Tuesday, March 29, 2011

Information reporting at the source. A person engaged in a business must file an information return for certain payments that he makes to others during a tax year, in the course of business.Code Sec. 6041 . In general, Code Sec. 6041(a) relates to following types of payments: (1) salaries, wages, commissions, fees, and other forms of compensation for services rendered—if they total $600 or more; (2) deferrals under a nonqualified deferred compensation plan, whether or not paid (3) interest, rents, royalties, annuities, pensions, or other fixed or determinable gains, profits and income—if they total $600 or more; (4) foreign items—if they total $600 or more; ( Code Sec. 6041(a) ) and (5) wagering winnings of $1,200 or more from bingo game or slot machine play or $1,500 or more from a keno game ( Reg §7.6041-1(c) , explained below). Solely for purposes of Code Sec. 6041(a) , and except as provided in Code Sec. 6041(h)(2) (discussed below), a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property. Code Sec. 6041(h)(1) Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider. (Joint Comm Staff, Tech Expln of the Small Business Jobs Act of 2010 (JCX-47-10), 9/16/2010, p. 27,. The rental property expense payment reporting treatment described above doesn't apply to: • any individual who receives rental income of not more than the minimal amount, to be determined under IRS regs; Code Sec. 6041(h)(2)(B) • any individual, including one who is an active member of the uniformed services or an employee of the intelligence community if substantially all rental income is derived from renting the individual's principal residence ( ¶1214 ) on a temporary basis; and Code Sec. 6041(h)(2)(A) The term “substantially all” rental income is not defined for purposes of Code Sec. 6041(h)(2)(A) , nor is “temporary basis.” Thus, a situation may exist where a person renting his principal residence could reasonably expect to sell his residence within six months, but because the residential real estate market in the area declined, the person may have to wait several years to sell the property or take the property off the market for a period of time. It's unclear whether the taxpayer's intent will control for purposes of the “temporary basis” test, or whether IRS will set a length of time under regs or other guidance. An individual who owns several residences will need to determine which residence is the principal residence if one or more residences are rented out, in order to determine whether the individual meets the Code Sec. 6041(h)(2)(A) exception to the treatment of the receipt of rental income from real estate as a trade or business. • any other individual for whom the requirements of Code Sec. 6041 would cause hardship, as determined under IRS regs. Code Sec. 6041(h)(2)(C) For payments of $600 or more made after Dec. 31, 2011 ( Sec. 9006(c), PL 111-148, 3/23/2010 ), Code Sec. 6041(a) will also relate to amounts in consideration for property; or other ( Code Sec. 6041(a) as amended by Sec. 9006(b)(1), PL 111-148, 3/23/2010 ) gross proceeds. Code Sec. 6041(a) as amended by Sec. 9006(b)(2), PL 111-148, 3/23/2010 . Thus, for payments made after 2011, the term “payments” (above) includes gross proceeds paid in consideration for property or services. Joint Comm Staff, Tech Expln of the Revenue Provisions of the Reconciliation Act of 2010, as Amended, in Combination With the Patient Protection and Affordable Care Act (JCX-18-10), 3/21/2010, p. 114, see ¶60,411.0038 . The information return will have to set forth the amount of the gross proceeds described in Code Sec. 6041(a) . Code Sec. 6041(a) as amended by Sec. 9006(b)(3), PL 111-148, 3/23/2010 . By enacting the rules discussed above for post-2011 payments, Congress presumably intended to ensure that payments made by persons engaged in a trade or business, made in consideration of property, in excess of $600 in the aggregate to a payee in one tax year, will be reported to IRS if made in 2012 or thereafter. This will flag the payment for IRS, to help determine if it was properly reported by the payee. Example (1). X Corp., a calendar-year taxpayer, is engaged in the trade or business of manufacturing. X purchases a used automobile from Y, an individual, for $1,000 in 2010. The $1,000 is an amount paid in consideration of property. X is not required to file an information reporting return with IRS for the $1,000 payment made to Y. Example (2). The facts are the same as in Illustration 1, above, except that X buys the automobile from Y in 2012. Y's adjusted basis in the automobile is $500. X will be required to file an information return with IRS for the $1,000 payment of gross proceeds, setting forth the amount paid ($1,000), regardless of the fact that Y's gain on the sale is only $500. It isn't certain whether payors will be able to use Form 1099-MISC, Miscellaneous Income, for the required reporting of the items at (6) and (7), above, or some other form. The above rules regarding reporting of post-2011 payments, do not override specific provisions elsewhere in the Code that except certain payments from reporting, such as securities or broker transactions as defined under Code Sec. 6045 and its regs (see ¶60,454 et seq.). Joint Comm Staff, Tech Expln of the Revenue Provisions of the Reconciliation Act of 2010, as Amended, in Combination With the Patient Protection and Affordable Care Act (JCX-18-10), 3/21/2010, p. 114, see ¶60,411.0038 . Payments covering personal expenses are not reported. Reg §1.6041-1(b) . Payments are usually reported in the manner explained at ¶60,414.06 . For submission of information on magnetic media, see Reg §1.6041-7 and Reg §1.9101-1 . For magnetic or electronic filing requirements where 250 or more forms must be filed. The above types of payments are reported under Code Sec. 6041 only to the extent they are not reportable under certain other IRC provisions. Reg §1.6041-1(a)(1) . These provisions relate to the following items: • dividends— Code Sec. 6042 • liquidation distributions— Code Sec. 6043 • patronage distributions by cooperatives— Code Sec. 6044 • brokers' transactions— Code Sec. 6045 (see ¶60,454 ); • payments under self-employed retirement plans— Code Sec. 6047 • interest— Code Sec. 6049 • nonwage payments such as supplemental unemployment benefits, annuity, and sick pay— Code Sec. 6051 • payments of employee group-term life insurance premiums— Code Sec. 6052 (see ¶60,524 ); and • payments of royalties, . A payment is considered made, when an amount is unconditionally credited or set apart to a person without any substantial limitation on withdrawal or payment. Reg §1.6041-1(f) . A payment in property is reported at its fair market value on the date of payment. Reg §1.6041-1(e) . For valuation of property, see ¶10,114.21 et seq. For a chart of information reporting requirements and forms to use, see ¶60,414.001 . Prior law. For payments of $600 or more made to service providers by certain recipients of income from rental real estate before Jan. 1, 2011 ( Sec. 2101(b), PL 111-240, 9/27/2010 ) the information reporting rules in Code Sec. 6041(h) didn't apply. Wagering winnings. Persons who make payments of a bingo game or slot machine winnings of $1,200 or more, or of $1,500 or more from a keno game (including earnings exempt from withholding) in the course of a business, must file an information return as to payment. The return is made on Form W-2G and filed with the local IRS Center before Feb. 28 of the year following the year of payment. Reg §7.6041-1(c) . The above regulation was promulgated in '77, before the IRS Restructuring and Reform Act of '98. Thus, the place for filing returns may differ from that stated in the regulations. To determine if the winnings of bingo game or slot machine play total $1,200 or more, the person making the payment must not reduce the winnings by the amount wagered. However, in determining whether the winnings of a keno game total $1,500 or more, the amount of winnings from one game is reduced by the amount wagered in that one game. Also, the payor must: • include the fair market value of payments not made in cash; • aggregate all winnings of a winner of one bingo or keno game; and • ignore results of the winner's other wagering transactions if any. Reg §7.6041-1(b) , ¶60,412 . Statements to payees. Every payor who files an information return with the IRS under Code Sec. 6041(a) must also furnish to each person for whom he files the return a written statement showing: (1) the name and address of the person required to make the return and the phone number of that person's information contact, and ( Code Sec. 6041(d)(1) ) (2) the aggregate amount of payments that must be shown on the return. Code Sec. 6041(d)(2) . The statement must be furnished on or before Jan. 31 of the following year. Code Sec. 6041(d) . The phone number required under (1) above should provide direct access to individuals with immediate resources to resolve payees' questions expeditiously.H Rpt No. 104-506 (PL 104-168) p. 45, see ¶60,411.005 . Furnishing statements to recipients electronically. Except as the IRS otherwise provides, any person required to furnish a statement under any section of Subpart B of part III of Subchapter A of Chapter 61 of the Code (which includes Code Sec. 6041 through Code Sec. 6050S ) may electronically furnish the statement (without regard to any first class mailing requirement) to any recipient who has consented to having the statement provided electronically in a manner similar to the one permitted under the Code Sec. 6051 regs (with respect to Form W-2, see ¶60,514 ) or in any other manner as the IRS provides.Sec. 401, PL 107-147, 3/9/2002 . Reg §31.6051-1T(j) permits electronic furnishing of Form W-2 to a consenting recipient, Information reporting requirements for payments to employees. …………………………………………………………………………. Wages (as defined by Code Sec. 3401 ) that are paid to an employee are reported on Form W-2 , see ¶35,014.001 . Any other form of compensation not subject to withholding paid to an employee (including non-cash payments) must also be reported on Form W-2 . These rules apply if the total of the payments and the amount of employee's wages subject to withholding, if any, equals $600 or more in a calendar year. A separate Form W-2 is furnished for each employee for whom a return is required. An employer may elect to use more than one Form W-2 to report components of amounts required to be reported. Reg §1.6041-2(a)(1) ; IRS Pub. 15 , (1/2010) , p. 4, 10, 11, Cir. E ………………………………………………………………………………………………………………………………….. Where an employer is required to file Form W-3 and Form W-2 for withholding tax and employment tax purposes, the time for filing is the time, including extensions, prescribed under Reg §31.6011(a)-4 or Reg §31.6011(a)-5 . If an employer is not required to file under these two regulations, Form W-3 and Form W-2 must be filed on or before Feb. 28 of the following year, except if the return is filed electronically. If the returns are filed electronically, they are not due to the IRS until Mar. 31. Reg §1.6041-2(a)(3) . The transmittal form for a return on Form W-2 is Form W-3 . An employer required to file Form W-3 under Reg §1.6041-2(a)(2) and the two regulations mentioned above must use the same Form W-3 for a return on Form W-2 . The same Form W-3 is also used for a return for payment of wages in the form of group-term life insurance whether the employer elected to report payment in the same Form W-2 or in a separate Form W-2 . See Reg §1.6052-1(a) . To transmit statements for gambling winnings (Form W-2G , see ¶34,024.06 ) and lump-sum retirement distributions, payors should use Form 1096 . Ann. 85-139, 1985-39 IRB 118 . Contributions to a qualified retirement plan used to purchase life insurance protection and taxable to participants by reason of Code Sec. 72(m)(3)(B) , are reported on Form 1099-MISC , transmitted by Form 1096 or Form W-2 , transmitted by Form W-3 . See Reg §1.6041-1(d)(1) . For returns for payment of wages in the form of group-term life insurance, see Reg §1.6052-1(a)(1) Contributions to a nonqualified plan for employees whose rights thereunder aren't subject to substantial risk of forfeiture are compensation that must be reported on Form W-2 and transmitted by Form W-3 . Deferrals under a nonqualified deferred compensation plan. The information at source reporting rules apply to: Code Sec. 6041(g) . • any deferrals for the year under a “nonqualified deferred compensation plan”, whether or not paid, other than all deferrals that are required (as if there were no de minimis exception) to be reported under Code Sec. 6051(a)(13) (dealing with the Form W-2 reporting requirement for deferrals under a nonqualified compensation plan, see ¶60,514 ); Code Sec. 6041(g)(1) . and • any amount includible under Code Sec. 409A (dealing with the nonqualified deferred compensation plan failure rules, that is not treated as wages under Code Sec. 3401(a) . Code Sec. 6041(g)(2) . Until IRS issues further guidance, employers aren't required to report deferrals for the year under a nonqualified deferred compensation plan subject to Code Sec. 409A on Form W-2. Notice 2008-155, Sec. III(A), 2008-52 IRB 1367 . Prior law. For calendar year 2007, employers weren't required to report deferrals for the year under a nonqualified deferred compensation plan subject to Code Sec. 409A on Form W-2. Notice 2007-89, Sec. III(A)(1), 2007-46 IRB 998 . For calendar years 2005 and 2006, employers weren't required to report deferrals for the year under a plan subject to Code Sec. 409A on Form W-2. Notice 2006-100, Sec. III(A)(1), 2006-51 IRB 1 superseding Notice 2005-94, Sec. III, 2005-2 CB 1208 . Payments representing income paid to a U.S. citizen for services outside the U.S. are not reportable, if it can be reasonably believed that they will be excludable under Code Sec. 911 . Reg §1.6041-3(e) . Reimbursements and expense allowances. Information returns aren't required for payments made under reimbursement or other expense allowance arrangements if the arrangements meet the requirements of Code Sec. 62(c) , and Reg §1.62-2 , and the payments don't exceed the amount of the expenses substantiated. See ¶624 for requirements. No return is required for allowances and reimbursements, including allowances for meals and lodging or per diem allowances in lieu of subsistence, paid to persons in the service of an international organization, designated as such by the President of the U.S. pursuant to 22 USC 288 , whether or not those persons are required to account for them. See Reg §1.6041-3(k) . Distributions under employees' trust or under supplemental unemployment benefit trust. Amounts that are paid (or made available) to a beneficiary under an employee retirement trust or qualified trustee annuity plan and are includible in his income are reportable on Form 1099-MISC and 1096 , but only if they total $600 or more in a calendar year. A similar rule applies to payments by supplemental unemployment benefit (SUB) trusts, including separation and sick and accident benefits. For this purpose, trustees of SUB trusts need not consider payments by employers or others in determining whether the $600 minimum has been paid. Payments to an owner-employee are reported separately under Code Sec. 6047 , but not under Code Sec. 6041 . See Reg §1.6041-2(b)(2) . Form 1099-R , Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc., is used to report all distributions of $1 or more from profit-sharing or retirement plans, IRAs, annuities, life insurance contracts, etc., whether or not federal income tax was withheld. However, periodic payments subject to withholding of Social Security (FICA) and Medicare taxes are reported on Form W-2 . Form 1096 is used to transmit Form 1099-R . A separate Form 1099-R must be filed for each recipient. A copy of Form 1099-R , or a substitute form, must be sent to the recipient. Instructions to Form 1099, 1098, 5498, and W-2G , (1996) , p. 20 . Third-party payments of sick pay described in Code Sec. 3402(o) , are reported as required under Code Sec. 6051(f) (see ¶60,514 ). For constructive receipt of income, see ¶4514.036 et seq. For taxation of insurance premiums paid by employer, see ¶614.031 . For information returns for payments to independent contractors and payments made by certain “direct sellers,” Prior law. For amounts deferred before 2005, Sec. 885(d)(1), PL 108-357, 10/22/2004 , the rules with regard to the reporting of deferrals under a nonqualified deferred compensation plan did not apply. Code Sec. 6041(g) before amend by Sec. 885(b)(3), PL 108-357, 10/22/2004 . www.irstaxattorney.com 888-712-7690

No comments: