In response to the legislation Congressional Democrats and Republicans have both submitted repeals and or amendments in an effort to undo some of what many see as overly burdensome elements of the new 1099 reporting requirements.  The first wave of these efforts -amendments to raise the $600 limit and to repeal the law altogether –  were both denied by the Senate on September 14th.   This Monday, similar amendments were introduced by Senate Democrats and Republicans to the Small Business Jobs Act but… neither amendment received the necessary 60 votes to be included in the final bill.

Although, many accounting professionals, politicians and small business owners are searching for ways to either manage or overturn the new requirements, it is important to acknowledge that “repeal” is not a fait accompli.  In fact the opposite may be more likely in this case; consider that the 1099 reporting changes are not new ideas from the 2010 Obama administration.  The idea dates back to GAO studies conducted over several years.  The recommendations to alter the 1099 reporting is clearly articulated in a 2005 report (and others like it) where the GAO reports that 92% of small businesses are not filing 1099’s which translates into significant losses to the federal government.  Given this long history and planning, the new 1099 reporting changes appear to have considerable stability and support.

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*  As a bit of background, the new amendment will require reporting for all for-profit corporations (excluding tax-exempt corporations) as well as for any payments made for property (goods, merchandise, supplies, raw materials, equipment, etc.)  In addition, the new requirements require reporting for any supplier that has receive $600 or more in aggregate payment for a calendar year. A close look at this requirement reveals that where companies were performing 1099 reporting for less than 10% of their supplier populations they will now be reporting for more than 90% of their suppliers. Recently, a Lavante client estimated that its 1099-applicable suppliers could jump from only 2500 companies to over 50,000 when the new law takes effect. Because this requirement will have a major impact on organizations, it is important to begin developing a plan to effectively manage this process as soon as possible.

The biggest challenge to maintaining the quality of your supplier data is its near immediate decay after being recorded.  Suppliers constantly undergo mergers, purges, acquisitions and employee churn that challenge the integrity of their data.  Dun & Bradstreet (D&B) reports its database of businesses experiences annual changes of 20% for addresses, 17% for business names, and 18% for phone numbers underscoring how quickly and frequently supplier data decays.  ERP systems perform some data quality measures at the time a supplier is set up, but they do little to preserve the integrity of the data over time.  ERP systems are reliant on quality data, but they do not ensure it.

Allowing your supplier data to decay over time is very costly to your enterprise. Inaccurate data delays implementation of ERP systems and other automated solutions and can prevent those solutions from achieving their optimal ROI, effectiveness or their value over time.  Failure to identify overlaps or relationships within your supplier population can lead to missed volume discounts or rebates as well as an increase of duplicate payments by up to 300%.  Poor supplier data quality is also very costly in terms of lost efficiency and time.  Bad addresses alone can lead to miss-sent shipments and checks.  Quality supplier data is also vital to stay in compliance with various external regulations and internal controls.  Failure to achieve this compliance can be both disruptive and very costly while causing great exposure and risk.

Collection and management of supplier data is more important now than ever.  New 1099 tax legislation included in the funding provisions of the Patient Protection & Affordable Care Act (March 2010) requires companies to collect valid Tax Identification Numbers (TINs) on a much larger scale than pre-legislation levels.  Today most companies are expected to perform 1099 reporting for less than 10% of their supplier population. When the new law takes effect, companies can expect reporting levels to rise above 90%.  Companies will need to implement new policies and potentially even new systems to manage supplier information more accurately in pursuit of staying in compliance.

The question arises: How are you going to ensure the ongoing quality of supplier information to achieve optimal project ROI and on-going efficiency while maintaining compliance with controls and regulations?

Check back for part two.

Section 6041 of the Internal Revenue Code outlines 1099 reporting requirements.  The Patient Protection and Affordable Care Act includes an Amendment to Section 6041 which now requires 1099 reporting for any payments aggregating $600 to a supplier per year

The new amendment will now create requirements for reporting for:

• All for-profit corporations (excluding tax-exempt corporations)
• Payments made for Property (goods, merchandise, supplies, raw materials, equipment, etc.)

Companies will be required to submit accurate TIN information or face monetary penalties

The provision in the health care law is aimed to reduce the gap between income that individuals and businesses make and the federal taxes they pay, which the Government Accountability Office estimates is $345 billion

The Wall Street Journal says Congress hopes the new 1099 provision will collect $17 billion more in federal taxes and fees.

What has been changed?

• Before: Most payments to corporations were exempt from Form 1099 reporting requirements. These exemptions include: Providers of Goods, Corporations, Tax Exempt Organizations, Internal Organizations, and Retirement Plans. 1099’s are only required for a small subset of the suppliers where payments were made. This was typically well less than 10% of supplier payments.
• After: Companies will be required to submit 1099’s on all for-profit companies who receive payments greater than $600. This will typically be 95+% of supplier payments.
• The big change: Corporations have been added to the entities that require 1099 reporting this will account for the biggest increase.

What are some details surrounding the timing of the new change?

• New law becomes effective for all payments made after December 31, 2011.
• Companies should plan to start collecting and validating W-9’s & TIN’s for each supplier they will spend more than $600 with for the 2012 year.
• Companies will need to issue and submit 1099’s to suppliers and IRS early in 2013 for the year 2012.

Having closely monitored this impending law for years Lavante can help significantly to help companies automate the collection of W9’s as well as the require IRS TIN-match. At the very least this huge work load can be eliminated. We encourage people to learn more at HERE.

How will this effect AP and other financial personnel at corporations?

The new Legislation poses a significant burden to corporation that must ramp up their reporting efforts.

• Information reporting requirements bring with them the responsibility of obtaining appropriate taxpayer identification numbers (TINs) from suppliers that were not previously subject to Form 1099–MISC reporting.
• If the corporation fails to produce a TIN, or fails to properly perform their 1099 reporting, then backup withholding is required on payments 1099-application suppliers.

The new Legislation also poses a considerable increase to the amount of reporting that takes place within a business’s accounts payable system and department.

• Employers will need to implement the appropriate record keeping and data collection processes to meet the reporting requirements, including, where necessary, processes to effectively communicate the required information to third parties providing payroll administration or managing other reporting obligations.

The monetary risk is expected to increases significantly.  Where companies were experiencing b notice fines at the following levels:

• $50 per each supplier that is not properly reported
• $250,000 maximum potential risk per company

The new legislature increases the levels to:

• $250 per each supplier that is not properly reported
• $1.5M maximum potential risk per company, although some sources have indicated that this number could be higher

Due to the steep increases that the new amendment poses, it is widely believed that the many aspects of the new legislation will go through an appeals process.

Congress tucked a small section into the enormous bill that amends Section 6041 of the Internal Revenue Code that will soon mandate businesses to file an information return (likely a Form 1099) when payments to the single payee total $600 or more in a calendar year… including corporations!

The provision is effective for payments made after Dec. 31, 2011. Currently in Section 6041 most payments to corporations are exempt from Form 1099 reporting requirements. These exemptions include: Providers of Goods, Corporations, Tax Exempt Organizations, Internal Organizations, and Retirement Plans. Possibly the biggest change is that reporting is now required for corporations. As of now 1099’s are only required for a small subset of the suppliers where payments were made. This is typically well less than 10% of supplier payments, under the new law that number could spike to 95%.

Section 9006 of the 2010 Health Care Act also includes “gross proceeds” paid for “property” or services. (if the $600 min is met) This will of course exclude tax-exempt corporations under Section 501(a) of the IRC. Vice President of Government Relations has stated that if a vendor refuses to provide a Tax Information Number to the payer required to provide the 1099, the vendor may be required to withhold on behalf of the IRS. I have been unable to find a corroborating source for this online, but assuming this comes to pass, this will create a mountain of work to stay in compliance with such legislation. Legislation requiring this level of attention and workload from corporations is by no means unprecedented.

Although there is much to learn about the new legislation the new reporting appears as though it will include payments for much routine expenditure

• Some travel expenses such as gasoline and automobiles
• Computers and hardware purchases
• Software
• Rental and Leases
• Office supplies and expenses
• Janitorial services
• Some mail delivery services

If all of these items require 1099 reporting we will be dealing with the exchange of potentially billions of forms for which companies will have to obtain and verify an official vendor/supplier company name and a TIN and match the information successfully or they are penalized!!!

Having closely monitored this impending law for years Lavante can help significantly to help companies automate the collection of W9’s as well as the require IRS TIN-match. At the very least this huge work load can be eliminated. We encourage people to learn more at HERE. So how much tax revenue do you suppose that this provision will save compared to what is will cost the business that is now forced to deal with the new demands?!

In this bloggers opinion benefit to taxpayers are completely undermined by the volume of work and the spike in costs that the new mandates will create. Business of all sizes will be trying to support increased workload for employees, opportunity costs associated with pulling staff off of their already swelling workloads, payments to accountants and possibly lawyers and much more.

A TIN is one of the following four numbers.

1. A Social Security Number (SSN)
2. An Employer Identification Number (EIN)
3. An IRS individual taxpayer identification number (ITIN). Aliens who do not have an SSN, and are not eligible to get one should get an ITIN. Form W-7, Application for IRS Individual Taxpayer Identification Number, is used to apply for an ITIN.
4. An Adoption Taxpayer Identification Number (ATIN). An ATIN is a temporary tax identification number issued for a child born in the U.S. An ATIN is used as an identifying number is the child is not eligible for an SSN.