payor receives a second CP2100 Notice within a three-calendar year period for the same payee, then the payor is instructed to send a second B Notice to the payee. Unlike the first B Notice, the payor does not include Form W-9, rather the payor must instruct the payee to contact the IRS (if the payee is an entity) or the Social Security Administration (SSA) (if the payee is an individual) to either request a TIN or resolve any errors it is encountering with its current TIN. Specific to this, an entity payee must provide the payor with a copy of IRS Letter 147C, EIN Verification Letter. A payee that is an individual must provide the payor with a copy of his/her social security card that contains a different number than the one in the payor’s records or that has been issued less than 6 months prior to the date of the second CP2100. If the payor receives a third CP2100 Notice for the same payee containing a different name/TIN combination, then the payor should consider this as a new first CP2100 Notice with respect to its B Notice obligations. See Publication 1281, for additional information and a sample template of each of the B Notices.

References

For information on the recent IRS issuance, see IR-2022-87. For general information on the backup withholding, see Publication 1281, or the IRS Backup Withholding “B” Program webpage. 

Cayman Issues Enforcement Guidelines for CRS 

April 29, 2022 | by Jigna Patel

On March 31, 2022, the Cayman Islands Ministry of Financial Services (Ministry) and Department for International Tax Cooperation (DITC) announced that the Cayman Tax Information Authority (TIA) has issued Enforcement Guidelines v1.0, with respect to the Common Reporting Standard (CRS) and Economic Substance (ES) frameworks. These guidelines set out the enforcement process and subsequent penalties for failure to comply by any persons within the scope of TIA’s compliance monitoring and enforcement powers.

CRS

The CRS Enforcement Guidelines are broken out into nine sections: (1) Overview; (2) Administrative Penalties; (3) Investigatory Functions of the Authority; (4) Breach Notice; (5) Contesting a Proposed Penalty on its Amount; (6) Penalty Notice; (7) Appeals Process; (8) Payment of Penalty & Interest; and (9) Notice Templates.

These Guidelines are only applicable to those under the administrative penalties’ regime of the CRS Regulations, and do not extend to the criminal provisions of the CRS Act. The intent of the administrative procedures under the Enforcement Guidelines is to ensure effective implementation of the CRS Act, including:

• Rules to prevent any Financial Institutions (FIs), persons or intermediaries from adopting practices intended to circumvent the reporting and due diligence procedures;
• Rules requiring Reporting FIs to keep records of the steps undertaken and any evidence relied upon for the performance of the above procedures and adequate measures to obtain those records;
• Administrative procedures to verify Reporting FIs’ compliance with the reporting and due diligence procedures; administrative procedures to follow up with a Reporting Financial Institution when undocumented accounts are reported;
• Administrative procedures to ensure that the Entities and accounts defined in domestic law as Non-Reporting FIs and Excluded Accounts continue to have a low risk of 
• Effective enforcement provisions to address non-compliance.

The Authority may impose a Primary Penalty of up to 50,000 CI (approx. $60,975 USD) for offenses by an FI, as well as Continuing Penalties of 100 CI (approx. $122 USD) for each day the violation continues.

The Authority’s procedure for imposing penalties will be to initially issue a Breach Notice, potentially followed by a Penalty Notice. The statute of limitations for issuing penalties is the earlier of (a) one year after becoming aware of the breach, or (b) six years after the breach occurred. Notices will be issued by email to the PPoC of an FI, using the email address registered on the DITC Portal. If the PPoC is not available, the Notice will be sent to the Authorised Person (“AP”). If neither the PPoC nor AP are available, the Notice will be sent to the Registered Office address of the FI. In the case of Notices served on individuals, they will be served directly on that person electronically. The penalty amounts on the Notices are not final and may be appealed by the FI within 60 days of the Penalty Notice.

The following list provides some examples of what the Authority may prioritize during reviews:

• Incorrect submission of undocumented accounts
• No AP or PPoC registered on the DITC Portal
• Incorrect Entity classification
• Failure of an FI to register on the DITC Portal and notify its classification and reporting obligations
• Failure to submit a CRS Filing Declaration
• Failure to submit a CRS Compliance Form
• Incorrectly reporting, or failing to report, a Reportable Account in a CRS XML Return
• Incorrectly reporting, or failing to report, the Taxpayer Identification Number or date of birth of Account Holders or Controlling Persons

The FI under review should have its books and records, written policies and procedures, self-certifications and other documentary evidence readily available for the Authority.

KPMG Comments

While the potential Primary Penalty imposed on each FI, excluding Continuing Penalties, may be up to 50,000 CI, it is important to note the individual amounts for each offense. Some of the more notable offenses and their respective penalties are:

• Failure to establish and maintain written policies and procedures under the CRS – 7,500 CI (noting there are 3 other offenses related to failure to comply with policies and procedures under the CRS)
• Failure to register on the DITC Portal by the notification deadline of April 30th – 37,500 CI
• Failure to provide an update via the DITC Portal to inform the Authority of changes to reporting obligations, Entity classification, or authorized users – 10,000 CI
• Failure to submit a CRS return – 5,000 CI (penalty per reportable account)
• Failure to submit a nil return or provide any further information (e.g CRS Filing Declaration and CRS Compliance Form) – 10,000 CI
• FI relies on self-certification that it knows or has reason to believe is inaccurate and makes a return based on this self-certification – 20,000 CI

Reference

For further information, please refer to the full Cayman Islands CRS Enforcement Guidelines, here.

Evolving Form 1099-K Thresholds

March 25, 2022 | by Martin Mueller and Kelli Wooten

On March 15th, a bipartisan bill was introduced which, if enacted, will increase the federal Form 1099-K reporting de minimis threshold for reporting transactions made by third party settlement organizations (TPSOs) from payments exceeding $600 to those equal to or exceeding $5,000. The Cut Red Tape for Online Sales Act (H.R. 7079), found here, was introduced by House Representatives Chris Pappas and Cindy Axne in order to reduce the administrative burden encountered by small online sellers, particularly those merely reselling personal goods for less than they were originally purchased.

As noted in a November letter to the Speaker of the House, Rep. Pelosi, and the Chairman for the Committee on Ways and Means, Rep. Neal, here, Rep. Pappas and 15 other members of Congress outlined the issues produced by the reduced threshold for Form 1099-K reporting. Notably, the letter states that the $600 threshold will lead to overreporting of income and overpayment of taxes, potentially rendering some taxpayers ineligible for certain tax benefits. The concerned group also pointed out that the increased reporting will require additional collection of personal information, potentially leading to privacy concerns for online sellers. Thus, the bipartisan bill would increase the threshold to $5,000, retroactive to the beginning of the 2022 calendar year. In addition, the bill would provide relief for payments made during 2022 by extending the de minimis number of transactions to 200 for one transitional year.

Read more 

Avoid Common Errors when Filing Forms Series 1099

February 17, 2022 | by Elis Prendergast

When planning for year-end reporting, necessary steps should be taken to ensure your forms series 1099 are correctly processed and filed timely. In the following, we would like to highlight some guidance to your attention to avoid common errors you may encounter while preparing the forms.

Follow the guidance

The Internal Revenue Service (IRS) issued several new versions of Forms series 1099 and its corresponding instructions in the fourth quarter of 2021. Most of the newly published forms are rolled forward without substantive changes. However, we recommend you carefully read the information provided in the general Form 1099 instructions and the instructions applicable to the specific Form 1099 filed. The updated forms include Form 1099-DIV, Form 1099-H, Form 1099-K, Form 1099-MISC, Form 1099-NEC, and Form 1099-R. 

All required fields should be completed and accurately presented when filling in the Forms 1099. The required recipient information includes the recipient’s name, address, and U.S. Tax Identification Numbers (TIN). The filer needs to provide the filer’s name, address, Employer Identification Number (EIN), payment amount, and a name and phone number for a contact person. In addition, the filer's name and TIN must match the name and TIN used on the form (which is required for Form 945), otherwise, the filer may be subject to information return penalties. 

Unexpected Forms series 1099

There are unexpected circumstances that may give rise to a Form 1099 filing requirement: 

— U.S. Persons who receive payments through non-U.S. entities

When assembling Forms 1099 reporting, many withholding agents will initially treat any entity providing a Form W-8 as out of scope for Form 1099 reporting without considering the U.S. non-exempt recipients that passed up Forms W-9 through a chain of intermediaries or flow-through entities (i.e., attached to a Form W-8IMY). For example, a payment made to a non-U.S. intermediary or non-U.S. flow-through entity may not initially appear to be reportable if the payment is not FDAP income, but may be in scope of Form 1099-B reporting if it constitutes gross proceeds that is allocated to a U.S. non-exempt recipient. As a result, the actual scope of reportable payments may be larger than expected.

— Undocumented payees 

In most cases, an undocumented individual or entity will be presumed to be a U.S. non-exempt recipient even if invalid or expired documentation is on file.

— Forms W-8IMY for which no allocation or underlying documentation is provided

Undocumented payees who receive payments through foreign intermediaries and foreign flow-through entities are typically presumed to be non-U.S. payees. Still, they may be presumed to be U.S. non-exempt recipients under chapter 61 claw-back rules (e.g., applying to short-term interest/OID) in certain instances.

Reconcile prior to filing

A final tip to all filers is that when you finish preparing your Form 1099 reporting, we recommend that you reconcile the gross income and withholding amounts reported and ensure the information is consistent with the amounts reported on Form 945 (for electronic filers) and Form 1096 (for paper filers). If you are a paper filer, you should also reconcile the number of forms you are filing with the total number of forms reported on your Form 1096.

Form 1099-K Reporting and 6050W Updates

February 17, 2022 | by Elis Prendergast

The de minimis threshold for section 6050W reporting on Forms 1099-K by third-party settlement organizations (TPSOs) was reduced substantially.

The updated instructions to Box 1a require TPSOs to report under 6050W for any payment totals exceeding $600, regardless of the number of transactions. Under the prior de minimis threshold, TPSOs were not required to report under section 6050W until the total payments made to a payee exceeded $20,000 and the aggregate number of transactions for such payee exceeded 200. The new de minimis threshold applies to transactions made after December 31, 2021.

The change will require TPSOs to obtain U.S. Tax Identification Numbers (TIN) from payees sooner than before and bring a significant number of transactions back into scope for Form 1099-K reporting.

Direct state reporting

In addition, a number of states require Form 1099-K direct reporting with the state despite being listed as Participating States for CF/SF program in Publication 1220—a consequence of the changes of threshold and filing requirements of each state. These states include Alabama, Connecticut, Delaware, Massachusetts, Montana, and North Carolina. What’s more, the following states are required to File Forms 1099-K directly to the state but are not listed in Publication 1220: Washington DC, Florida, Illinois, New York, Oregon, Tennessee, Vermont, and Virginia.

Backup withholding update

Section 3406 of the Internal Revenue Code currently provides that backup withholding is imposed on the first dollar paid to payees that have failed to provide a TIN. The Build Back Better Act proposes to amend the backup withholding provisions by adding a de minimis threshold for amounts reportable under Section 6050W. Under the proposed legislation TPSOs are only required to impose backup withholding, for purposes of section 6050W, on payments of $600 or more. In addition, transitional relief will be in place for calendar year 2022. During 2022, TPSOs are not required to impose backup withholding until the total payments made to a payee exceed $600 and the aggregate number of transactions for such payee exceeds 200. For payments made after December 31, 2022, backup withholding is imposed on payments of $600 or more made to a payee who has not provided a TIN, without regard to the aggregate number of transactions conducted with the payee.

State Usage of the CF/SF Program for Form 1099-NEC

January 24, 2022 | by Cyrus Daftary and Martin Mueller

The Internal Revenue Service (IRS) issued an updated version of Publication 1220 in the fall of 2021. One noteworthy change was the inclusion of Form 1099-NEC into the Combined Federal State Filing (CF/SF) Program. Form 1099-NEC was reintroduced for the 2020 tax year, but was not originally included in the CF/SF Program, leaving state agencies and taxpayers scrambling to get their processes updated ahead of the filing deadlines. The recent inclusion of the form in the program for the 2021 tax year comes as welcome relief to many taxpayers. Accordingly, some states have recently updated their guidance to note that they will accept the form when submitted through the CF/SF Program. However, not all state agencies have caught up with the update. 

Click here to read the full article and view the table containing the states which currently accept Form 1099-NEC when there is no withholding to report.