The Federal Income Tax system depends upon voluntary compliance. That is, the government depends upon taxpayers to prepare complete and accurate tax returns and then go on to file them and pay the taxes due on a timely basis. However, just because the IRS depends upon compliance does not mean that there are not penalties (including jail time) for failure to “volunteer”.
The Federal Income Tax laws have provisions designed to make it easy for the IRS to collect data. This allows the IRS to cross-check information reported by taxpayers to determine the level of a taxpayer’s compliance. These forms are generally referred to as “Information Returns”. Some believe that this is just another form of intrusion into their lives ala “Big Brother” and a burden to perform. Others believe that Information Returns are a valuable tool to help enforce the law and reduce the extra tax burden placed upon law abiding citizens by those who do not report all of their income.
Regardless of your perspective, new reporting requirements are added and expanded each year. Often, the changes target what the Federal Government believes to be an area of abuse.
In addition to deadlines and penalties relating to income tax returns and payment of tax, there are deadlines and penalties relating to the various Information Returns.
Here are a few of the most common Information Returns.
Employers are required to report wages paid to employees on a Form W-2 (Wage and Tax Statement). Form W-2 reporting began many years ago, as a simple vehicle to report Gross Wages, withholding of Federal and state tax and withholding for Social Security taxes. Form W-2 is a joint IRS and Social Security Administration form and is filed with the Social Security Administration, not the IRS.
Over the years dozens of different types of information have been added to the list of things that must be reported somewhere on the Form W-2. This includes everything from charitable contributions made by the employee through their employer to fringe benefits provided by the employer. Not all of the information on a Form W-2 results in a tax. Much of the information is to keep track of other activities and provide the employee with information needed for them to prepare their Individual Income Tax Returns (Form 1040).
Most employers are now required to report/file the Form W-2 information electronically. The Federal government is pushing for this to reduce the processing required by the Social Security Administration and IRS. With few exceptions, employers are also required to remit payroll taxes to the United States Treasury via electronic payments through a program called “Electronic Federal Tax Payment System (EFTPS).
The Federal Government recently passed a law requiring employers to report health insurance benefits paid by the employer on behalf of the employee. A widespread misconception is that these benefits are now being subjected to income tax. The new law does not subject these benefits to income tax, only requires that the benefits be reported.
Form W-3 (Transmittal of Wage and Tax Statements) summarizes all of the Form W-2 information issued by a particular employer to any and all employees during the calendar year. Accordingly, an employer must prepare and file one Form W-3 regardless of how many employees and Form W-2’s they have.
Employers are required to deliver Form W-2’s to each employee by January 31st of each year. Employers must file Form W-3’s and Form W-2’s with the IRS by the last day of February (i.e. either February 28th or 29th) if reported via paper and by March 31st if the employer files the information electronically.
Form I-9 and Form W-4.
Employers must collect certain information from each employee though the use of several Information Returns. Employees must prepare a Department of Homeland Security Form I-9 (Employment Eligibility Verification) and attach copies of certain documents supporting their eligibility. Employees must prepare and deliver a Form W-4 to each employer showing their legal name, address, Social Security Number, withholding allowances, etc. While the burden to prepare these forms is on the employee, employers are not allowed to employ someone without them receiving these completed forms.
Form 1099 is used to report a wide variety of income tax information. Here is a list of the different types of Form 1099’s.
- 1099-A: acquisition or Abandonment of Secured Property
- 1099-B: Proceeds from Broker and Barter Exchange Transactions
- 1099-C: Cancellation of Debt
- 1099-CAP: Changes in Corporate Control and Capital Structure
- 1099-DIV: Dividends and Distributions
- 1099-G: Government Payments
- 1099-H: Health Insurance Advance Payments
- 1099-INT: Interest Income
- 1099-LTC: Long Term Care Benefits
- 1099-MISC: Miscellaneous Income
- 1099-OID: Original Issue Discount
- 1099-PATR: Taxable Distributions Received From Cooperatives
- 1099-Q: Payment from Qualified Education Programs
- 1099-R: Distributions from Pensions, Annuities, Retirement Plans, IRAs, or
- 1099-S: Proceeds from Real Estate Transactions
- 1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
- SSA-1099: Social Security Benefit Statement
- SSA-1042S: Social Security Benefit Statement to Nonresident Aliens
- RRB-1099: Payments by the Railroad Retirement Board
- RRB-1099R: Pension and Annuity Income by the Railroad Retirement Board
In addition to the many different types of Form 1099, each Form 1099 has a sub-list of the different types of information to be reported on that particular Form 1099. For example, the categories of income reported on Form 1099-MISC include:
- Non-Employee compensation (this is where payments to independent contractors are reported).
- Gross proceeds paid to an attorney.
- Other income.
In general, all businesses must issue a Form 1099 where the cumulative payments made to a particular payee equals or exceeds $600 in any calendar year. Here are a few exceptions to this general rule:
- Payments Made By Financial Institutions: Banks, credit unions, brokerage firms and other “professional” reporting companies are required to report interest income earned by a taxpayer on a Form 1099-INT if the amount is $10 or more. The same low $10 threshold is also applies to the issuance of a Form 1099-DIV where these same types of organizations pay dividends, capital gain distributions, etc.
- Payments Made To Corporations: In general, payments for goods and services do not have to be reported on a Form 1099 if the payee is a corporation. If these same payments were made to an unincorporated payee, a Form 1099 would have to be issued. While you could question the logic of differentiating between the types of legal entities, that is the rule. Of course, there are exceptions to this exception. For example, the IRS targets payments to attorneys. If total payments made to an attorney (or law firm) for legal services hits $600 in any particular year, the client must report this on a Form 1099-MISC even if the law firm paid is a corporation.
- New Broad Requirements: A law was recently passed greatly expanding the reporting requirements for Form 1099. Beginning in 2012:
- There is no more “corporation” exception. If the payments equal or exceeds $600 then it must be reported even if paid to a corporation.
- The types of goods and services that must be reported is expanded to include pretty much anything that is used or purchased.
This has become a very controversial law and there is broad support for its repeal. The proponents say that this will allow the government to collect hundreds of millions of dollars in taxes on unreported income while detractors say that it will place a huge burden on taxpayers. Both positions are probably correct. It would not be surprising if the law was revised to reduce the burden (or repealed altogether) before 2012.
Each year, the Form 1099’s must be sent to the IRS along with a Form 1096. Form 1096 is sort of like the “cover sheet” for all Form 1099’s. Form 1096 summarizes all of the Form 1099 information issued by a particular taxpayer to any and all payees during the calendar year.
Taxpayers are required to deliver Form 1099’s to each recipient by January 31st of each year. Taxpayers must file Form 1096’s and Form 1099’s with the IRS by the last day of February (i.e. either February 28th or 29th) if reported via paper and by March 31st if the taxpayer files the information with the IRS electronically.
Form 1098 is most commonly used to report the mortgage interest paid each year.
However, there are a few other flavors of Form 1098:
- 1098-C: Contributions of Motor Vehicles, Boats and Airplanes.
- 1098-E: Student Loan Interest.
- 1098-T: Tuition.
Taxpayers are required to deliver Form 1098’s to each recipient by January 31st of each year. Taxpayers must file Form 1098’s with the IRS by the last day of February (i.e. either February 28th or 29th) if reported via paper and by March 31st if the taxpayer files the information with the IRS electronically.
In the next issue of Tax Law Explained, we will explore the Schedule K-1 reporting requirements of S Corporations, Partnerships, LLC’s (taxed as Partnerships or S Corporations), Trusts and Estates.
Copyright ©, Keith B. Baker – 2010
This article is designed to be a public resource of general information. It does not constitute “legal advice” nor does it create a “client-attorney” relationship. While the information is intended to be accurate, this cannot be guaranteed. Tax laws are complex and constantly changing as a result of new laws, regulations, court interpretations and IRS pronouncements. Often, there are also various possible interpretations. Further, the applicable rules can be affected by the facts and circumstances of a particular situation. Because of this, some of the information may no longer be correct or may not apply to all situations. We are not responsible for any consequences or losses resulting from your reliance on such information. You are urged to consult an experienced lawyer concerning your particular factual situation and any specific legal questions you may have.
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