If you take credit cards in your business, you will be issued a form 1099-K by your merchant services company. IRC Code Sec. 6050W imposes information reporting requirements on payments made in settlement of payment card and third-party network transactions. The reporting requirement applies to payments made after December 31, 2011. The IRS finalized Form 1099-K, Merchant Card and Third Party Payments, in 2011, revised the rules for certain payment settlement entities making payments outside the U.S., and modified the rules for certain insurance companies. The IRS also delayed backup withholding for payment card transactions.
Certain transactions do not need to be reported, such as a withdrawal of funds at an ATM by a payment card. Form 1099-K is similar to other Forms 1099 used to report interest, dividends and other payments.
Starting with securities purchased in 2011, brokers are required to file information returns that not only provide the IRS and customers with details on the sales proceeds from each trade executed during the year but also the customer’s adjusted basis in the security and whether any gain or loss is long- or short-term.
The basis reporting requirement was enacted under the Emergency Economic Stabilization Act of 2008, but carried delayed effective dates to allow brokers time to comply. Basis reporting began for purchases of individual corporate stock on or after January 1, 2011; begins for purchases of mutual fund or dividend reinvestment plan shares using the average basis method on or after January 1, 2012; and begins for other securities as specified by the IRS on or after January 1, 2013.
The IRS issued proposed regulations in 2011 on information reporting by brokers for transactions related to debt instruments and options (NPRM REG-102988-11). The proposed regulations build on regulations issued in 2010. The types of securities covered by the reporting requirement (“covered securities”) include stock in a corporation, notes, bonds, debentures and other evidence of indebtedness, commodities, commodity contracts or derivatives, and any other financial instrument for which the IRS determines reporting adjusted basis is appropriate.
Elaborating on other basis reporting rules, the IRS also clarified in Notice 2011-56 that a dividend reinvestment plan (DRP) does not fail the requirement that at least 10 percent of every dividend on any stock be reinvested in identical stock if it pays cash in lieu of fractional shares when the cost of a share is greater than the dividend amount. Further, in Notice 2011-18, the IRS provided a transition deadline of January 17, 2012 for corporations that must report any organizational action (such as a stock split, merger or acquisition) occurring in 2011 that affects the basis of stock.
The IRS announced a new program to enable employers to voluntarily reclassify their workers for federal employment tax purposes (IR-2011-95; Ann. 2011-64). The Voluntary Classification Settlement Program (VCSP) is open to employers that currently treat their workers as independent contractors and want to prospectively reclassify the workers as employees. In exchange for prospective treatment of the workers as employees, the IRS is offering a reduced penalty framework. Employers will not be liable for any interest and penalties on the amount and will not be subject to an employment tax audit with respect to the workers being reclassified.
The VCSP, the IRS explained, is intended to give employers a streamlined way to voluntarily reclassify their workers as employees. Employers must have consistently treated the workers as nonemployees and must have filed all required Forms 1099 for the workers for the three preceding calendar years (with a six-month grace period).
Employers under audit by the IRS cannot participate in the VCSP. They may, however, be eligible to participate in the IRS Classification Settlement Program (CSP).
In other worker classification news, the Tax Court found that an adjunct professor who taught online courses was an employee and not an independent contractor (Schramm, TC Memo. 2011-112, CCH Dec. 58,746(M)). The court found that the university controlled the taxpayer’s performance and treated the arrangement as an employer-employee relationship, despite the lack of brick-and-mortar surroundings.
The IRS audit rate for individual returns filed in fiscal year 2010 was 1.1 percent, according to statistics released by the agency in 2011 (IR-2011-27). This represented approximately 1.6 million returns out of the approximately 143 million returns filed by individuals. The audit rate for individual returns with positive income of $1 million or more was 8.4 percent for FY 2010. The FY 2010 audit rate for small corporations (corporations with assets below $10 million) was 0.9 percent. The FY 2011 audit rate for large corporations was 16.6 percent.
The majority of individual audits in FY 2010 were correspondence audits. Nevertheless, a trend toward in-person audits for both individuals and businesses seems to be growing. The Treasury Inspector General for Tax Administration (TIGTA) reported in 2011 that the number of IRS revenue agents and tax compliance officers who conduct audits increased by four percent from FY 2009 to FY 2010. TIGTA also called for increased and more sophisticated audit strategies in connection with small businesses in which the noncompliance rate in some sectors is above 50 percent.
The New Year will bring the biggest unemployment tax increase in state history for Florida’s businesses already struggling from the recession. Right now the minimum unemployment tax is 72 dollars per employee. Starting next year the minimum rate rises to 171 dollars.
At Helen’s Uniform Shop in Tallahassee the increase comes as new rules and regulations are making it difficult to grow. “It could hurt us from a stand point of rather than having three fulltime and three part-time people we may have to scale back a part time person,” said Cal Gleaton. Owner Cal Gleaton has five employees. The tax increase will cost him an estimated 850 dollars, five hundred dollars more than he pays right now.
The increase will be used to pay back the 2.7 billion dollars the state borrowed to pay unemployment claims. So far a billion has been paid back with interest. The Florida Chamber of Commerce is asking the governor and state legislature to take extra time paying the money back to ease the burden on businesses. “With over 900-thousand of our fellow Floridians still unemployed, it seems to be a bad time to have our unemployment rates go up dramatically,” said David Hart with the Florida Chamber of Commerce.
If nothing changes business owners will pay an extra 800 million dollars in unemployment taxes next year. That’s money that won’t be spent to create jobs.
A corporation that failed to obey an IRS wage levy on one of its employees was liable for the employee’s delinquent taxes and for a penalty under Code Sec. 6332(c)(2) (United States v. Heli USA Airways, Inc., DC Nev., 2011-2 ustc ¶50,728). The corporation’s argument that it’s Chief Financial Officer, who was responsible for responding to the notices, suffered from mental health breakdown and that it was unaware that he ignored the notices, was not reasonable cause for failure to honor the levy. Code Sec. 6332.
Freezing the unemployment tax rate isn’t without precedent. At the beginning of 2010 legislative session lawmakers rushed through a bill that postponed an unemployment tax increase for one year.
The Tax Court has found that a payment from an S corporation to its sole shareholder was not a transfer of funds to be held in a fiduciary capacity (Rogers v. Commissioner, Dec. 58,819(M), TC Memo. 2011-277). The court found it was a distribution to be included in the shareholder’s gross income.
The taxpayer managed several business entities, including an S corporation and a limited liability company (LLC). The taxpayer deposited half of a payment due to the LLC in the S corporation’s bank account. The S corporation subsequently paid the taxpayer a distribution of $732,000, and deducted $513,500 as the cost of legal and professional fees due to the taxpayer. Meanwhile the taxpayer reported the $513,500 on his and his wife’s joint return, but not the remaining $218,500, which the taxpayer claimed to be a distribution to a fiduciary to be held in trust.
The Tax Court held that the unreported amount distributed to the taxpayer was taxable and not a distribution to a fiduciary. The court rejected the taxpayer’s argument state law required the taxpayer to hold funds as trustee, stating that the S corporation was not subject to the state law. Furthermore, the taxpayer held and used the funds without restriction.
