The North Carolina Society of Accountants is proud to be the Affiliated State Organization of the National Society of Accountants.
We are pleased to republish the NSA Alert for our members.
August 6, 2010
In this Issue
Karen Hawkins: What Every Tax Preparer Should Know
A live video feed of Karen Hawkins, Director of the Internal Revenue Service (IRS) Office of Professional Responsibility, discussing tax preparer regulation and oversight, will be offered by NSA on Thursday, August 19 from 2:00-3:00pm. Director Hawkins will be presenting the keynote presentation at the 65th NSA Annual Meeting, August 18-21, 2010, at the Hyatt Regency Crystal City in Arlington, VA, and will discuss recent initiatives by her office to promote competency for filers and enforce compliance with ethics and disclosure requirements. She will also review the impending IRS tax preparer registration and testing regulations and has agreed to respond to questions as time allows.
NSA will charge a $10 fee to defray the cost of producing the webinar. NSA members may access the live video by registering at http://webinars.nsacct.org. During the registration process members will receive information on how to log on to the event on August 19. Any member may submit questions in advance to members@nsacct.org or during the webinar via text chat.
New Form 1099 Reporting Requirement In 2012 – Congress Working Overtime To Give Itself A Bad Name
It is becoming increasingly apparent that no one likes the new Form 1099 reporting requirement effective in 2012, but no one can figure out just how to fix it, either.
Enacted into law as part of the Patient Protection and Affordable Care Act (Pub. L. No. 111-148), the Form 1099 requirements mandate that all businesses file an information return for aggregate payments totaling $600 or more in a calendar year to a single payee beginning in 2012.
The IRS has already said that credit card payments are exempt from this new requirement since such payments are already subject to reporting requirements. However, if a small business annually writes checks or pays cash totaling $600 to Staples for office supplies, that small business will now have to send Staples a Form 1099. What about painting or decorating an office in 2012? You will have to provide Home Depot a Form 1099. Are your clients set up to do this? Are you? Do you have their TIN? How about a signed W-9?
NSA is unaware of a vast underreporting problem with Staples or Home Depot or the like that would somehow be corrected by flooding these companies with thousands of tax forms. Stated another way, what knucklehead is responsible for this? Oh wait, it was Congress.
Well, Congress has suddenly realized that they have blundered but they have a problem: the requirement is estimated to raise about $19 billion over ten years and, because it was signed into law, it is part of the government’s baseline budget. So, if Congress wants to repeal it they will have to raise other taxes by $19 billion or they will raise the deficit by $19 billion. Neither Democrats nor Republicans seem to be able to agree on what is the best course.
Last week, House Democrats and Republicans agreed that the new reporting requirements “could be burdensome” for small businesses, but they disagreed over how best to pay for repeal, with Democrats opting for foreign tax credit changes opposed by Republicans and Republicans basically just wanting to repeal the provision without worrying about either increasing taxes (which they don’t like) or increasing the deficit (which they don’t like either).
After a heated debate that included House Ways and Means Committee Chairman Sander Levin (D-Mich.) and the senior Republican Committee member Dave Camp (R-Mich.) yelling at each other, the House voted 241-154 for the Democratic small business proposal to repeal the reporting requirements and pay for the repeal using a package of recycled international tax provisions. But, the vote fell short of the two-thirds requirement for passage of suspension measures. So, back to the drawing board in the House.
Meanwhile, over in the Senate, just prior to adjournment for the summer, the procedural stage was set for another attempt to pass legislation on a bill that would provide a number of tax and lending incentives directed at small businesses. According to the procedural rules, only two amendments will be allowed when the Senate returns in September to consider the bill. The first is an amendment by Sen. Mike Johanns (R-NE) that would repeal the new Form 1099 reporting requirement. It is paid for by, among other things, eliminating the $15 billion Prevention Trust Fund, which helps citizens who have lost insurance to access preventive health care services. It is unclear why the Prevention Trust Fund won this particular lottery.
The second amendment would address the same $600 reporting requirement (assuming, presumably, the first amendment fails). This amendment, sponsored by Sen. Ben Nelson (D-NE) would exempt companies with fewer than 25 employees from the reporting requirement and raise the $600 reporting threshold for everyone to $5,000. Credit card purchases would also be exempt from the reporting calculation. Let us get this straight: tax compliance will be increased by billions of dollars because large corporations are required to provide Forms 1099 to each other? Really? The revenue reduction resulting from the Nelson amendment is paid for by repealing the section 199 deduction for major integrated oil companies. It is very clear why major integrated oil companies won this lottery.
The Senate stands in adjournment until 2:30pm on September 13, 2010. Votes on this bill are scheduled to begin on September 14, 2010. Given the Senate’s inability to agree on any tax bills recently, we will just have to wait and see what surprises the Senate has in store for us when the bill is discussed.
On the other side of town, meanwhile, the IRS has requested comments on how best to implement the current From 1099 reporting requirements and the NSA Federal Taxation Committee met at NSA’s offices in Alexandria this week to consider ways to minimize cost and disruption to practitioners and their clients in any regulations IRS will issue on this matter. We will be surveying the NSA membership shortly to get a better sense of the impact of this provision should it be implemented.
Since the House and Senate are in recess, you many want to discuss this provision with your Congressman or Senator when they are back at home. Since many of them are owners of small businesses, ask them whether their small business is prepared to issue a Form 1099 to Staples, Home Depot, Sears, etc., and whether they really think those companies will pay more taxes as a result of receiving a Form 1099 from them. Let us know what you hear.
IRS Will Contact Tax Preparers Directly Regarding Registration System's Availability
Approximately 900,000 known tax preparers will be receiving letters from the IRS notifying them that an online registration system is available, shortly after it is up and running in September, according to Leann Ruf, communications project lead for the IRS return preparer regulation implementation office.
All tax preparers, including some 900,000 who already have preparer tax identification numbers (PTINs), will be required to register on the new online system and obtain a preparer tax identification number or refresh their old one, said Ruf. That is because the IRS will be building a database of never-before compiled information about tax preparers, she said. “We are really wanting to start clean,” Ruf said. “We are building an entire new database of all federal tax return preparers and we are gathering information that the IRS has never tracked before.” Even if a tax preparer already has a PTIN, the only information they provided to the IRS at that time they received it was their name, Social Security number, date of birth, and an address, she said. “We don't have any kind of database that tells us that preparer A is also an attorney, or that preparer B is also a certified public accountant in the state of Arkansas. So we are trying to start with a clean slate, and build a full and accurate registration system that has full information about all federal tax return preparers.”
Preparers also need to renew their PTINs because there is a new PTIN application or user fee, Ruf said. The IRS issued proposed rules in July that set the IRS fee at $50, but did not specify what the separate fee from the vendor setting up the online registration system would be. However, Ruf said, IRS Electronic Tax Administration Director David Williams has been telling audiences that the total fee “will be closer to $50 than $100.”
“We hope any day now to announce the vendor portion of the fee so we can announce that full amount,” Ruf said. She reiterated that even though the fee is made up of the two parts, the tax preparer will just be paying the one amount to register online and the money will be divided between IRS and the vendor by the IRS afterward.
Although IRS is expecting to bring up its new online registration system in September, Ruf said, the exact date is uncertain. Tax preparers will be able to go online and get a PTIN or refresh their old one at any time once the system opens, or at any time before they prepare their first return after January 2011, she said. The payments will be made online, and credit or debit cards will be accepted. Ruf repeated what IRS officials have been saying recently—that the PTIN renewal period will be for one year rather than three as originally planned. The PTIN will be required to be renewed annually, and the renewal date will be established by the date of registration, she said. Therefore, someone who gets his PTIN October 1, 2010, would renew it Oct. 1 for each year thereafter.
The IRS is also making provisions for tax preparers who are located in foreign countries since they do not have Social Security numbers with which to register. These individuals will submit to IRS a supplemental PTIN application, she said. Under the new regime, foreign preparers will be able to complete their registration online up to a certain point, and will then be directed to a separate document that must be printed and mailed to the IRS, along with verification of identity and foreign address status. Ruf said original documents will not be needed to get this supplemental PTIN. The IRS will not be issuing an individual tax identification number to the foreign preparer, but the documentation required for “identity proofing and proving of a foreign address” will be similar to that for obtaining a ITIN, she said. There will be options to send the original document or certified copies of the document, she said, in what will be “an ITIN-like process.”
IRS Removes Debt Indicator for 2011 Tax Filing Season
The IRS has announced that starting with next year’s tax filing season it will no longer provide tax preparers and associated financial institutions with the “debt indicator,” which is used to facilitate refund anticipation loans (RALs).
The IRS announcement noted that with both RALs and RACs, tax preparation and product fees are subtracted directly from the refund, and the taxpayer does not make any “out-of-pocket” payments. They are frequently marketed to taxpayers who do not have cash to pay for professional tax preparation services. Consequently, the IRS plans to explore the possibility of providing a new tool for the 2012 tax filing season to give taxpayers a mechanism to use an appropriate portion of their tax refund to pay for the services of a professional tax return preparer. The IRS plans to engage with taxpayers, consumer advocates and the tax return preparer community to consider whether providing this option would be a cost-effective way for consumers to pay for tax return preparation services. Click Here to view a copy of the IRS announcement.
Monetary Penalties Will Not Replace Other OPR Disciplinary Sanctions
In another sign that the IRS is intent on more closely monitoring and penalizing wayward practitioners, IRS Office of Professional Responsibility Director Karen Hawkins said in a recent IRS webcast that she is not in favor of substituting monetary penalties for other disciplinary sanctions her office can impose on practitioners for misconduct.
Hawkins said she has been asked quite a bit recently if she would consider substituting a monetary penalty sanction in lieu of a suspension or disbarment of a practitioner and she wanted to make it very clear that her position is that she will not do that.
“I don't see that there is a bargaining chip here on either side. I don't see the monetary penalty as a way for practitioners to buy a way out of the inconvenience of not being able to practice before the IRS anymore,” she said. “I think that suspension and disbarment provisions are there to make a point. It's almost like a time out for the practitioner to think about what their conduct has been.”
Hawkins said she sees the monetary penalty as more of a restitution for economic harm that has been done to the taxpayer or the system by the practitioner or the firm's conduct. “At least while I am the director I intend to keep these two very separate and distinct and to be used for very explicit reasons.”
IRS Issues New Guidance on HIRE Act; Clarifies Coverage For Self-Employed, 52-Week Retention Credit
For employers hiring workers who have been self-employed, the time worked while self-employed does not count in determining whether a newly hired employee meets the criteria of being unemployed for purposes of claiming the tax benefits under the Hiring Incentives to Restore Employment Act (Pub. L. No. 111-147), according to a recently released set of questions and answers posted on the IRS website. Key provisions affecting payroll operations under the HIRE Act, which was enacted March 18, 2010, include:
• exempting employers from paying their 6.2 percent share of Social Security (Old Age, Survivor, and Disability Insurance, or OASDI) on covered wages paid for previously unemployed workers hired after Feb. 3, 2010, and by Dec. 31, 2010, and
• an employment-related retention tax credit for businesses of up to $1,000 for retaining such workers for 52 weeks.
In the Q&A's posted July 29, IRS also addressed in more detail how businesses will be able to claim the retention credit. Form 941, Employer's Quarterly Federal Tax Return, is used to claim the payroll tax exemption. A revised Form 941X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, is expected to be released this month, IRS said.
Under the law, the qualified newly hired employees must have been unemployed or employed for less than 40 hours during the 60-day period ending on the date employment begins. Wages paid to newly hired workers who replace those who have left employment voluntarily or through termination because of gross misconduct or poor performance can be used to claim the payroll tax exemption or the retention credit “as long as the employee is otherwise a qualified employee.”
With regard to the retention credit, IRS clarified that while the Work Opportunity Tax Credit and the payroll tax exemption both cannot be claimed for the same employee, there is no such restriction on an employer to claim the tax credit for wages paid to such a worker over a 52-week period. Click Here to read the HIRE Act Q&As.
IRS Likely To Receive At Least $12.4 Billion Budget
The Senate Appropriations Committee July 29 approved a $12.5 billion fiscal year 2011 spending plan for the Internal Revenue Service that includes $5.68 billion for enforcement and $2.3 billion for taxpayer services. Separately, the House Appropriations Financial Services and Government Appropriations Subcommittee July 29 approved by voice vote $12.4 billion in funding for IRS, which is $271.5 million more than the FY 2010 enacted levels.
In the Senate package, the enforcement allocation is $178.8 million above the FY 2010 enacted level. The panel said it supports the funding to address business and individual international tax compliance to help reduce tax evasion. The committee approved a 47 percent funding increase for IRS business systems modernization. The allocation would fully fund the IRS business systems modernization request at $387 million. This represents an increase of $123 million over the FY 2010 enacted level of $263 million. The funding would allow the IRS to migrate to state-of-the-art data systems beginning in the 2012 filing season.
IRS Updates Procedures for Electronic Filing of Information Returns Through FIRE System
The Internal Revenue Service in Rev. Proc. 2010-26, updated the specifications for electronic filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G for tax year 2010. The revenue procedure updates the specifications for filing the forms through the IRS Filing Information Returns Electronically (FIRE) System. The service noted it is effective for 2010 returns filed beginning Jan. 1, 2011.
IRS noted that changes in this year's FIRE System specifications include:
• the addition of Form 1097-BTC, Bond Tax Credit
• Form 6847 was made obsolete under the combined federal/state filing program, although a test filing is still required for approval to participate in the program; and
• the name Information Reporting Program has changed to Information Returns Branch, and the contact name has changed from IRS/ECC-MTB to IRS/IRB, with Mail Stop 4300 added to the mailing address.
The revenue procedure supersedes Rev. Proc. 2009-30 and will be published as Publication 1220 (Rev. 07/2010), Specifications for Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G Electronically, the IRS said.
