Several tax information reporting updates in May are worth monitoring.
Perhaps the most interesting of these is the Biden Administration’s proposal to enhance third-party tax information reporting contained in a newly released American Families Plan Tax Compliance Agenda. The Agenda proposes tax reporting of gross inflows and outflows from financial accounts.
In addition, the Treasury Inspector General for Tax Administration (TIGTA) has released a new report that once again bemoans the discrepancy between contents of Form 1099 returns and actual backup withholding. The IRS also updated a FATCA FAQ providing reason codes to be used by foreign financial institutions (FFIs) in FATCA reports for which taxpayer identification numbers (TINs) are missing.
- The U.S. Treasury in its American Families Plan Tax Compliance Agenda is proposing enhancing Form 1099 tax information reporting to include reporting of inflows and outflows from financial accounts, with such rules extending beyond banks and brokers to payment service entities and crypto exchanges.
- In a newly issued report released in May, TIGTA reveals that for TY2018, noncompliance with backup withholding continues to be a problem and indicates that reconciliation of backup withholding and Form 1099 reports remains an issue that the IRS is continuing to address.
- The IRS has updated its FATCA FAQs to provide reason codes that may be used by a Model 1 FFI in reporting potential U.S. accounts for which there are no TINs.
1. Enhanced Form 1099 reporting for financial account flows
When the Biden Administration’s American Families Plan (AFP) fact sheet was released in April, tax information reporting specialists took note of the fact that the administration was planning on instituting rules for enhanced third-party information reporting.
In particular, the fact sheet noted that the AFP “would require financial institutions to report information on account flows so that earnings from investments and business activity are subject to reporting more like wages already are”.
But what that enhanced reporting really would encompass remained rather vague. In May, the U.S. Treasury released a Tax Compliance Agenda document for the AFP that expands at least a little on the enhanced reporting requirement.
According to the agenda, the enhanced reporting would build upon the Form 1099-INT reporting that financial institutions such as banks and brokers are currently subject to. Banks and brokers generally report interest earned by an account holder on Form 1099-INT.
The Treasury’s proposal would expand the reporting to encompass “gross inflows and outflows on all business and personal accounts from financial institutions, including bank, loan, and investment accounts”. There would be a carve out for accounts “below a low de minimis gross flow threshold”.
In addition, the Agenda noted that these new reporting rules would extend to payment settlement entities that would then need to report gross receipts and gross purchases. The reporting requirements would also extend to cryptocurrency and crypto asset exchanges; the Treasury fearing that the role virtual currency plays in financial transactions would grow in the coming years.
Since the publication of the Agenda, the Treasury has released its ‘green book’ explaining the provisions of the FY2022 budget. The green book provides further details on the account inflow and outflow reporting requirements.
It seems simple gross inflow and outflow reports may not be the most useful to the IRS. The green book envisions some breakdown of these flows for physical cash, transactions with a non-U.S. account and transfers between accounts owned by the same taxpayer. It is unclear whether the IRS through regulations could provide further identification of payment flow types.
What mechanisms might need to be in place to identify different types of account flows?
The green book also proposes that brokers, including entities such as U.S. crypto asset exchanges and hosted wallet providers, would be required to report information relating to certain passive entities and their substantial foreign owners when reporting with respect to crypto assets held by those entities in an account with the broker.
How these proposals become crafted into law and the details of the reporting deserve monitoring, as it could significantly impact bank and broker tax information reporting.
2. TIGTA identifies continued issues with backup withholding
There has been increasing discussion among tax practitioners that there needs to be better recognition of the need to reconcile Forms 1099 and backup withholding reported on Form 945.
The IRS has given indications that it is increasing payor compliance enforcement in this area and appears to have established a dedicated team for this effort.
In May, a TIGTA report threw more fuel on the fire of payor backup withholding noncompliance. The report revealed TIGTA’s investigation of actual backup withholding versus expected withholding based on a review of Forms 1099 filed for tax year 2018.
Under U.S. backup withholding rules, certain payments must be withheld at a rate of 24 percent if a U.S. or presumed U.S. account holder fails to provide a TIN. Backup withholding may also be required in certain cases where the withholding agent has been notified that the account holder’s TIN is incorrect.
TIGTA found that for 2018 there were 182,075 payers that submitted 440,404 information returns for which the payee TIN was either missing or incorrect. At the same time, these payers did not backup withhold on some $55.6bn in reported income (which would have netted $13.3bn in backup withholding tax).
Most of the missing and incorrect TINs occurred with Form 1099-MISC, which would have included nonemployee compensation to contractors as well as other miscellaneous payments. But a significant number of incorrect TIN Forms 1099 occurred with Form 1099-B, which is filed by brokers to report proceeds and cost basis for sales of securities.
The report indicated that although IRS processes enforcing backup withholding compliance are not comprehensive, it has made progress in certain functional areas. For calendar year 2019, the IRS was working on tax year 2017 cases where there were discrepancies between Forms 1099 and expected backup withholding.
The report also noted that the IRS was developing a cross-functional working group to analyse current backup withholding policies and procedures.
With increased focus on data analytics to reduce the gap in tax collections, reconciliation of Form 1099 reporting and actual backup withholding will remain a focus for the government in the near and intermediate term.
3. IRS FATCA FAQ provides guidance on reason codes for missing TINs
For financial institutions engaged in FATCA reporting for offshore accounts, the IRS updated in early May one of the FATCA FAQs on Reporting.
FAQ 6 applies in cases where an IGA Model 1 FFI does not have the TIN for a reportable account. In this case, the IRS is providing reason codes that the reporting FFI can use to identify why the TIN is missing.
The codes are noted in the FAQ as optional and are intended to provide the IRS with more detail as to why the FFI does not have the TIN.
Reporting the reasons for not having TIN, however, does not prevent the IRS from finding the FFI non-compliant. But, in accordance with prior guidance, the IRS will look at facts and circumstances surrounding the lack of TIN, including good faith efforts by FFI in soliciting it.
The FAQ noted that error notices will still be generated even if the codes are used.
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