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Wage and Investment Subgroup Report (2007 IRPAC Report)

Issues Covered in this Section:

A.  Form 994 regulations and impact

B.  Form W-9

C.  Unnecessary Mailings

D.  Form 1099A/Form 1099C

I. INTRODUCTION

During the 2006-2007 IRPAC sessions the Wage and Investment Subgroup explored many key issues brought up by representatives of the W&I Operating Division.  Several forms and form families, coming up for revision in their review cycle, were reviewed for proposed changes, and recommendations for any further changes. 
Additionally, the subgroup surfaced an issue that could be a cost saving measure for the Service. Forms routinely mailed out by IRS Service Centers to taxpayers or practitioners were explored to determine their pertinence and continued need. Many returns are filed on forms generated by tax preparation software, with the mailed-out forms being discarded.  Moreover, many of the mailed-out forms themselves simply are not needed for the vast majority of returns.  Elimination of these mailings would save the Service operating funds.

Form 944, an annual form for payroll taxes and its impact on small businesses were explored in detail. The requirement to file Form 944 instead of Form 941 has caused unintended consequences discussed below. The history of the proposed regulation and complications that arose were reviewed and evaluated.

Form W-9 (Request for Taxpayer Identification Number and Certification) is used to collect information in order to issue the Form 1099-MISC.  The form was discussed by all members of IRPAC with input resulting in clarification of the form and instructions.

The Form 1099 A/Form 1099 C (Acquisition and Abandonment of a Secured Property and Cancellation of Debt) issue was resolved with a minor change to the form directing the receiver to the publication.

II. ISSUES AND RECOMMENDATIONS

A. Form 944 Regulations and Impact

Background

IRS issued temporary and proposed regulations introducing the new Form 944 (Employer’s Annual Federal Tax Return) effective January, 2006.  The intent of the new form was to reduce burden on specific eligible small employers to just one employment tax return and payment per year.  However, the implementation of the new regulations has caused unintended complications and confusion to a portion of the small employer community, payroll service providers, CPAs and the Service itself.
Some commercial tax preparers were unable to complete programming or elected not to pay additional fees for electronic submission of Form 944 causing more paper Form 944s to be filed.  Notices of discrepancy were generated further confusing taxpayers who wanted to continue filing and paying their taxes as Form 941 filers using established procedures and more readily available software.  Initially, IRS systems were not ready for taxpayers identified as Form 944 filers who electronically filed their first quarterly Form 941, causing taxpayers to be notified that IRS had switched their accounts from Form 944 to Form 941 after the original notification.

Many new employers were identified, erroneously, as Form 944 filers because the base determination period is the second prior calendar year, when the business did not exist.  The initial IRS impact estimates predicted that 1 million taxpayers would be eligible to file and pay annually as Form 944 filers each year, with an additional 250,000 taxpayers added each subsequent year.  The 2006 extract identified 646,000 taxpayers and the 2007 extract identified an additional 379,000 taxpayers.  Although the initial first year impact was lower, the subsequent year is over 50% higher than expected. 

As a result of this unintended inclusion a large number of Form 944s filed in 2006 showed much higher tax liabilities than the maximum $1,000 threshold.  IRS Chief Counsel has acknowledged that there is some confusion and has estimated that at least 16% (101,000 Form 944 returns) exceeded the $1,000 threshold for 2006 filing.
The IRS deadline for opting out of the 944 filing requirement (April 1 of each year) caused confusion as well.  By the time an inexperienced taxpayer understands what the Form 944 notification from IRS really means, the time allowed to switch to a Form 941 filer (prior to the first return filed for the tax year or April 1) may have elapsed.
The maximum threshold for filing an annual return is $1,000; however, the threshold for remitting taxes annually (with return) is $2,500.  The different dollar amounts and levels are confusing to taxpayers.

Recommendations

  1. IRS should change the regulation to allow small employers to elect to file Form 944 annually or continue to file Form 941 quarterly, instead of being forced to file Form 944.
  2. IRS should increase the maximum annual tax liability for filing Form 944 to $2,500 to match the maximum for annual deposit frequency.
  3. IRS should consider the filing of a quarterly Form 941 as the indicator that the taxpayer wishes to opt out of the Form 944 filing designation.  IRS should send a notification to the taxpayer to confirm the filing change.
  4. IRS should make the election to opt out of the Form 944 filing requirement permanent and not require an annual confirmation by taxpayers.

Discussion

Generally, qualifying employers will pay their tax liability when they file their Form 944 on January 31; however, those employers who exceed the maximum of $2,500 must pay on a monthly or semi-weekly frequency.  Many employers are confused between the $1,000 liability maximum for Form 944 filing and the $2,500 tax liability maximum for annual tax payments.

The regulations state that employers are required to file Form 944 if notified in writing from IRS to do so, even when liabilities exceed the threshold of $1,000.  This delays the IRS balance process for those employers who really do not fit the intention of the regulation thus creating a potential loophole for fraudulent activity and possible additional cases contributing to IRS compliance workload or, ultimately, the tax gap.  The IRS does not allow Payroll Service Providers to elect out of the Form 944 designation on behalf of the employer even with a fully executed Form 8655 (Reporting Agent Authorization), thus requiring the inexperienced taxpayer to contact IRS directly to make the election to opt out of the filing.  This must be done each and every year as the regulations are currently written. 

Allowing for a voluntary opt-in approach to Form 944 filing will maintain the intention of burden reduction for those small taxpayers that meet the criteria.  It will also allow the employers, who may fall into the criteria unintentionally, to use the existing infrastructure and readily available options in fulfilling their employment tax requirements.

Benefit to Payers

Software vendors or payroll service providers would not have to program or maintain another form and payment process for a small subset of the employer market.  By allowing the employer to opt out of the Form 944 program, small CPA firms or other vendors would be able to file the quarterly Form 941 electronically rather than filing the paper Form 944 tax return.  Because of the complexity of limits, general confusion over 944 regulations, and tax notices generated, professional preparers would not have the burden of preparing informational documents or discussing the new and old rules for taxpayers.

Benefit to IRS

IRS will continue to reduce the number of tax returns and payments needing processing for small employers who wish to file and pay annually.  The IRS will benefit from receiving electronically filed Form 941s, rather than face the burden of processing paper Form 944s.  IRS will reduce their annual costs to notify and process requests from taxpayers who have already opted out of the 944 filing and who want to continue filing as Form 941 filers.

Benefit to Taxpayers

Employers who already have financial software packages that produce an electronic Form 941 file or who contract with a service provider that files electronically can continue to enjoy the benefits of automation in meeting their employment tax obligation.  New business owners, who may have under-estimated their initial tax liability on Form SS-4, will be able to elect out of the Form 944 program just by filing a Form 941 during their first quarterly filing period.

B.   Form W-9

Background

In 2006, a recommendation was made by IRPAC to revise Part II, item # 3 (clarification to definition of a U.S. Person) of Form W-9 (Request for Taxpayer Identification Number and Certification).  The Form W-9 continued to be ambiguous enough to cause confusion to those completing the form.  The form is used to gather information about payees such as legal name, TIN/EIN number, type of entity, etc.  This information is then used by the payer when issuing a Form 1099 to ensure the name and tax identification number on the Form 1099 is accurate, based on the information the payee provided to the payer on the Form W-9.    One area of confusion lies with the definition of a limited liability entity since these entities can be taxed as an individual/sole proprietor, a corporation, an S-corporation or a partnership.  Clarification of the form is essential to reflect the correct designation for a Limited Liability entity. 

Recommendation

IRPAC made several recommendations to clarify parts of the Form W-9 which have already been agreed to by W&I points of contact.  Additionally, the subgroup has recommended the expansion of the classification of limited liability entities. The change in the text for item # 3 in Part II, Certification, to clarify the definition of a U.S. person and the revised text and new heading of the section definition of a U.S. person were both made in 2006. There also were minor changes in format for the SSN and the EIN in Part I that were included in revision plans (for example, typographical matters such as changing lines to dashes so they would fax and photocopy more clearly).

Discussion

IRPAC believes that clarity and precision in completion of the Form W-9 is critical and clarification of any areas of ambiguity or confusion was essential.  The W&I Division requested that the form be given great critical attention as it came up for planned revision and the IRPAC LMSB subgroup had also noted the need for greater clarity, for example, in the definition of “disregarded entity.”

Benefit to Payers

Identification of the correct entity for taxing issues and the ability to issue Form 1099-MISC to the correct entities will help ensure greater accuracy and increase compliance of those who are asked to complete and sign the W-9.

Benefit to IRS

Increased compliance and correct use of the Form W-9 will make it more reliable and valuable as an information document.

Benefit to Taxpayers

The ability to correctly fill out the W-9 Form with the correct entity information will ensure accurate reporting and compliance with tax regulations.

IRS Action(s)

W&I agreed that the following major changes to Form W-9 (Rev. September 2007) were warranted in view of the subgroup’s recommendations:

  • IRS changed the 3rd line of the entity section on the form to expand classification of limited liability entities.
  • IRS revised the check boxes format for the SSN and EIN in Part I.
  • IRS revised the text for item 3 in Part II, Certification, to clarify the definition of a U.S. person.
  • IRS revised the text and added a new heading to the section for the Definition of a U.S. person.
  • Under “What is backup withholding?” IRS added tax-exempt interest to the list of items subject to backup withholding per Notice 2006-93.
  • Under “Specific Instruction,” IRS revised the text for Limited Liability Company section to expand the entity classification portion.
  • On page 4, IRS added a section for Identity Theft information because the taxpayer is providing their TIN to a third party.  
  • IRS will add language to the instructions for Requester of Form W-9; it need not include the language “(defined below)” in the third certification of substitute forms.
  • IRS will change the Exempt check box to read “Exempt Payee.”

C.  Unnecessary Mailings

Background

The Service mails millions of forms and related instructions of many types to taxpayers and tax practitioners in many categories, including Form 941 (some 22 Million in 2006), Form 940 (some 6.6 Million), Form 1040 ES (nearly 6.4 Million for the first three payments for 2007) and Form 1040-ESV (about 9.5 Million in 2006).

Recommendation

The Service already has taken steps to identify taxpayers who do not need all of the forms they are receiving.  Preliminary findings for Forms 1040 ES and ESV mailings alone indicate costs could be reduced (mailings could be reduced by 8 Million pieces).  The IRS should continue this analysis across all mailed forms and IRPAC should continue to nominate forms, instructions and other mailings which could be explored for possible elimination.

Discussion

Many of these forms go to taxpayers who may use tax preparation software or who use a paid preparer, who in turn uses this software.  In many cases, the software generates the appropriate forms and forms mailed by the IRS are discarded. There are also other forms taxpayers receive that they have no use for and discard.  There are many cost factors involved in the Service’s generating and mailing out of these unused forms and accompanying instructions to taxpayers and paid preparers: printing, postage and IRS handling costs are obvious factors.  Non-Service cost factors include environmental impacts such as costs to produce the raw print stock and eventual disposal of the paper wasted. 

Benefit to Payers

Practitioners will save considerable time fielding questions from their taxpayer clients who receive mailings from the IRS that are unnecessary and unused.  IRS field activities will likely save time responding to similar queries from taxpayers.

Benefit to IRS

Resource savings will be realized from decreased print and publication paper purchase, printing, handling and postage costs, in addition to time saved responding to queries from taxpayers.

Benefit to Taxpayers

Reduction in unnecessary mailings received and time spent learning what to do with them.
 
D.   Form 1099A/Form 1099C

Background

Form 1099A (Acquisition and Abandonment of Secured Property) is often issued by the lender when a home foreclosure takes place and Form 1099C (Cancellation of Debt) is issued by the lender when the debt is canceled. This was a carry over issue from 2006.

Recommendation

Language should be added on Forms 1099A and 1099C directing taxpayers to Publication 523 (Selling Your Home) for specific use of these forms.

Discussion

Real estate sales and home ownership have increased in the U.S. during the past few years due to low interest rates. Now, with increasing interest rates affecting many taxpayers, we are already seeing an increase in home mortgage foreclosures. At the August meeting IRPAC noted that there was no mention of a possible Section 121 exclusion of gain from a home sale either on the back of the copy of the 1099A/1099C received by the taxpayer, or consistently in Publication 544 (Sales and Other Dispositions of Assets.)

Benefit to Taxpayers

The taxpayer will be able to determine from the additional information in Publication 523 if they have Section 121 exclusion when receiving the Forms 1099A/1099C.

 

Page Last Reviewed or Updated: 25-Jun-2013