2010 IRPAC Report Executive Summary of Issues
Tax Gap Subgroup
The subgroup made recommendations concerning updating estimates of estate tax filing non-compliance and a strategy for updating the tax gap estimates. Members of the subgroup emphasized the need to explain carefully the determinants of the tax gap estimates and the degree of confidence associated with various components. There was concern that changes that reflect improvements in methodology or random errors could be misinterpreted as reflecting real changes in compliance rates. The group discussed how best to communicate the results to avoid any misinterpretation.
A. Health Care Valuation on Form W-2
Based on the lack of guidance and time necessary to implement system-wide W-2 changes, IRPAC recommends that the IRS make health care reporting optional for 2011 or waive penalties for failure to comply.
B. Tip Reporting Compliance and Enforcement Efforts
To facilitate tip reporting and increase compliance, IRPAC recommends a number of changes to simplify the process and help identify and conform non-filers.
C. EINs for Qualified Plans/Trusts
Based on the lack of clear guidance on the need and the proper procedure for obtaining EINs for qualified plans/trusts, IRPAC strongly recommends changes to Forms 5500 and SS-4 (and related instructions) to clarify these rules and encourage plan sponsors to obtain a trust EIN for qualified plans.
D. TIN Masking on Payee 1099s
Supported by initial comments on the temporary pilot program, IRPAC recommends that the TIN Masking pilot (which provides for optional masking) be made permanent beginning for tax year 2011, and expand the program to additional 1099 series forms, paper or electronic, and cover SSNs or EINs.
E. Transparency for Abusive Use of Multiple EINs – to Establish Multiple Tax-Favored Benefit Plans
IRPAC recommends additional certification/disclosures be made on the entity's annual tax return for employers that improperly establish multiple tax-favored plans for its workforce through the use of multiple entities.
F. 2009 Form 5500/5330 Automatic Extension for Calendar Year Plans
IRPAC first recommended an automatic extension of the filing deadline for 2009 Form 5500s (without the need to file Form 5558) for calendar year plans to October 15, 2010 to be able to comply with EFAST2. As that extension was not granted, IRPAC further recommend that the 2009 Form 5500/5330 deadline for all calendar plans be extended to December 31, 2010 (or otherwise waive penalties for late filers through such date).
G. Basis Allocation for Direct Rollovers
IRPAC recommends that the IRS retain the long-standing interpretation of Code section 402(c)(2) and treat a partial or split direct rollover as a single distribution for basis allocation purposes.
A. Electronic Furnishing of Forms 1098, 1099, 5498 and W-2
IRPAC recommends the IRS publish guidance to clarify procedures by which furnishers of these information statements might standardize the process for obtaining electronic affirmative consent, such as through a global consent to conduct business electronically, and bring it in line with other electronic business practices. IRPAC advanced this cause by gaining approval for a global electronic delivery consent FAQ for Form 1098-T, Tuition Statement.
B. Form 5498 and Fair Market Value Reporting for Deceased and Successor Beneficiaries
Effective for 2011 Form 5498 reporting, the IRS will provide instructions for IRA custodian/trustee/issuers to prepare such forms for deceased beneficiaries and their successor beneficiaries. The IRS will bring standardization to this reporting where no guidance previously existed.
C. Information Regarding Non-Resident Alien Taxation and Tax Reporting
IRPAC initiated and has supported an ongoing effort by the IRS to publish taxpayer friendly web-based content on IRS.gov for non-resident alien taxation, withholding and reporting. The content will be found in a section titled “Taxation of Aliens by Visa Type and Immigration Status.” The IRS will populate IRS.gov in stages with content by visa type as it is approved by Counsel.
D. Reporting Guidelines for the Return of Mistaken HSA Contributions to an Employer
IRPAC requested 2011 reporting guidance in the Instructions for Forms 1099-SA and 5498-SA related to excess employer contributions to an HSA that are returned to an employer. A 2008 IRS Notice created this possibility but the reporting of the transactions had not been addressed. The request will result in an update to these instructions.
E. Form 1099-R Reporting under EPCRS Guidelines for SEP, SARSEP, and SIMPLE Excesses Returned to Employer
IRPAC requested 2011 reporting guidance in the Instructions for Form 1099-R with respect to SEP, SARSEP and SIMPLE excess employer contributions returned to the employer under an EPCRS streamlined VCP correction. The request will result in an update to these instructions.
F. Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information Due Date Change
A proposal was made to change the due date of Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information to participants from May 31 to January 31 to aid practitioners and taxpayers. Currently, there is insufficient support to make this change.
A. Announcement 2010-41: New Backup Withholding Procedures: Social Security Number Validation following Receipt of Second “B” Notice
IRPAC commends the IRS on their release of interim procedures for payees requiring validation of their social security number to prevent or stop backup withholding. IRPAC will continue working with IRS as additional guidance, including revision of Rev. Proc. 93-37 and Publication 1281, is prepared.
B. Form 1099-INT, Box 10
As published for 2010, Form 1099-INT includes a new box 10 which is intended to convey the CUSIP number of each tax exempt bond from which the taxpayer derived tax exempt income. The addition of this information to the form comes from IRS’s need to identify taxpayers that are the beneficial owners of tax exempt private activity issues which are in danger of or have lost their tax exempt status. IRPAC’s recommendations are oriented toward consideration of alternate approaches to communication with bondholders and, if the alternatives are untenable, addressing the structural and logistical shortcomings of the addition of box 10 to the Form 1099-INT. Since the introduction of the revised form 1099-INT there has been insufficient time for IRS to consider the issues identified by IRPAC or for payers to implement any systematic changes. It is recommended, therefore, that the obligation to report the CUSIP numbers of tax exempt bonds be deferred for at least one year.
C. IRC §1441 and §1442 Documentation and Withholding Issues on Freight, Shipping and Other Transportation Expenses
IRPAC began discussion with IRS Chief Counsel about Chapter 3, IRC §1441 and §1442 documentation and withholding issues on freight, shipping and other transportation expenses. Discussion topics have included: the absence of a clear withholding process for payments for transportation services made to foreign persons; the application of IRC §1441 and §1442 withholding to transportation payments that vary depending upon whether the services are classified as ship and air transportation subject to the 4% excise tax on U.S. source gross transportation income (GTI) or classified as trucking or rail transportation; the need for a simpler sourcing method for Chapter 3 withholding such as the one now used for GTI sourcing of transportation income; and the need for regulations that exempt "freight" from withholding under IRC §1441 and §1442 rules as part of the purchase price of the goods.
D. Comments on Proposed Cost Basis Regulations and the Draft 2011 Form 1099-B
IRPAC published three comment letters in 2010 and participated in many meetings and conference calls on cost basis reporting with IRS Chief Counsel. IRPAC notes that with the late release of cost basis regulations, the necessary guidance will not have been made available in time to guide required system development and provide time for testing of system changes. There are many implementation details that remain ambiguous or that are impossible to implement in the remaining time frame. IRPAC continues to recommend that serious consideration be given to delaying the implementation of these provisions to 2012, particularly as they apply to transfer statements, and to deferring enforcement of the gift and inheritance provisions to 2013.
E. K-1 Matching Program
IRPAC met with IRS SB/SE to discuss the IRS K-1 matching procedures, specifically to determine what is causing erroneous mismatch notices and what the IRS and practitioners can do to alleviate the false mismatches. Further, IRPAC asked IRS to investigate frivolous return notice procedures based on a case where fuel tax credit from a passthrough entity resulted in a frivolous return notice even though the taxpayer’s return was not disproportionately excessive to any business income.
F. Information Reporting for Tax Credit Bonds and Stripped Tax Credits
IRPAC made many recommendations in response to provisions outlined in IRS Notice 2010-28, Stripping Transactions for Qualified Tax Credit Bonds. IRPAC’s recommendations are intended to harmonize the statutory requirements with how the securities industry functions while ensuring the availability of the information needed for a robust system of information reporting. All stakeholders will benefit from the recommendations because they provide the minimum disruption to existing processes. This translates into smoother and timelier implementation once all the details of the requirements are finalized by IRS.
G. Electronic Power of Attorney (POA) Validation for Business Returns
Rather than requiring personal information related to shareholders, partners or trustees to validate an electronically filed POA for a business entity, IRS e-Services should develop alternative criteria related specifically to the entity, such as the date of incorporation, date business started or was created, and the entity’s taxable income or ordinary business income.
H. Central Withholding Agreements: Addressing Needs of Venues and Foreign Performing Artists through a Mini-CWA Program and Problems Encountered by Foreign Artists When Applying for U.S. Social Security Numbers (SSNs)
IRPAC began discussions with IRS LMSB regarding Central Withholding Agreements (CWA). Issues include addressing the needs of venues and foreign performing artists through the creation of a mini-CWA program and problems encountered by foreign artists when applying for U.S. social security numbers.
I. Business Master File (BMF)
IRPAC met with IRS W&I and Chief Counsel to discuss the Business Master File. The technology employed by IRS only allows for one address per business. IRPAC raised concerns about the current procedure of automatic change of business address with every tax filing. IRPAC recommended the Business Master File issue for inclusion on the 2010-2011 Guidance Priority List.
J. Staggered “B” Notices
IRS responded to IRPAC’s concerns regarding randomly staggered “B” Notices with 2010 changes to the processing of CP2100, Notice of Missing or Incorrect Name/TIN Match for large volume filers. However, this change does not address the issues with randomly staggered CP2100A Notices which are extremely burdensome for related groups of information return filers. IRPAC recommends that IRS’s Martinsburg center use the same notice date on all CP2100A notices regardless of when they are mailed. Alternatively, IRS should distribute CP2100A notices for related entities during the same mailing period so that they include the same notice date.
K. Form 8886, Reportable Transaction Disclosure Statement
IRPAC reiterates its 2009 recommendation that IRS should clarify that the reporting requirements under IRC Section 6011 will terminate for the corporate participants in the Lease-in/Lease-out and Sale-in/Sale-out (LILO/SILO) Settlement Initiative after the year of actual or deemed termination of the tax shelter related transactions. IRS Office of Chief Counsel acknowledged, in an unofficial correspondence, that these taxpayers do not have a continuing obligation to file Forms 8886. IRS indicated that they would send letters to the settlement participants explaining this position. IRPAC, however, has not received verification of whether this has occurred.
A. Foreign Account Tax Compliance Act (FATCA)
On March 18, 2010, the Hiring Incentives to Restore Employment Act (the HIRE Act) was enacted. The Foreign Account Tax Compliance provisions of Subtitle A of Title V of the HIRE Act (commonly referred to as FATCA) enact an expansive new withholding tax and reporting regime. IRPAC has been working closely with the IRS and Treasury regarding the implementation of FATCA. The ECI Subgroup report summarizes a number of issues on which IRPAC has provided recommendations.
B. IRC Section 6050W, Information Reporting of Payments Made in Settlement of Payment Card and Third Party Network Transactions
IRC Section 6050W was added to the Internal Revenue Code on July 30, 2008, by section 3091 of the Housing Assistance Tax Act of 2008. On November 24, 2009, the IRS released proposed regulations and a draft of new Form 1099-K. On January 19, 2010, IRPAC submitted a comment letter addressing several issues. A copy of IRPAC’s January 19, 2010 comment letter relating to the proposed regulations is included in Appendix K. IRPAC’s ECI subgroup also met with IRS Office of Chief Counsel at its January and April meetings, and provided both written and oral information regarding several issues, including ACH transactions, the payment process, and convenience checks. On August 16, 2010, the final regulations were published. In the final regulations, the IRS made a number of clarifications, but did not adopt IRPAC’s principal recommendation regarding the definition of gross amount. Unfortunately, this will create a number of processing problems and will substantially complicate reporting parties’ ability to comply with IRC Section 6050W.
C. Expansion of Information Reporting Under IRC Section 6041
The Patient Protection and Affordable Care Act of 2010 expanded information reporting under IRC Section 6041 by repealing two exemptions that have been in the regulations for over a half-century. Effective 2012, payers will be required to report payments for property and payments to corporations. These changes have been discussed for years but never before enacted due to numerous challenges to utilizing the information reported. IRPAC met twice with IRS Office of Chief Counsel to discuss these challenges. IRPAC also sent the IRS two letters, the first dealing with a legal analysis of the scope of the changes, and the second dealing with practical implications of the changes. Copies of the letters are included in Appendix L and M.
D. Withholding Tax Issues
IRPAC has identified several issues concerning withholding tax imposed under Chapter 3 (section 1441 et seq.) of the Code. These issues also will be important under the new Chapter 4 regime enacted by the HIRE Act. IRPAC met with the IRS to discuss these issues and offer recommendations. The ECI Subgroup Report summarizes the issues and recommendations.
E. Identity Theft and Information Reporting
The problem of identity theft has become a serious issue within the payer community. While the circumstances in which identity theft can affect an account are quite varied, IRPAC’s focus has been on the question of whether a payer must report payments of income or proceeds on Forms 1099 when the named payee is known to be a victim of identity theft. IRPAC met twice this year with the IRS to address possible solutions that would best protect the identity theft victim while minimizing the reporting burden of payers. IRPAC also recently raised with the IRS the issue of whether Forms 1099 should be issued when the address of the payee is known to be a “stale” (or undeliverable) address. IRPAC expects to have further discussions with the IRS on this issue next year.
F. Clarification of the Information to be Reported to U.S. Investors on the Form 1099-DIV, Box 6, Foreign Tax Paid.
U.S. payers are required to report to U.S. investors on Form 1099-DIV dividend payments made in respect of foreign securities. In addition to reporting the dividend payments, payers are also required to report any foreign tax paid on such dividends. Prior to 2008, the Instructions for Form 1099-DIV directed payers to report in Box 6 any foreign tax withheld and paid on dividends and other distributions on stock. However, in 2008 the language in the instructions was changed to direct payers to enter creditable foreign tax withheld and paid (within the meaning of IRC Section 901) on dividends and other distributions on stock. IRPAC requested that the IRS reconsider this change because payers do not possess the type of information required to make a determination as to whether the foreign tax withheld may be taken as a credit by the payee. IRPAC met with members of the IRS’s Forms and Publications Division to discuss this issue. All agreed that reinstating the language provided on the 2007 Form 1099-DIV would be appropriate. The IRS has published a correction to the 2010 Instructions for Form 1099-DIV in the “What’s Hot” section of IRS.gov because the form instructions had already been published for this year. The IRS also agreed to make the language change for the 2011 Instructions for Form 1099-DIV.