Full Disclosure Part Deux: IRS to Require Millions of New 1099′s

From the CNN Money website:

Stealth IRS changes mean millions of new tax forms

By Neil deMause, contributing writerMay 21, 2010: 1:51 PM ET

NEW YORK (CNNMoney.com) — The massive expansion of requirements for businesses to file 1099 tax forms that was hidden in the 2,409-page health reform bill took many by surprise when it came to light last month. But it’s just one piece of a years-long legislative stealth campaign to create ways for the federal government to track down unreported income.

The result: A blizzard of new tax forms that the Internal Revenue Service will begin rolling out next year.

“It was actually something that we were following back under the Bush administration under the 2008 budget — we started to see these kinds of rumblings about the ‘tax gap’ and whether or not businesses were paying their fair share,” says Tom Henschke, president of the Pennsylvania-based SMC Business Councils, which was one of the first organizations to call attention to the health care amendment when it was introduced last fall. “So two administrations can claim credit for this.”

The first tax-reporting expansion was buried in a different bill, the Housing Assistance Tax Act introduced by House Speaker Nancy Pelosi and signed into law by President George W. Bush in July 2008. Best known for its first-time homebuyers’ credit, the bill also created a new addition to the family of 1099 tax forms: the 1099-K.

The 1099 is a catch-all series of IRS documents used to report non-wage income from a variety of sources like contract work, dividends, earned interest and pension distributions. The new 1099-K aims to shine a light on a currently hard-to-track payment stream: credit cards. Starting in 2011, financial firms that process credit or debit card payments will be required to send their clients, and the IRS, an annual form documenting the year’s transactions.

The rule comes with a floor to weed out the most casual retailers: The 1099-K is only required when a merchant has at least 200 payment transactions a year totaling more than $20,000. But it applies to all payment processors, including Paypal, Amazon.com, and others that service very small businesses.

The goal of the new regulations is to catch income that is going unreported to the IRS. The federal government loses an estimated $300 billion each year from the “tax gap” between what individuals and businesses owe and what they actually pay.

“Better information reporting helps the tax system work better by ensuring that everyone pays what they owe,” IRS Commissioner Doug Shulman explained last year as his agency unveiled the 1099-K. “The new law gives us an important new tool for closing the tax gap and also provides business taxpayers better documentation to compute and report their income and expenses.”

For companies that currently report all their credit card and Paypal sales to the IRS, the 1099-K requirement will have little impact. All the paperwork will be done by the bank or payment processing service, and business owners will simply receive a form at the end of the year listing their total receipts.

The 1099 changes attached to the health care reform bill are another kettle of fish. These massively expand the requirements for filing the “1099-Misc” form, which companies use for recording payments to freelance workers and other individual service providers. Until now, payments to corporations have been exempt from 1099 rules, as have payments for the purchase of goods.

Starting in 2012, that changes. All business payments or purchases that exceed $600 in a calendar year will need to be accompanied by a 1099 filing. That means obtaining the taxpayer ID number of the individual or corporation you’re making the payment to — even if it’s a giant retailer like Staples or Best Buy — at the time of the transaction, or else facing IRS penalties.

In essence, the 1099-Misc is having its role changed from a form for tracking off-payroll employment to one that must accompany virtually any sizeable business transaction.

“Just with business travel it would include hotels, rental cars,” Henschke says. “Phone service: 1099. Computer service: 1099. Whoever does your postage meter: 1099. You do a little advertising, Yellow Pages: 1099. Your landlord: 1099. You might as well just keep them in your pocket and hand them out as you go around every day.”

Small Not For Profits Under the Gun For 990n

All not for profits including those with income under $25,000 must file a 990 tax return this year. 990n cards (notices to file) were received last week. If you are a small not for profit organization you may file online. It’s really not the big deal they are making out to be:

From reporternews.com in Abilene, Texas:

Today is the deadline for many nonprofits to file with the Internal Revenue Service or risk losing their nonprofit status.

About 60 Taylor County organizations could lose their nonprofit status if the deadline is not met, according to unofficial data from the National Center for Charitable Statistics.

Recent changes in IRS regulations force small organizations to file. Previously, smaller groups did not face that requirement.

Some organizations on the Taylor County list may no longer be active and today’s deadline could serve to filter them out.

“As far as I know, we’re not even existing anymore,” said Bob Weissinger, a one-time president of the Abilene Downtown Homeowners Association. About five years ago, the organization worked to put a ‘Welcome’ sign at North Third and Grape streets noting the historic nature of downtown.

In recent years, however, the organization has become “sort of defunct ,” Weissinger said.

Others remain active, like the Abilene Fastpitch Softball Association, a youth sports organization.

But Bill Black, president of the association, said he wasn’t aware of any filing requirements.

“We’ll look into it, if we need to file,” Black said, adding that “we have never filed anything.”

According to the IRS, a mandate that first took effect in 2007 requires all nonprofits—other than churches and church-related organizations—to file an information form, regardless of the amount of receipts taken in.

Filings for 2009 mark the third consecutive year under the mandate, and nonprofits that go three years without filing will automatically lose their tax exempt status.

New Health Care Tax Credit For Tax Exempt and Small Employers

From the IRS Website: New for 2010: Tax Credit Helps Small Employers Provide Health Insurance Coverage

IR-2010-38, April 1, 2010 WASHINGTON ― Many small businesses and tax-exempt organizations that provide health insurance coverage to their employees now qualify for a special tax credit, according to the Internal Revenue Service. Included in the health care reform legislation, the Patient Protection and Affordable Care Act, approved by Congress and signed by President Obama on March 23, the credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. “This credit provides a real boost to eligible small businesses by helping them afford health coverage for their employees,” said IRS Commissioner Doug Shulman. “We urge small businesses and tax-exempt employers to look closely at this important tax break — which is already effective — to see if they qualify.” The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. In 2014, this maximum credit increases to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible employers that are tax-exempt organizations. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. It is generally available to employers that have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers. The maximum credit goes to smaller employers — those with 10 or fewer FTEs — paying annual average wages of $25,000 or less. Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit. The IRS will use postcards to reach out to millions of small businesses that may qualify for the credit. The postcards will encourage small business owners to take advantage of the credit if they qualify. More information about the credit, including tax tips, guides and answers to frequently asked questions, is now available on the IRS Web site, IRS.gov.

It’s The Employment Taxes Stupid! IRS Launches Study to Determine Employment Tax Gap

From the IRS website:

IRS Will Begin Employment Tax Research Study in February 2010
NOTE: This headliner is current through the publication date. Since changes may have occurred, no guarantees are made concerning the technical accuracy after the publication date. Headliner Volume 280 November 9, 2009 In February 2010, the Internal Revenue Service will begin its first Employment Tax National Research Project in 25 years. Business practices regarding employment tax issues may have changed significantly since the last IRS employment tax study in the 1980s, necessitating the need for this study. Examinations comprising the study will be conducted to collect data that will allow the IRS to understand the compliance characteristics of employment tax filers. The results will allow the IRS to gauge more accurately the extent to which businesses properly comply with employment tax law and related reporting requirements. When completed, this information will help the IRS select and audit future employment tax returns with the greatest compliance risk. There are two main goals for the ET NRP: To secure statistically valid information for computing the Employment Tax Gap, and To determine compliance characteristics so IRS can focus on the most noncompliant employment tax areas. The IRS will randomly select 2,000 taxpayers each year for the next three years. The examinations will be comprehensive in scope. Taxpayers will receive notices describing the NRP process similar to those used in recent NRP studies for individuals and Form 1120S corporations. Records pertaining to employment tax returns and issues will be subject to review during these examinations. Employers should have all of their records available to expedite these examinations.