A. De Minimis Threshold for Form 1099 Corrections
1. IRPAC recommends establishing under regulations a de minimis dollar threshold for corrections to original information returns and original recipient statements, creating a safe harbor to provide that no penalty will apply for failure to correct net changes of $50 or less in the reported amount. This will relieve significant burdens on taxpayers and the IRS for the cost and use of resources to report and process corrections that generally are not the result of payer error and do not increase taxable income of the recipients.
IRPAC again recommends that a failure to correct a de minimis amount of $50 or less previously reported to the IRS should be defined in Reg. § 301.6721-1(c) and Reg. § 301.6722-1(b) as an “inconsequential error” not subject to the penalty provisions of IRC §§ 6721 and 6722.
Regulations currently require a payer to issue a corrected information return if the reported amount is incorrect in “any monetary amount” or “any dollar amount,” depending on the regulatory language used. Up to 10 corrected forms (or one and one-half percent of the filer’s total information returns for the year) can be filed without penalty. Above that number, each corrected information return triggers a penalty under IRC § 6721(a)(2)(B) for having included incorrect information on the original return. The penalty under IRC § 6721(a)(1) is $100 for each such return, up to $1.5 million for any calendar year. When corrected information returns are filed with the IRS, corrected recipient statements must be furnished and under IRC § 6722 each triggers a separate $100 penalty, up to $1.5 million for any calendar year, for having included incorrect information on the original statement. However, Treas. Reg. §§ 301.6721-1(c) and 301.6722-1(b) provide for penalty exceptions for inconsequential errors and it is in these sections that IRPAC recommends the creation of a safe harbor for de minimis dollar amount corrections of $50 or less (up or down).
Restatements of investment earnings are a high-volume example of corrections that are required under current rules and cause burden on Form 1099, Information Returns, filers and the IRS and the reported taxpayers, yet do not necessarily increase tax liabilities or government revenue. The filers of information returns often receive late notifications of reportable amounts from mutual funds and corporations, generally because those entities did not have the information they needed in time to pass along to 1099 filers or because a fiscal year-end after the 1099 filing deadline revealed that restatement was necessary due to insufficient accumulated earnings and profits to support dividend treatment. The volume of information returns requiring correction for small amounts has also increased significantly due to wash sales and changes on Form 8937, Report of Organizational Actions Affecting Basis of Securities. The amount of the change is often immaterial and has no impact on the recipient’s tax liability, or often results in a reduction in the recipient’s taxable income when changes are due to reclassification of dividend distributions to return of capital.
The $50 de minimis threshold recommended by IRPAC for information return and recipient statement corrections will significantly reduce the burden on taxpayers (who receive corrected statements after having filed their income tax returns and then face new costs for the preparation and filing of amended returns), reduce the burden on the IRS (which must process all of the corrections, then handle a higher volume of resulting penalty notices and the prolonged process of reasonable cause review and appeal) and reduce the burden on information return filers (who must reprocess, create a new IRS filing and print and mail new statements).
The cost to the IRS to handle corrections and penalties is not disclosed to IRPAC. The cost to information return filers was illustrated in the 2013 IRPAC Public Report by an example of one common type of correction: a filer issued 456,559 corrected Forms 1099-DIV, Dividends and Distributions, for tax year 2012 to retail brokerage customers to report changes in the ordinary dividend amount (box 1a) due to dividend reclassification announcements received after the original information returns were created; 59% of these (270,275) were for changes less than $50; each recipient statement correction cost the Form 1099 filer $1.53 to print and mail so the cost of statements for changes less than $50 was $413,520.75; the filer also incurred the use of resources to produce the corrected IRS file and later will incur costs to deal with IRS proposed penalties (additional illustrations were furnished in the 2012 IRPAC Public Report). The cost to individual taxpayers relates to their concern about filing amended income tax returns which for many would mean additional fees to accountants or other tax preparers.
The closing agreement process offered under IRC § 7121 is not a sufficient answer to these problems because it does not reduce the burdens described above on the IRS, taxpayers or information return filers. Many months are consumed in the process at the end of which there may be no agreement, leaving the payer to issue even later corrected information returns and taxpayers facing the same burden of amended tax returns. Moreover, the closing agreement for Forms 1099 addresses underreporting of income, while most of these high-volume, small-amount restatements reduce reportable income and are not the result of 1099 filer error.
B. Business Master File and Form 8822-B
- IRPAC recommends reinstating the process of issuing a change of address notification letter mailed to the last address when a mailing address on the Business Master File (BMF) is updated based on the requirements in Revenue Procedure 2010-16.
- IRPAC recommends, as an alternative, IRS revise Revenue Procedure 2010-16 to state that an address change related to an Employer Identification Number (EIN) will only occur after receipt of IRS Form 8822-B,Change of Address – Business.
- IRPAC recommended old representative’s name and Taxpayer Identification Number (TIN) lines be eliminated from the Form 8822-B and IRS was very receptive to the recommendation.
Business Master File
IRPAC recommended creating additional mailing address fields on BMF in 2013. We understand the challenges associated with this recommendation as it will be a monumental undertaking that may not be achievable in a short period. Please refer to 2013 Public Report for a detailed discussion. We do feel strongly about providing additional address fields in BMF and we will continue to work with IRS until such time as resources become available to implement it.
Pursuant to Reg. § 301.6212-2(a) that states a “taxpayer’s last known address is the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return,” the IRS has issued revenue procedures to determine which returns will result in the IRS changing the address based on the address included on the most recently filed return, as well as which notices must be mailed to that “last known address.” The current guidance is found in Revenue Procedure 2010-16 (2010-19 IRB 664, dated 04/16/2010).
The recommendations for BMF outlined above are achievable without having to overhaul entire computerized BMF system. Yet one of the above recommendations will reduce notices (such as B-notices (CP2100 and CP2100A notices) that include TIN and customer name and account information) being delivered to an incorrect address increasing the risk of stolen identity in some cases, or penalties and interest being assessed against the information return filer for failure to respond in a timely manner.
We believe these recommendations would help prevent identity theft, allow companies to be forewarned if their withholding agent is not making payroll deposits, permit businesses to have specific tax correspondence directed to the appropriate group or person, and increase efficiencies by having the IRS receive timely responses to its inquiries and notices without repeated mailings.
We are happy to report that IRS is in the process of implementing sending notices to taxpayers when deemed address change occurs with a different address on the tax return from prior period’s return. The Notice CP 148, Name and/or Address Change, initially mailed to all taxpayers filing employment tax returns with address change, will be sent to the taxpayers’ old addresses starting in January, 2015. IRS is planning to publicize implementation of this notice on IRS.gov. prior to January.
Form 8822 – B
IRS issued final regulations in May 2013 that require every person obtaining an EIN to provide IRS with updated information. (T.D. 9617). Subsequently revised form 8822-B was issued to accommodate the requirement set out in Reg. § 301-6109-1(d)(2)(ii)(A). The form is to be used to provide old and new mailing addresses, old and new responsible parties and the old and new responsible party’s Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN) or EIN.
IRPAC reviewed the form and had a meeting with the Wage & Investment (W&I) division of IRS and discussed box 1of the form which currently lists many forms with a line description, employment, excise, income, and other business returns. We would like to see the box brokenin to 4 boxes to capture each type of return the box lists. We understand the actual address change cannot be accomplished based on these box types until such time as more address fields are implemented in BMF. We will continue to discuss how we can improve the form with this in mind.
We raised concerns relating to the required information for the old representative. Many companies, especially the ones that have been in operation for a number of years, do not know which entity or individuals name was put on the Form SS-4, Application for Employer Identification Number, when the EIN was first applied for. Often, the lawyers or accountants engaged in helping owners set up companies put their names and their address on the form, not the owners’. Or, they may not be able to locate the form as it is not a form that any business refers to on a regular basis. There is no reason to have the old information if the purpose is to gather current information and having the form considered incomplete because the business cannot provide the old representative’s name.
We are, once again, delighted to note that the IRS understood our concern and removed lines pertaining to the old responsible party’s information on the recent draft published on IRS.gov.
C. Form W-9, Request for Taxpayer Identification Number and Certification, Revision
IRPAC continues to recommend revisions to Form W-9, Request for Taxpayer Identification Number and Certification, to clarify for many individual taxpayers and small businesses what information is needed on the form. Increased clarity in the line captions and form instructions will result in greater numbers of Forms W-9 with valid name-TIN combinations, which will reduce the administrative burden on the IRS and businesses for incorrect TIN notices and incorrect TIN penalty notices and abatement requests. It will reduce the burden on businesses where, realizing the information on the form is incomplete or unclear and will lead to B Notices and penalties when used on information returns, the business spends time contacting payees for correct information. Listing additional information return types in the Purpose of Form section will establish a recognition factor for more taxpayers, leading them to furnish the form as requested rather than ignoring it and thus becoming subject to backup withholding.
- Add line numbers to the form.
- Add corresponding numbers to the form instructions so each numbered line of the form relates to a specific numbered paragraph in the instructions.
- Add to the caption in line 1 (name) to explain that a name is required on this line; do not leave this line blank.
- Add to the caption in line 3 (tax classification) to say “Check only one of the following seven boxes.”
- Add to the first tax classification description to clarify that it is for Individual sole proprietor or individual single member of Limited Liability Company (LLC).
- Add to the caption in line 4 (exemptions) to clarify that exempt payee codes apply only to certain entities, not individuals, and to see instructions on page 3; and clarify that Foreign Account Tax Compliance Act (FATCA) reporting exemption codes apply to accounts maintained outside the U.S.
- Insert “or” between the SSN and EIN number boxes.
- In the Purpose of Form section, list 11 of the most widely recognized Forms 1099 and 1098, Mortgage Interest Statement, by number and name. This will increase the likelihood that taxpayers will realize the Form W-9 relates directly to an information return the taxpayer expects and wants to receive every year. Also add:
a. The information must match your government-issued identification information
b. If you do not return the Form W-9 to the requester with a TIN, SSN or EIN you might be subject to backup withholding; see What Is Backup Withholding on page 2.
c. See What Is FATCA Reporting on page 2 for further information.
- Throughout the instructions, clarify TIN as SSN or EIN. Individual taxpayers know what their SSN is but often do not understand the term TIN.
- In the Specific Instructions, add to line 1 (name) instructions to clarify:
a. You must enter one of the following on this line – do not leave this line blank. The name should match the name on your tax return.
b. If you have a business name, trade name, doing business as (DBA) name, or disregarded entity name, you may enter it on Line 2.
c. Sole proprietor or individual single member of LLC: Enter your individual name as shown on your income tax return.
- In line 3 instructions (tax classification), add clarifying language about LLCs and disregarded entities.
- In line 4 instructions (exemptions), use bullets instead of running text to call attention to the exempt status statements and add one additional statement:
a. Corporations that provide medical or health care services, or provide legal services, are not exempt from backup withholding.
- In line 5 instructions (address), add “This is where the requester of Form W-9 will mail your information returns, unless you later ask the requester to change your address in their records.”
The Form W-9 will be more easily understood by the person filling out the form, and the data taken from Forms W-9 and filed on information returns to the IRS will be more accurate, if the recommended enhancements are incorporated into the Form W-9. At present, taxpayers and businesses do not always furnish the requested information to payers or do not properly fill out the Form W-9. Taxpayers all too often look only at the first page and do not read through the following three pages to search out instructions for the various lines and boxes on the first page.
Taxpayers unable to locate clear instructions sometimes fail to furnish Form W-9 to the requester because they do not understand why it is needed and thus some of them become subject to backup withholding. Or, taxpayers furnish a nonmatching name-TIN combination or incorrect tax classification status because they do not find the instructions for those lines of the form and this leads to B Notices, Backup Withholding Notice (Incorrect/Missing TIN), all of which create extra burden for the taxpayer, the IRS and the information return filer.
The Burden Reduction subgroup undertook the issue of Form W-9 clarifying revisions partway through 2013 and resumed work on the issue in 2014. The participation and assistance of tax law specialists from the W&I Division in addressing the W-9 issues in 2014 has been much appreciated.
Adding numbers to the lines on the form, and corresponding numbers to the specific instructions for each line, will assist taxpayers in finding the instruction needed to provide correction information. Adding “do not leave this line blank” to the line 1 (name) caption will reduce the number of forms on which the LLC name of a single-member LLC, or a doing business as (DBA) name of a sole proprietor, is written in line 2 but line 1 (the name of the taxpaying individual or entity) is left blank.
Adding clarifying language for the various tax classifications will help payers determine the correct tax treatment and whether information reporting is required. Adding “check only one of the following seven boxes” to the line 3 (tax classification) caption will reduce the number of forms on which a single-member LLC checks both Limited liability company and Other, or an LLC checks both Limited liability company and C Corporation.
For Exempt payee code, adding “codes apply only to certain entities, not individuals; see instructions on page 3” makes it clear to individuals that they can ignore this line and their Form W-9 will remain valid.
For Exemption from FATCA reporting code, adding “Applies to accounts maintained outside the U.S.” makes it clear that this information is not applicable to most taxpayers who provide Form W-9 to withholding agents located within the United States, and the form will remain valid without a FATCA exemption code for the vast majority of persons who will complete the Form W-9.
D. 1099-MISC - Miscellaneous Income
We would like to acknowledge that tremendous progress has been made on some of our 2013 recommendations related to Form 1099-MISC, Miscellaneous Income. Forms 1099-MISC filed with the IRS that incorrectly report non-reportable types of payments, payments reported in the wrong field, or payments reported to exempt payees, create a burden on small-business and individual taxpayers and burden the IRS with inaccurate data. The burden on taxpayers and the IRS is further compounded when filers fail to properly file corrections for erroneously filed 1099-MISC forms. IRPAC continues to encourage IRS to act on the following recommendations to address these problems.
In the 2013 Public Report we recommended adding a 1099-MISC page and have it linked to the home page of IRS.gov. IRS Representatives from SB/SE and Taxpayer Burden Reduction have been extremely responsive to our suggestions. The list below is the recommendations from 2013 that are now on the webpage dedicated to 1099-MISC. We applaud the swift action by W & I representatives.
• An expanded list of the types of payments reportable on the 1099-MISC
• A short list of payments that are not reportable and should not be reported on the
• FAQs about 1099-MISC reporting
In addition, all of the recommendations under the item number 2 below have been accepted by IRS and incorporated in the draft 2015 instructions published on IRS.gov on September 15th. We really appreciate the IRS representatives from Forms and Publications who were involved in the discussions during the year and worked diligently to update 2015 instructions.
1. Establish a free e-service on the IRS website for small-business payers to manually enter on-screen, and electronically file with the IRS, up to 100 Forms 1099-MISC and up to 50 corrected Forms 1099-MISC.
Electronic filing of 1099-MISC by small businesses would increase accuracy and reduce costs for all parties concerned. Currently the Social Security Administration (SSA) has a similar service for W-2 (Wage and Tax Statement) forms which has been successful. IRPAC also recommends that this feature be linked to TIN matching to reduce or eliminate B notices.
2. Improve the Instructions for Form 1099-MISC
a. Add new basic language about corrections
If you need to correct a Form 1099-MISC that you have already sent to the IRS:
• For paper forms, see the General Instructions for Certain Information Returns, part
H “Corrected Returns on Paper Forms” or for electronic filing of corrections see
Publication 1220, Publication 1220, Specifications for Filing Forms 1097, 1098,
1099, 3921, 3922, 5498, 8935, and W-2G Electronically.
• If filing a correction on a paper Form 1099-MISC, do not check the “VOID” box
on the form. The “VOID” box on the paper Form 1099 alerts IRS scanning
equipment to ignore the form and proceed to the next one. Your correction will not
be entered into IRS records if the “VOID” box is checked.
b. Add a new bullet point in the “Exceptions” list of the Instructions for Form 1099-MISC:
• Generally, payments to a corporation (including a limited liability company that is
treated as a C or S Corporation). But see Reportable payments to a corporation,
c. Consolidate the instructions that explain what is reportable in box 7. Instructions
applicable to box 7 appear in several different sections on different pages of the
Instructions for Form 1099-MISC.
• In addition to the list of Examples of payments reportable in box 7, insert a short list
of payments that are not reported on the 1099-MISC box 7.
3. Improve the “Instructions for Payer” on the paper Form 1099-MISC
Add the following sentence to the back of copy A instructions of the 1099-MISC: “See
instructions for 1099-MISC for explanation on how to correct previously filed forms or when
to void a 1099-MISC.
Every year many taxpayers receive erroneous 1099-MISCs from small businesses. Most errors happen with the use of box 7, non-employee compensation of Form 1099-MISC. Most boxes are clearly labeled but box 7 is often used by companies to report any and all payments to a person that is not an employee. The erroneously reported box 7 payments include not only the proper payments for services but also payments for products purchased, prizes and reimbursements of expenses. While the amounts in these examples may be reportable, they are not necessarily reportable in box 7 as reporting in box 7 indicates that these payments will be subject to self-employment tax. Therefore, improving instructions and providing examples explained on paper instructions as well as on the website will improve the proper reporting, especially for small businesses.
Entities that incorrectly prepare Forms 1099-MISC are often reluctant to file corrections and uninformed about how to properly do so. This issue is even more evident with small issuers who have neither the knowledge nor resources to interpret 1099 filing instructions. If they fail to correct erroneous 1099 filings, or make the corrections improperly, the problems become worse for the taxpayer and the IRS. Tax practitioners are left to try to explain the error on a client’s tax return; or the taxpayer remains vulnerable to IRS systems identifying erroneously reported amounts as taxable income. The resulting correspondence absorbs resources on both sides.
The current method of issuing 1099 forms or correcting 1099 forms is time consuming and confusing. Paper Form 1099-MISC filing requires issuers to file a “red ink” paper copy of the Forms 1099 and Form 1096, Annual Summary and Transmittal of U.S. Information Returns, with their IRS service center if they are not electronically filing the forms. A small business has four options for compliance:
1. order the “red ink” copies of the Forms 1099 and 1096 from the IRS well in advance;
2. purchase a packet of at least 25 forms from a retailer (when they may need only a few
3. purchase a program that will electronically prepare and file the forms; or
4. pay a tax professional to prepare the 1099s.
If taxpayers or their representatives could file original and corrected 1099-MISC forms via a free on line service, the process would be easier and increase accuracy as well as reduce costs for IRS and 1099 issuers.
IRPAC recommends a secure system that allows a payer/filer to register and enter information into a form on the IRS website. An IRS efile feature for 1099-MISC will give small-business Form 1099-MISC filers a service similar to the SSA free filing of W-2s and W-2cs on the SSA.gov website. If supported by public education efforts, a 1099-MISC small-business free efile system will give the IRS a greater amount of usable information, make data available to IRS sooner for matching (compared to hand-written or typed paper forms that must be scanned), increase the number of 1099 efilers, and improve the accuracy of 1099-MISC filings by reducing scanning input errors and linking to FAQs and TIN Matching. This concept may also be scaled up to increase the number of free efile of forms 1099-MISC and to include other 1099 forms in the future.
Accurate information reporting is essential to assist taxpayers in filing correct tax returns, it encourages a greater level of compliance, allows the IRS to more economically and efficiently detect and pursue noncompliant taxpayers who underreport income or do not file tax returns. Incorrect filings of Form 1099-MISC are a burden to taxpayers, the IRS, and the recipients of payments.
Taxpayers who receive 1099-MISCs reporting amounts that are not reportable or 1099-MISCs that report amounts in the wrong field are burdened with time-consuming communications with the issuers of erroneous 1099s attempting to have corrected forms filed. Payers who erroneously file 1099-MISCs often fail to file corrections with the IRS, or file on forms marked “VOID” and are never scanned into IRS files. An additional burden falls on the taxpayers and their tax preparers if they are contacted by the IRS about box 7 amounts, assumed by the IRS to be taxable income and subject to self-employment tax, but may be erroneously reported because they were either not a reportable type of payment or a different type of reportable payment.
The IRS is also burdened by erroneous 1099-MISC reporting, both by taking in erroneous tax data and by having to devote resources to what are presumed to be underreporting recipients of income. IRPAC recommends the changes listed above to improve instructions for 1099 issuers.
The recommendations above are intended to help small businesses become better compliant with the 1099-MISC requirements. The 1099-MISC can be a confusing form as it serves as a catch-all for a diverse range of payment types. The recommendations above are intended to make it easier for small businesses to find information on what is reportable, what box of the form to use, what is not reportable, and how to report and correct forms.
E. Nonresident Alien Withholding and Reporting of Payments for Truck or Rail Transportation
1. IRPAC recommends a short addition to the first paragraph under “Transportation income” in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, to clarify that income from rail or truck transportation does not qualify for the exemptions that may be available to ship or aircraft transportation income.
2. IRPAC again recommends that withholding agents be permitted to use a 50% - 50% allocation to determine the U.S.-source portion of payments of truck or rail transportation income.
IRPAC made multiple recommendations in 2010, 2011, 2012 and 2013 to address withholding agents’ uncertainty about IRC Chapter 3 withholding requirements, withholding agents’ concerns about exposure to penalties for failures to withhold or report and perceptions of underreporting of income, all in regard to rules for tax withholding and Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, reporting of payments to non-U.S. persons for international transportation that either begins or ends in the United States. The 2010 IRPAC work on these issues was led by the Burden Reduction Subgroup; from 2011 - 2013 the Emerging Compliance Issues Subgroup took the lead; and in 2014 the Burden Reduction Subgroup again took the issues but with intent to present only two of the original six recommendations.
IRPAC appreciated the participation of the Office of the Associate Chief Counsel (International) in a meeting by conference call in which the issues raised by IRPAC were acknowledged and the areas needing study were identified. IRPAC understands that there was a reorganization within the Office of Chief Counsel (International) and in addition, many resources were reassigned to projects necessary for the implementation of the Foreign Account Tax Compliance Act and the directly related changes to other sections of the regulations. Largely as a result of that call, IRPAC makes only two recommendations on these issues this year. We trust the IRS will return in the next year or two years to the requests for broader guidance on these issues made in the 2010 – 2013 IRPAC Public Reports.
Background: Gross transportation income and exceptions from chapter 3 withholding. U.S.-source transportation income is generated by foreign transportation providers through the use of aircraft, ships, trains and trucks, but tax law and regulations and the compliance issues faced by withholding agents differ depending on whether the income is derived through the use of ships and aircraft or derived through the use of trains and trucks.
For purposes of certain exemptions from 30% Chapter 3,(Withholding of Tax on Nonresident Aliens and Foreign Corporations) withholding, “transportation income” means income derived from or in connection with the use or hiring or leasing for use of a vessel or aircraft or the performance of services directly related to the use of a vessel or aircraft under IRC § 863(c)(3). This income from ships and aircraft is exempt from the 30% tax under IRC §§ 871 and 881 pursuant to IRC § 887(c) if it is subject to the 4% excise tax on U.S. gross transportation income under IRC § 887(a). The income may be exempt from tax under a U.S. income tax treaty, a shipping treaty or an equivalent tax exemption as described under IRC § 883. Or, it may constitute income effectively connected with a U.S. trade or business that is subject to U.S. income tax under IRC § 1 or § 55.
Income from railroad or truck transportation is not included in the statutory definition of transportation income, so it does not qualify for the exemptions from 30% withholding that are available under IRC §§ 887 or 883. Withholding agents must look to the rules for services to determine withholding and information reporting obligations for truck and train transportation income.
Publication 515 is widely consulted by withholding agents particularly at the point of setting up vendors and approving invoices for payment, where withholding agents identify and classify payments for tax withholding and information reporting. Publication 515 provides guidance under the subheading “Transportation Income” which begins with this sentence: “U.S. source gross transportation income is generally not subject to NRA withholding.”
IRPAC advised the IRS that many withholding agents, as well as foreign cross-border transportation providers uneager to provide additional tax forms, are not reading beyond that first sentence. The term “transportation income” has a naturally broad meaning, and people pressed for time and seeking simplicity may take away only the idea of all transportation income being generally not subject to NRA withholding. There is an explanation in the second paragraph that transportation income is income from the use of a vessel or aircraft, but Publication 515 will be more helpful if there is an initial statement of how to treat income from truck or train transportation.
To clarify withholding obligations and increase compliance, IRPAC recommends the following wording for the first paragraph: “Transportation Income. U.S. source gross transportation income (in connection with a ship or aircraft) is generally not subject to NRA withholding. U.S. source income in connection with rail or truck transportation does not qualify for the exemptions that may be available to ship or aircraft transportation income.”
Background: Gross transportation income and allocation of U.S.-source income. Under IRC § 863, gains, profits and income from services rendered partly within and partly without the United States is treated as derived partly from sources within and partly from sources without the United States. This requires withholding agents to make an allocation of each such payment, in order to know what amount is subject to Chapter 3 withholding. IRC § 863(c)(2) provides a special income sourcing rule for transportation income that either begins or ends in the United States: the U.S. portion is a simple 50% of the total payment. However, this is limited to transportation income derived from or in connection with the use of a vessel or aircraft. Withholding agents for payments of income derived from rail or truck transportation have no current authority for a simple 50% allocation, so they bear the burden of trying to obtain and interpret rail container logs, truck drivers’ logs, and similar records in an attempt to identify what percentage of their total invoiced amount was driven within the U.S. Even if logs can be obtained, direct correlations with truck transportation invoices are extremely difficult to achieve due to onloading and offloading at depots and lack of detail on truck routing and miles traveled attributable to a particular withholding agent’s business.
IRPAC recommends that withholding agents be permitted to use a simple 50% - 50% allocation to determine the U.S.-source portion of payments of truck or rail transportation income. The lack of an allocation rule invites failures to withhold and report, and IRPAC believes the IRS has broad statutory discretion to develop sourcing rules for types of income where sourcing is not clearly established. Where a category of income is not listed in the sourcing regulations, case law tells us to proceed by analogy (Howkins v. Commissioner, 49 T.C. 689 (1968); Container Corporation v. Commissioner, 134 T.C. No. 5 (2010) affirmed by No.10-60515 (5th Cir., 502011). Regulations should be able to address this matter without statutory constraint.
F. Instructions for Form 2848, Power of Attorney and Declaration of Representative
1. IRPAC recommends revising the Purpose of Form section of the instructions. Specifically, we recommend that the other forms listed be grouped together under a section with a common heading that indicates that these are the forms that can be used if you only want to authorize an individual or organization to inspect your tax documents but do not want representation. This would also allow for some of the repetitive language under each of the other forms to be removed.
2. IRPAC recommends clarifying and shortening several paragraphs in the Specific Instructions to make them easier to read and understand.
3. IRPAC recommends adding a link to the Centralized Authorization File (CAF) webpage entitled Common Reasons for Power of Attorney (POA) Rejection
Many taxpayers, especially individuals or small business owners, are not equipped to respond to inquiries received from Internal Revenue Service due to the complexity of the tax laws. They often rely on tax preparers or others to represent them before IRS. With this in mind, IRPAC recommends the following changes to make it easier for taxpayers to understand when and how this form is to be used and when certain other forms are used in lieu of Form 2848. We will discuss the issues in the order they appear in the instructions for Form 2848 as revised in July, 2014.
Purpose of Form
After the initial paragraph describing the form, three forms are listed with some repetitive language. IRPAC recommends the three paragraphs listing the forms be replaced with the following sentence that applies to all three forms followed by a bulleted list of forms and specifics for the particular form as shown below.
If you want to authorize an individual or organization to request and inspect your confidential information, but do not want to authorize an individual to represent you, you can do one of the following:
- Use Form 8821, Tax information Authorization – This authorization is valid for 6 months,
- Use Form 4506T, Request for Transcript of Tax Return – Request for a Transcript of Tax return,
- Use Form 56, Notice Concerning Fiduciary Relationship – To notify the IRS of the existence of a fiduciary relationship. A fiduciary (trustee, executor, administrator, receiver, or guardian) stands in the position of the taxpayer and acts as the taxpayer, not as a representative. A fiduciary may authorize an individual to represent or perform certain acts on behalf of the person or entity by filing a power of attorney that names the eligible individual(s) as representative(s) for the person or entity. Because the fiduciary stands in the position of the person or entity, the fiduciary must sign the power of attorney on behalf of the person or entity.
- Add a new paragraph that explains that the taxpayer may also request his/her own copy of a transcript on IRS.gov.
• IRPAC recommends breaking up the long paragraph about Individuals into three shorter
paragraphs as shown below so that individuals not familiar with the form can better
understand what needs to be entered in the Taxpayer Information section of the form.
Individuals. Enter your legal name, social security number (SSN), individual taxpayer
identification number (ITIN), and/or employer identification number (EIN), if applicable,
and your street address or post office box, and city, state, and zip code.
If you file a tax return that includes a sole proprietorship business (Form 1040 (Schedule
C, Profit or Loss From Business ) and you are authorizing the listed representative(s) to
represent you for your individual and business matters, including employment tax liabilities,
enter both your SSN (or ITIN) and your business EIN as your taxpayer identification
If you, your spouse, or former spouse is submitting powers of attorney to the Centralized
Authorization File (CAF) in connection with a joint return that you filed, you must submit
separate Forms 2848 even if you are authorizing the same representative(s) to represent
• IRPAC recommends changes to the first paragraph of Line 3, Acts Authorized, so that a
list of items that must be entered is on a bulleted list so that each item is easily checked off
as taxpayers fill out the form. Here are the suggested changes to the paragraph.
Enter the description of the matter, and where applicable, the tax form number, and the
year(s) in order for the power of attorney to be valid. For example:
- You may list “Income, 1040” for calendar year “2010”
- “Excise, 720” for “2010” (this entry covers all quarters in 2010
- You may list all consecutive multiple years or a series of inclusive periods, including quarterly periods, by using “thru” or a hyphen. For example, “2008 thru 2010” or “2nd 2009-3rd 2010.”
- For fiscal years, enter the ending year and month, using the YYYYMM format.
- DO NOT use a general reference such as “All years,” “All periods,” or “All Taxes.” The IRS will return any power of attorney with a general reference.
- Representation only applies for the years or periods on line 3.
- List on line 3 only tax forms directly related to the taxpayer listed on line 1.
- You may list the current year/period and any tax years or periods that have already ended as of the date you sign the power of attorney.
- Future tax periods listed may not exceed 3 years from December 31 of the year that the IRS receives the power of attorney.
- If the matter relates to an estate tax, enter the dates of the decedent’s death instead of the year or period.
- If the matter relates to an employee plan, include the plan number in the description of the matter.
IRPAC recommends adding a link to the CAF webpage
The instructions are comprehensive and the mistakes may be even further reduced when IRPAC suggestions are incorporated. However, it will be helpful, since the webpage already exists, to place a link on the instructions to alert taxpayers to a list of common reasons why POAs are often rejected.
G. Form 8889 – Health Savings Account
The IRPAC thanks the IRS for responding to a recommendation made during 2014 meetings to change the description for Line 15 of Form 8889, Health Savings Accounts (HSAs), to avoid inadvertent incorrect reporting. We are happy to report that 2014 draft form posted on IRS website is changed to reflect our recommendation.
The wording of Line 15 on the 2013 Form 8889 is ambiguous, which may result in an incorrect amount being reported on a federal tax return. Taxpayers often interpret Line 15 to mean that they are to enter only the amounts for which they have not been reimbursed; then when they subtract this figure from the amount on Line 14 it often results in taxable income and penalties. Line 14 is the amount that is reported by the HSA administrator on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA, as distributed from the HSA plan in the tax year. The taxpayer should report only the qualified medical expenses their HSA has reimbursed them for.
To illustrate, a taxpayer incurred $1,000 in qualified medical expenses and submitted $1,000 to be reimbursed during 2013. As of 12/31/2013, only $800 had been received from HSA and $200 was not yet distributed to the taxpayer.
Taxpayer enters $800 reported on the Form 1099-SA on line 14 and reading line 15 of Form 8889 that states “Unreimbursed qualified medical expenses”, the taxpayer enters $200 on line 15. This results in the taxpayer reporting $600 in taxable income (line 14 minus line 15). The intended and correct entries for these lines are $800 for line 14 and also $800 for line 15 for a net result of no taxable income as the taxpayer did not receive any distributions from HSA in excess of medical expenses incurred and paid for by the HSA provider.
To avoid this type of error, IRPAC recommended changing the line description to one of the following three.
- Qualified medical expenses paid using HSA distributions (see instructions),
- Qualified medical expenses paid by your HSA directly to you or on your behalf, or
- Distributions from all HSAs in 2014 that were used for qualified Medical Expenses.
2014 draft form 8889 dated June 20, 2014 shows the line description #1 suggested above. We thank IRS for a swift action.