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Small Business/Self-Employed Subgroup Report (2007 IRPAC Report)

Issues Covered in this Section:

A.  Creation/Modification of Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers

B.  Revised Form 2678, Employer/Payer Appointment of Agent

C.  Tax Gap Legislation

D.  Barter Exchange Backup Withholding and B Notice Requirements for Name-TIN Mismatches

E.  Expansion of the Definition of Broker Under Section 6045

I.  INTRODUCTION

The Small Business and Self-Employed (SBSE) subgroup includes representatives of the tax preparer, information reporting, tax training and technology communities. Throughout the year, the subgroup met with IRS representatives to discuss a number of issues: development of a Schedule R for Form 941 and changes to Form 2678, changes to the B Notice processing procedures for Barter Exchange companies, and review of certain tax gap Internal Revenue Code (IRC) modifications for their impact on the information reporting community.  In addition, the subgroup continued to observe the development of the proposed changes to the definition of broker for Form 1099 reporting purposes.

II.  ISSUES

A.  Creation/Modification of Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers

Discussion

IRS is creating a Schedule R for Form 941 - Allocation Schedule for Aggregate Form 941 Filers.  Schedule R is to be completed each time an agent, approved by the IRS and defined by Section 3504, files an aggregate Form 941.  Schedule R is used to allocate the aggregate information (wages, FIT, FICA, AEIC, and any payments) reported on Form 941 to each employer.  

This form is in initial draft stages, and is scheduled for release in 2009.

Recommendations

Draft Schedule R (Form 941) has been passed to the full IRPAC for review and comments.

Benefits to Payers

Per Section 3405, agents as well as the employers/payers they represent, are liable for taxes.  The Schedule R will appropriately allocate this liability among the employers/payers.

Benefits to IRS

IRS will have information sufficient to appropriately allocate liability amounts to employers/payers represented by agents filing aggregate Forms 941.

B.  Revised Form 2678, Employer/Payer Appointment of Agent

Background

Agents as defined in Code Section 3504 are authorized to make deposits or payments of employment and backup withholding taxes.  However, Form 2678 does not cover Form 940, Federal Unemployment Taxes.  The form has historically been used by corporations to have one entity perform payroll and reporting functions for its related entities.  The largest volume of Forms 2678 is now coming from recipients enrolled in homecare programs administered by state and local governments.  The state and local governments generally contract with one or more vendors to administer the care programs, and the disabled or elderly service recipients often appoint an IRC 3504 agent to handle payroll and tax reporting using Form 2678.  Changes were also made to accommodate these filers.

Recommendation

The SBSE Subgroup recommended changes to language in the form to clarify that the form is to be used for both wages and other compensation and by employers as well as non-employer payers. 

Discussion

References were included, for example, to employers as well as payers, rather than exclusively to employers, as well as to compensation other than wages.
A check box was also added to allow the revocation of an existing agreement with an IRC Section 3504 agent. 

Benefit to Payers

The form has been simplified, is easier to read, and the instructions are clearer.

Benefit to IRS

IRS is able to better identify agents through improved system programming.

IRS Action(s)

Most of the SBSE subgroup’s recommendations were adopted.

C. Tax Gap Legislation

Background

Three tax gap bills that have been passed have come to the attention of the SBSE subgroup as having a potential impact on information reporting.  The SBSE subgroup was asked to make recommendations on any issues that might arise in the implementation of the Code for:

  1. modification of collection due process procedures for employment tax collections; and
  2. understatement of taxpayer liability by tax return preparers;

Discussion

Questions were raised during discussions on whether new notices should be drafted regarding the modification of the collection due process procedures for employment tax liability, and whether a tax preparer who files a protective claim for refund on behalf of a client can be penalized under the modifications to Code Sections 6694, 7701 and 6662.

Recommendation

The SBSE subgroup makes the following recommendations:

  1. Modification of Collection Due Process Procedures for Employment Tax Liability

Under this provision, a levy issued to collect federal employment taxes is exempted from the pre-levy collection due process (CDP) hearing requirement if the taxpayer subject to the levy requested a CDP hearing with respect to unpaid employment taxes arising in the two-year period before the beginning of the taxable period with respect to which the employment tax levy is served.

Considering the extremely broad implications of the implementation of this section of the Code on the taxpayer, the SBSE Subgroup recommends that the notices for this levy not be a modification of the existing notices for levy, but that a separate notice regarding the exception from the pre-levy CDP hearing should be created and drafted with care. The heading of the notice should clearly indicate that the taxpayer does not have a right to pre-levy CDP.  The taxpayer should also be informed about his or her right to a post-levy hearing within a reasonable period of time.

As a procedural matter, the SBSE Subgroup recommends that the notices be sent by certified mail or return receipt requested to ensure that the taxpayer has received the levy notice.  The collection process should start only after affirming that the taxpayer has been served the levy notice.

2.  Understatement of Taxpayer Liability by Tax Return Preparers

The SBSE Subgroup recommends that the instructions include an explicit explanation of how the protective claims for refunds procedure is interpreted under Sections 6694 and 7701, clarifying that tax preparers who file such claims would not be subject to penalty under the modifications to the provisions.

Benefit to IRS

The protective claims process is an important mechanism for disclosure.  A clear understanding by taxpayers that these claims are allowed under the new modifications to the law will increase disclosure and compliance.

Benefit to Taxpayers

The recommendations will minimize the possibility of any unintended, undue hardship to taxpayers.

Clarifying how protective claims are treated under the modifications to Sections 6694, 7701 and 6662 will remove certain concerns of tax preparers regarding the use of these claims.

D. Barter Exchange Backup Withholding and B Notice Requirements For Name-TIN Mismatches

Background

Barter Exchanges are defined as third-party record keepers under The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and are grouped together with financial brokerage companies for purposes of Form 1099-B reporting and subsequent B Notice solicitation requirements for name-TIN mismatches.  Subject to certain exceptions, Section 3406 requires that B Notice form letters be sent to payees appearing on the CP2100/2100-A.  The language in the B Notice specifically states that “the law requires us to backup withhold on interest, dividends, and certain other payments that we make to your account.” 

Barter Exchanges are unable to comply with the backup withholding requirements of Section 3406 because they are not in possession or control of any cash accounts for their clients.  Barter Exchanges only control barter/trade accounts which hold “trade dollars,” not cash.  Consequently, the backup withholding language of the B Notice makes an assertion that withholding may occur, when it is impossible for Barter Exchanges to backup withhold, as a matter of fact.  Barter Exchanges are then subject to 972CG penalties for the name-TIN mismatches. 

In order to argue successfully for waiver of the penalty, payers must establish, pursuant to Section 6724, reasonable cause for the failures referenced on the Notice 972CG. In order to establish reasonable cause, payers must explain the manner in which they satisfactorily met the B Notice solicitation requirements.  While Barter Exchanges are able to send the appropriate B Notices, they are unable to effect backup withholding on the accounts of any recipients who fail to respond.  Often, this practice results in a denial of the waiver request, even though all other reasonable cause requirements are met.  Consequently, Barter Exchanges must then pursue the appeals process for the denial of the penalty waiver, an undue hardship that results simply from the Barter Exchanges’ inability to effect backup withholding on non-cash accounts.

Recommendation

There are several methods of alleviating the problem including increased barter industry education, the creation of a revised B Notice that would be specific to barter exchanges, or legislation to exempt barter exchanges from backup withholding for Name-TIN mismatches.

Discussion

First, we recommend that the IRS educate the barter industry on the Form W-9 solicitation and Section 3406 backup withholding requirements through outreach programs that will be effective to reduce 972CG penalties in the future.
Second, we request that the language in the current B Notice be amended to provide language that would be more pertinent to the barter industry.  This recommendation could be accomplished by adding the words “to the extent feasible” before the words “the law requires us to backup withhold.”  If modifications to current B notices are not possible, we recommend the creation of a B notice specific to Barter Exchanges that includes the aforementioned language.

Third, we suggest that Section 3406 be amended to exempt Barter Exchanges from the backup withholding requirement, since it is impossible for them to comply with the requirement as they are not in control of any payee cash accounts.

Finally, we recommend updating IRS Publication 1281, Backup Withholding for Missing and Incorrect Name/TINs, if any changes are made to the B Notice solicitation procedures reflecting the issues unique to the barter industry.

Benefit to Payers

The barter industry would be relieved of the undue burden of unnecessary penalties for failure to comply with a requirement that is impossible to comply with on its face.

Benefit to IRS

Internal IRS education on the issue would reduce campus burden.  Amending the B Notice to provide a barter specific B Notice would increase compliance in the barter industry, thereby reducing the need for 972CG penalties, waiver requests and appeals.  The exemption of backup withholding for barter exchanges would further reduce IRS burden by eliminating a backup withholding requirement that on its face cannot be effected.

In addition, modification of the B Notice to exclude reference to the backup withholding requirement, or to include a reference that backup withholding will be effected to the extent feasible, increases the credibility of the solicitation, which is currently diminished as the result of reference to an action (backup withholding) payees understand would be impossible to take.

Moreover, it is now industry standard for Barter Exchanges to use the IRS TIN Matching Program at account set up to ensure that the proper name and TIN are obtained.  Accordingly, most of the accounts appearing on the CP2100/CP2100-A have long been closed and those account holders are no longer doing business with the Barter Exchange.

Consequently, granting such an exemption or modification would not represent a significant loophole, since Barter Exchanges already require current W-9s from all their clients before proceeding to conduct business. 

Benefit to the Taxpayer

Both education of the barter industry and/or amended B Notice language specific to the industry will result in more compliance.  The exemption of Barter Exchanges from backup withholding requirements would not increase taxpayer non-compliance, as the barter industry, through use of the IRS TIN Matching Program, already insists on proper Name-TIN matching as a prerequisite of doing business with the taxpayer.

E. Expansion of the Definition of Broker Under Section 6045

Background

The definition of “broker,” as defined in IRC Section 6045, is intentionally broad.  Despite the definition’s breadth, the IRS has determined that auction, consignment or similar transactions facilitated by third parties utilized by sellers and buyers do not come within the purview of this definition.  As such, these transactions are currently not subject to Form 1099-B, or other information reporting requirements.

Nonetheless, evidence indicates that a large number of people utilize traditional or digital auction, consignment or similar types of engagements to buy and sell property.  We note that converting unneeded or unused personal property to cash through such transactions creates no income reporting obligation, as personal property sold at a loss is not deductible.  In contrast, those persons utilizing auction, consignment or similar methods on a regular or frequent basis may be engaged in the conduct of a trade or business.   Because business owners incur a tax liability as a result of profitable transactions, sales are reportable on Schedule C.  The same result occurs for those persons engaged in the buying and selling of collectibles through auction, consignment or similar methods, as investment income is reportable on Schedule D.

It is probable that a significant number of these individuals either choose to ignore income reporting requirements or are unaware of their obligations in this regard, thus contributing to the tax gap.

Recommendation

IRPAC recommends that the definition of broker be further clarified or broadened to include within its parameters those third parties assisting, effecting or facilitating on a regular basis sales between buyers and sellers through auctions, consignment, or similar means.
 
Benefit to IRS

The IRS will benefit directly as it will receive information reporting on transactions effected through auction, consignment, or similar means.  IRS research has demonstrated that increased information reporting results in increased taxpayer compliance, thus contributing to the closure of the tax gap.

Benefit to Taxpayers

Through IRS and other education efforts, taxpayers unaware of their income reporting and taxpaying obligations will receive the necessary information to assist them in complying with their obligations.  In addition, taxpayers receiving reports of these sales will have a method of maintaining a yearly record of gross receipts, which will assist them not only in correctly completing their tax returns but in also taking the appropriate deductions for expenses incurred in the conduct of their trade or business, or sales of investment-grade collectibles or other property.

Page Last Reviewed or Updated: 28-May-2014