For tax information reporting and withholding developments, August has been a slow month. However, we do have an important practice note regarding extensions of time to file recipient tax statements, the annual publication of IRS information reporting statistics (always an interesting summer read), a draft Form 1040 for tax year 2020 that indicates the IRS’s continued interest in enforcing crypto tax compliance and some guidance in the form of proposed regulations on qualified plan loan offset amount rollovers that may be of interest for those performing Form 1099-R reporting.
- The IRS has changed the procedures for submitting applications for extensions for time to furnish tax reporting recipient statements so that they should now be sent by facsimile.
- The 2020 Form 1040 will include a question relating to crypto taxation on the front page indicating the attention the IRS is placing on crypto tax compliance.
- Proposed regulations on qualified plan loan offset amounts have been released as well as the annual tax information return statistics reports showing projections for Form 1099 and Form 1042-S filings as well as certain other tax information return filings for the next eight years.
1. Extensions for recipient statements
There are separate procedures for applying for extensions to filing deadlines for information returns filed with the IRS versus statements that are sent to recipients.
Traditionally, both the General Instructions for Certain Information Returns (covering Forms 1099 among other form types) and the instructions to Form 1042-S required the payer or authorized agent to obtain an extension to the deadline for recipient statements by sending a request by mail to the IRS.
Effective August 18, 2020, the IRS has announced that such extension requests are to be submitted by facsimile rather than by mail.
The updated fax submission information is as follows:
Internal Revenue Service Technical Services Operation
Attn: Extension of Time Coordinator
Fax: 866-477-0572 (International: 304-589-4151)
As with current extension procedures, the request must be accompanied by certain details:
(a) Payer name,
(b) Payer TIN,
(c) Payer address,
(d) Type of return (for example, Form 1042-S),
(e) A statement that the extension request is for providing statements to recipients,
(f) Reason for delay, and
(g) The signature of the payer or authorized agent.
This change appears to affect only the recipient statement piece for tax information reporting as Form 8809 and applicable procedures for that form remain applicable for extension requests relating to the information return itself.
2. IRS releases annual tax information reporting statistics
Each year, the IRS releases Publication 6961, Calendar Year Projections of Information and Withholding Documents for the United States and IRS Campuses.
The publication contains projections by the IRS of the number of various types of tax information returns from Forms W-2 to K-1’s to Forms 1099 and Form 1042-S for the current year and out eight years into the future.
The annual publication also provides the actual information returns filed for the prior year (in this case, 2019).
The 2020 update to the projections gives rise to several insights.
First, Form 1042-S returns are expected to continue to grow. The IRS’s current projection for Form 1042-S returns for 2021 are now at 7.56 million returns, and annual Forms 1042-S are expected to grow to 10.16 million by 2027 and 10.68 million per year by 2028. This is higher than projections made last year, which pegged Form 1042-S returns at 8.89 million by 2027.
Second, in most cases, paper filings for broker-related tax information returns continue to show a decline or leveling off, but in either case represent a small proportion of the total tax returns filed. Tax reporting has largely gone electronic.
Finally, the one big change in 2020 versus 2019 projections for the number of 2021 returns relates to Form 1099-B, used by brokers to report customer proceeds from sale of securities. The 2020 projection shows a decrease of some 737,000 returns for 2021.
It’s not entirely clear what caused the drop in 2021 Form 1099-Bs from the prior-year projection. However, since reporting on Form 1099-B is generally on a sale-by-sale basis, the projected numbers can vary significantly year by year.
In 2019, the 2020 Form 1099-B projections were bumped up by some 438,000 returns. More, with crypto tax guidance expected to come within the Form 1099-B purview in the future, the Form 1099-B form type may show significant variability to the upside in the coming years.
Those interested in tax information reporting statistics — granted this may be a limited group of tax aficionados — may find more numbers to digest on the Projections of Federal Tax Return Filings page on the IRS website.
3. New draft Form 1040 and crypto tax compliance
In August, the IRS released a draft of the Form 1040 individual tax return for the 2020 tax year that will be filed in 2021.
In addition to some changes to account for certain CARES Act provisions, the form now contains a crypto tax question conspicuously on the front page, right below the taxpayer name and address fields.
The question asks: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Last year, the individual tax return contained the same question, but it was inserted in Schedule 1 for additional income and adjustments, and may have been bypassed by certain taxpayers. There is less confusion now that the IRS wants taxpayers to be aware of their tax obligations with respect to crypto currency holdings and sales.
While this change does not directly impact tax reporting by brokers and other financial institutions, it may raise awareness among taxpayers that they need relevant tax data to report and pay taxes on their crypto trades.
Irrespective of regulatory requirements for broker reporting of crypto transactions, customer demand may become a driver for financial institutions to maintain and provide crypto tax reporting.
4. Proposed regulations issued on qualified plan loan offset amount rollovers
The IRS issued proposed regulations in August under Internal Revenue Code section 402(c) relating to what are called qualified plan loan offset amounts (QPLOAs).
A plan loan offset amount arises when a participant’s accrued benefit in a retirement plan is reduced (offset) by the amount of a loan (e.g., due to non-payment). This is generally treated as distribution from the plan subject to Form 1099-R reporting.
The Tax Cuts and Jobs Act of 2017 provided relief to certain plan loan offset amounts that arose principally through the termination of a retirement plan or an employee’s termination of employment.
These types of loan offsets are called QPLOAs. Unlike the case with other plan loan offset amounts, which could be rolled into another qualified plan or IRA tax-free within 60 days, the TCJA allowed a taxpayer the ability to roll over a QPLOA into another qualified plan or IRA tax-free until the time the taxpayer had to file her or his tax return for the year the QPLOA arose.
The distinction matters for tax reporting since a special distribution code assignment applies to QPLOAs under Form 1099-R instructions.
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