AP Journal Online. American Accounts Payable Association.

In preparing a November 2007 report for the Senate Finance Committee, the Government Accountability Office conducted case studies which revealed that existing information return costs are relatively low. This finding is likely to impact proposals to increase information reporting and revenue to the IRS. This article continues from Part I, highlighting additional proposals discussed in the report.

Proposal: Reporting Payments to Corporations

Today, businesses paying corporations for services generally do not have to file information returns covering the payments. Payments to corporations are generally not covered by an overall requirement that taxpayers paying a total of $600 or more for services, in the course of a trade or business, file an information return showing the dollar amount and the payee. Instead, most payments requiring information reporting today are subject to backup withholding if the payee has not provided a valid TIN. Note: Federal executive agencies are required to file information returns on payments to corporations for services provided.

It was proposed that information returns be required for payments to corporations for services totaling $600 or more in a calendar year. The proposal did not specify much detail.

The report considered the following compliance costs and mitigations in connection with this proposal:

More Forms

Payers would face additional costs for each additional Form 1099 — costs for bookkeeping, dealing with the IRS, postage, and outside help. For the first time, payers using payment cards may have to make changes to accounting systems if the systems do not show all qualifying payments to corporations but instead show payments only to the payment card industry.

Although payers would face additional costs, other costs would be reduced because the need to distinguish corporate from other payees for tax reasons would disappear. In addition, with adequate lead time, many payers could limit costs by using or extending current systems and procedures for paying noncorporate entities, including procedures for recording payment-card payments. Finally, with the risk of allowing noncompliance by some payees and gaming of the system, Congress or the IRS could exempt small payer businesses based on their revenues or other factors.

More Filing

Payers may have to file Forms 1099 for payments to about six million corporations, including S corporations, regardless of size, and some of the corporations would have many addresses.

At the risk of extra complexity, Congress could require that Forms 1099 be sent to only some corporations, such as those privately held or below a certain size, for instance, smaller than the Fortune 500. To reduce payers’ burden of determining which corporations are exempt, exempt corporations’ invoices could show the exemption. In addition, Congress could raise the $600 reporting floor, although compliance by current and future filers might suffer.

Outsourcing Costs

Payers may have to incur the costs of reporting payments for outsourced daily operations, such as overnight mail delivery.

The IRS could extend existing exemptions for payments like freight, effectively exempting certain categories of corporations.

Start-Up Costs

Start-up costs would be incurred to collect TINs and to determine which corporations predominantly provide goods and which predominantly provide services.

The IRS could issue guidance to require that TINs and goods-versus-services information be provided immediately on starting a business relationship, e.g., on the invoice. In addition, the IRS could grandfather ongoing relationships or specify a lead time for collecting information on them.

Inefficient Reporting

Added compliance costs would be imposed if more than one party — i.e., a bank and a payer to a service provider — is required to report information covering the same merchant transactions.

Inefficient reporting could be avoided if the IRS provides ordering rules or unified reporting rules so that the same transactions are not covered more than once. For example, transactions involving payment cards could be exempted under other proposals, so that proposals cover different kinds of transactions (e.g., services versus tangible goods). A proposal to require brokers such as auction houses to file information returns for certain customers showing gross proceeds from the sale of tangible personal property could exempt sales that otherwise need to be reported, i.e., under the payment card proposal.

IRS’s Ability to Process and Use Information Returns

The IRS received and handled 1.7 billion information returns for tax year 2006, the latest year for which figures are available. According to IRS officials, the Service has the capacity to process the information returns it currently receives electronically, but large files may take a few hours to upload from the receiving server to the main systems.

About 98% of information returns are potentially usable for matching purposes. According to IRS officials, the Service currently uses about 90% of the potentially usable returns in its matching efforts for individual taxpayers.

Discrepancies between what is reported on a taxpayer’s information returns and tax return may be referred to the Automated Underreporter (AUR) Program. Information returns that cannot be matched to a filed individual tax return may be referred to the Nonfiler Program.

The IRS does not know the total number of discrepancies that its matching efforts discover because discrepancies under certain dollar thresholds are not tracked. Above these dollar thresholds, the AUR and Nonfiler programs pursue millions of discrepancies (e.g., AUR pursued 30% for tax year 2005; Nonfiler pursued 35% for tax year 2005). However, millions of other discrepancies above the thresholds are not pursued because of resource constraints.

Generally, AUR pursues the higher dollar cases after categorizing the cases based on the type of income or expenses involved and the potential extra tax that might be assessed. However, regardless of dollars, AUR usually pursues a small number of cases in most categories to maintain a presence. AUR also pursues cases in certain high-risk areas regardless of dollars and coverage (e.g., stock and bond sales and Schedule C returns).

IRS’s Costs and Plans to Accommodate More Information Reporting

For fiscal year 2008, IRS programming and start-up costs were budgeted at $8 million for the payment card proposal and $3.8 million for the payments-to-corporations proposal. After fiscal year 2008, the IRS estimated administrative implementation costs at another $12.7 million and $4.1 million, respectively.

For the payments-to-corporations proposal, the IRS said its cost estimates could vary by an additional several-million dollars. Also for this proposal, the IRS conservatively estimated 60 million forms arriving annually, but said the actual number could range into the billions.

Note: The IRS did not cost-out enforcement estimates. For instance, it did not cost-out the hundreds of full-time equivalent staff years that it expected to need on an ongoing basis to use information gained from the payments-to-corporations proposal.

About the Author

Anne S. Lewis, Esq.

Managing Editor, Payroll Information Resources
American Payroll Association

As Managing Editor of Payroll Information Resources for the American Payroll Association, Anne Lewis researches and writes Payroll Currently, the APA's biweekly payroll compliance newsletter, contributes regular columns to PAYTECH, the APA's membership magazine, manages the content of the “Forms, Pubs, Info” page on the APA website, and edits the handouts for APA conferences and audio seminars.

Prior to joining the APA in 2000, Anne spent 17 years as a legal editor working for Banks-Baldwin Law Publishing Co. (Cleveland, OH) and Warren, Gorham & Lamont, Inc. (New York, NY).

Anne holds a B.A. from the University of Michigan and a J.D. from the Fordham University School of Law. She is a member of the New York and Ohio bars.

The tax-year 2001 gross tax gap — the difference between what taxpayers should have paid and what they actually paid — was an estimated $345 billion.

Source: U.S. Government Accountability Office, Report to Committee on Finance, U.S. Senate, Tax Administration, Costs and Uses of Third-Party Information Returns, November 2007.

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