© 2012 Financial Operations Networks LLC 1099 Filing Errors & Associated Penalties – What To Do Next

About Your Presenters John Foertschbeck CPA John has more than 20 years experience in providing and managing tax compliance services and consulting related to tax reporting software and associated full services. He has been responsible for the management of consultation and implementation services of tax software for clients (Fortune 500) that present complex business models in the integration and conversion process. Specific experience includes providing service directly to clients for the purposes of managing and maintaining compliance with information reporting requirements for 1099, W-2, 1042-S payments to the IRS, SSA and state agencies. He was also responsible for researching all requirements regarding information reporting and ensuring that the solutions provided were functioning in full compliance. John has a B.S. in Accounting from the University of Maryland. Formerly, John was with the Tax Controversy Services Group for Deloitte Tax, LLP, managing services to U.S. and international companies for both 1099 and 1042-S regulatory reporting, certification and withholding.

About Your Presenters Lynda Foertschbeck Executive Vice President, IRSCompliance, Inc. Linda has more than 25 years experience as a tax compliance professional in the development of compliance solutions of regulatory consulting services and tax software applications. Prior to joining IRSCompliance Lynda served as Manager in the Tax Controversy Unit at Deloitte Tax, as Vice President and Compliance Product Manager at DISC, Incorporated (now CheckFree) and Director of Compliance Services for Moore, BCS. Ms. Foertschbeck’s experience includes the development and enhancement of many proven tax software and service solutions for 1099, W-2, 1042-S processing and reporting to the IRS, SSA and state agencies. This includes products from: 1099PRO, Convey, FASTTAX, ATSG Inc., MOORE BCS and CheckFree. Specific areas of contribution have included the direction and development of information reporting products and service lines, regulatory compliance support services and strategic business needs analysis.

Agenda Potential Risk Activity That Can Lead to Audits Cost of Non-Compliance Minimizing Risk

Why is Information Reporting a Potential Risk? The Federal Government has estimated that the annual tax gap is $345 billion attributed to non- reporting of income Logical choice – either raise taxes or collect the taxes currently owed As states search for new revenue sources they are enforcing laws for information reporting, withholding and penalties ―Backup withholding ―NRA withholding ―Cross state issues

Why is Information Reporting a Potential Risk? (Cont’d.) The responsibility to file information returns rests with the payer In the extreme, responsibility for the liability can rest with the “Responsible Person” IRC 6672 Third party administrators ―Look at your contract ―Ultimate responsibility for reporting and withholding ―Who has fiduciary responsibility FINCEN disclosure Company officers can be held personally financially responsible

Could My Company Be Audited? Senior IRS officials have instructed all large- and mid-size audit teams to include a review of information reporting and withholding All companies are impacted Focus on related-party payments Full information reporting audits including: ―Policies and procedures ―Reporting and withholding systems ―Payee documentation and practices ―Reporting and withholding history

Other Information Reporting Activity That Could Lead to Audits Internal IRS programs used to provide employment tax audit leads Examples: ―Failure to Implement Backup Withholding, “B” Notice Program, ―Payers with repeat payees receiving Forms 1099 with missing or false TINs, ―Repeat payment of penalties for missing or false TINs, ―Review of Forms 1099 issued to payee where the proceeds are the payees main source of income

Corporate Policies & Procedures Compliance Enforcement Designate single business unit to manage all tax remittance and reporting responsibilities Business Unit Goals – for example Accounts Payable Departments ―Document each vendor properly ―Gather all pertinent information on payment Reportable? Type of payment Foreign or U.S.? If U.S. where is the money earned? —Based on the type of payment – state?

Corporate Policies & Procedures Compliance Enforcement (Cont’d.) If foreign – what type of payment? —Service – where is the service performed? —Rent – where is the property located? —Royalties – where are the royalties earned? —Other payments – where is the money earned? ―Apply federal and state withholding as required ―Limit IRS penalty exposure ―Guarantee balancing & reconciliation Interpretation of current and proposed federal and state regulations is the responsibility of the single business unit

Distribute Corporate Compliance Policy and Procedure Guidelines to all business units. ―Federal and state withholding requirements ―Due dates for tax liability notification ―General ledger reconciliation ―Payee TIN solicitation and certification ―B-Notice and TIN penalty processing and abatement ―Payee validation ―Liability for failure to comply with payee certification Corporate Policies & Procedures Compliance Enforcement (Cont’d.)

―Liability for failure to withhold, or to report withheld taxes timely ―Generation and mailing of recipient statements for originals and corrections ―Prior year statements for late originals and corrections ―Establish/maintain new account opening procedures US Citizens – W-9 certification NRA – W-8 documentation ―Tax withholding processes State and federal Back-up withholding NRA tax withholding Corporate Policies & Procedures Compliance Enforcement (Cont’d.)

Corporate Policies & Procedures Compliance Enforcement (Cont’d.) ―Timely reporting of daily tax liability Notification procedure General ledger process Quarterly reconciliation (CA /ME) ―IRS B Notice Process Process and mail notices as needed Vendors respond timely to notices Update new W-9 to current year source system

Specifics of Developing Your Corporate Policy Establishes Corporate Standards for the business units ―New account opening procedures ―Documentation required Changes in Payee Status Expiration of Payee Documentation Validation of Payee Certification Tracking Payee Certifications and document retention Remediation Process

―Implementing withholding when required for federal and state withholding ―Certification and Withholding Status TIN Matching Failures IRS Notices Specifics of Developing Your Corporate Policy (Cont’d.)

Corporate Policy Payment procedures – When do we pay? Hold the payment? Withhold tax? ―Valid certification on file ―Missing TIN ―Payee certification not yet received? ―Determine US Source Income or Foreign Income ―Apply Treaty withholding on payments issued to foreign payee Keep in mind: ―That payments to Foreign Payees may require federal withholding depending on tax treaties and that state withholding may also be required

―That several U.S. states require withholding based on how/where the money is earned ―Document your payee first and then you determine if the payment is reportable! Balancing and Reconciliation ―Ongoing balancing and reconciliation of payments, withholding and deposits – federal and states ― Procedure regarding adjustments to withholdings Information Returns – Originals and Corrections ―1099, 1098, 5498, W-2 filed as required to IRS, SSA and requiring states Corporate Policy (Cont’d.)

―1042-S filed as required to IRS and requiring states ―Prior Year activity Retention of Reasonable Cause History ―Tracking of each event for TIN Solicitation, B-Notice and TIN Penalty processing, withholding and deposits, federal and state reporting B-Notices (CP2100) ―Responsibilities of each business area, tax department ―Timely response to notice ―Action for Payees that do not respond Corporate Policy (Cont’d.)

Corporate Policy (Cont’d.) TIN Penalty (972CG) ―Responsibilities and liabilities of each business area, tax department ―Timely response to notice ―Action for Payees that do not respond Oversight/Annual Review of BU Processes and Adherence to Corporate Policy

Cost of Non-Compliance Penalties: ―Late filing, missing or false TIN, $100 per document Penalty capped at $500K Small Corp, $1.5M Large Corp —Example: 7,000 docs with missing TINS, penalty proposal would be assessed on; —5000 documents for Small Corp, 7,000 for Large Corp If intentional disregard penalty is proposed: ―$250 per document with no cap, resulting in $1,750,000 penalty for both Corps

Cost of Non-Compliance (Cont’d) Failure to Implement Back-up Withholding Payer is responsible for the amount due to be withheld which then could lead to Failure To Deposit Penalties; Failure to Pay Penalties; Accuracy Penalty Could lead to failure to file penalties Plus Interest IRC 6672(a) could apply

Risk Example $12,267,840 Includes 972CG Penalty Above Total Risk $1,693,440 Interest – Interest -varies $1,209,600 Accuracy Penalty - 20% $1,512,000 FTP – 25% $604,800 FTD Penalty – 10% $6,048,000Failure to B/U Withhold – 28% $21,600,000$1,200,00012,000100,000 Gross Amount Paid 972 CG Penalty Missing TIN Total Documents

Minimize Risk with a Compliance Review of Current Process? Review Company Policy Statements on Information Reporting, ―Does it address domestic and NRA payments? Review Training material, Review account opening procedures, Ensure no NRA payments, What steps have you taken to eliminate common errors?

Are all information returns filed and recipient statements mailed on a timely basis? Are corrections filed and corrected recipient statements mailed every 30 days? Do you process and report information returns for multiple tax years? Do you have the ability to retain the payment activity detail for an account? What steps have you taken to improve your accuracy of TIN and name information? Minimize Risk with a Compliance Review of Current Process? (Cont’d.)

Minimize Risk with a Compliance Review of Current Process? (Cont’d.) Do you require and perform TIN solicitations (Form W-9 or Form W-8 series) for each payee at time of payment? Are TIN solicitations produced and mailed annually or as prescribed by the IRS? Is backup withholding put into in effect when required? Do you currently interface account status information to payment systems for the purpose of backup withholding?

Minimize Risk with a Compliance Review of Current Process? (Cont’d.) Does your current process support B-Notice matching, notice generation and status tracking of TIN/Name accounts in error? Does your current process support TIN Penalty matching and generate the appropriate solicitations when necessary?

Handling issues for Non-resident Aliens Do you re-certify expiring Form W-8 series as required? Do you have a US issued TIN on the W-8? Are procedures followed to ensure that the proper Form W-8 certification and/or supporting documentation is obtained from the payee when making payments to Non-Resident Aliens? Have treaty benefits been allowed? Ensure the review process is correct and well documented.

Handling issues for Non-resident Aliens (Cont’d.) Are payments to Non-Resident Aliens reported on Form 1042-S when applicable? Does your 1042-S withholding process meet the IRS guidelines for the current treaty rates, types of income and exemptions?

Miscellaneous Items Do you have the functionality to report all form type payments to the IRS, SSA, resident and non-resident states, including U.S. Territories? Are you capable of processing and reporting information throughout the year to comply with current-year state reporting requirements? Can you generate all required reporting media and transmittals for original and correction reporting to IRS, SSA, states, and U.S. Territories?

Miscellaneous Items (Cont’d.) Does your process track payment state and resident state to meet state reporting and withholding requirements?

Legal Stuff "Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer for the purpose of avoiding any penalties that my be imposed on the taxpayer by an governmental taxing authority or agency."

Questions

© 2012 Financial Operations Networks LLC Thank You! The Accounts Payable Network 2100 RiverEdge Parkway, Suite 1010 Atlanta, GA Contact: For further information on this topic, contact