BEST PRACTICES IN 1099-K

REPORTING Ray Grove Convey

Product Marketing Manager

MAC is an organization comprised of members from Banks, Acquirers, ISOs, Card

Associations, Law Enforcement and others involved in risk management and

compliance of the electronic payment processing industry. The purpose of MAC is to

educate members in the electronic payment industries regarding the compliance with

electronic payments regulations along with the detection, prevention and

prosecution of those involved in electronic payment fraud. In the context of

fulfilling MAC’s ongoing educational obligations to its members, this webinar is

being presented by the MAC Education Committee in support of the MAC mission

regarding the exchange of information and continuous education of its’ members.

Agenda

• The Focus on Tax Information Reporting

• 1099-K Reporting Basics and Updates

• Reporting Workflow and Process

• More on Penalties, B-Notices, Withholding

& State Reporting

Third Party Tax Information Reporting

Why the Focus

$450,000,000,000

Most is Under-Reporting

83%

8% 9%

Under-Reporting Non-filing Underpayment

With no 3rd party reporting…

56%

44% Misreported

Correctly reported

With 3rd party reporting… 1%

99%

Misreported

Correctly reported

And by the way….

5 States = $2.2 Billion

In the last 6 years…

Even The IRS is Struggling…

TIGTA Report on IRS Challenges in Keeping Up

SSA and IRS are also going through system overhauls

because they can’t keep up with the changes

1099-K BASICS

The Basics • Form 1099-K is an information return that is used to report

the gross amount of payment card transactions to merchants.

• Requires the reporting of payment transactions by payment settlement entities as well as third party network transactions.

• The new requirement applies to Payment Settlement Entities (PSEs), Electronic Payment Facilitators (EPFs), Third Party Networks (3PNs) and Intermediaries. Generally this means acquirers, processors, and others, including non-traditional payment networks and even businesses that flow through payments to others, will be affected. The final IRS guidelines provide many examples and who has to report.

More Info • New For 2014

– The final 2014 form includes two new boxes: • Box 1b. Card Not Present Transactions - This box is optional for 2014. This new box is for the

gross amount of the total reportable payment card/third party network transactions for the calendar year where the card was not present at the time of the transaction or the card number was keyed into the terminal.

• Box 2nd TIN Not. - This box may have an "X" entered if the filer was notified by the IRS twice within 3 calendar years that the payee provided an incorrect TIN. If marked, the IRS will not send any further notices about the account.

• What to Report & Thresholds – Merchant Card: Report all amounts

– Third-Party Network Payments: Report $20,000 or more AND 200 or more transactions

• Due Dates for Paper Filing – Due to IRS: February 28

– Due to Recipient: January 31

Updates On Penalties & Withholding

• Backup Withholding – Beginning on January 1, 2013, backup withholding was required on the 1099-K. Backup

Withholding may be required in several situations, including:

– Missing TIN,

– Obviously incorrect TIN (a TIN that has more or less than 9 numbers, or has an alpha character as one of the 9), or begins with 000, 666, or any number between 900 – 999.

– Incorrect name/TIN combination

– Last year, backup withholding was required immediately for any missing or obviously incorrect TINS (did not need to wait for a CP2100 to begin withholding).

• Also, the IRS indicated they would begin to send out CP2100 Notices for incorrect name/TIN combinations in late 2014 for tax year 2013 1099-K forms.

• 1099-K and 6721/6722 Penalty Relief – The IRS released a notice in 2013 which provided partial penalty relief for the 2013 tax year for

incorrect name and TIN combinations ONLY. Therefore, when the 2014 CP2100’s begin to arrive shortly for tax year 2013, Merchant Processors will see notification to begin backup withholding for all three categories of failure, but penalty notices will be assessed for Missing TINS and Obviously incorrect TINS only, and will not be assessed for incorrect name / TIN combinations. Note – this will come on the 972CG the following spring of 2015.

Here is that notice:

Notice 2013-56 - http://www.irs.gov/pub/irs-drop/n-13-56.pdf

REPORTING WORKFLOW

Typical Tax Information Reporting (TIR)

Typical Tax Information Reporting (TIR)

Typical Tax Information Reporting (TIR)

Typical Tax Information Reporting (TIR)

Typical Tax Information Reporting (TIR)

MORE ON PENALTIES, B-NOTICES,

WITHHOLDING & STATE REPORTING

Trend 1: Expansion of Penalties

• More forms, form types and mistakes

• 1099-K story

– Closing the gap

• Penalties on the rise for more forms

– Last year: 5498, 1098-T, 1099-G

Expansion of Penalties

• IRS and States flexibility on abetment is

running short

• Verifying of your clients,

vendors/contractors is more critical than

ever

Bad TIN = Completely useless information

Evolution of TIN Management

Tax Identity Management

B&P

Notice Processing

W-9 Solicitation

Delivery

Response Gathering, Validating, Importing

Backup Withholding Reporting

Old Process

File 1099s

Receive B Notices

Send W9s Receive 972CG

Write Abatement

Evolution of TIN Management

Tax Identity Management

Real-Time

TIN/OFAC/DMF

TIN Matching

General Solicitation

Delivery

B&P Notice Processing

W-9 Solicitation

Delivery

Response Gathering, Validating, Importing

Backup Withholding Reporting

Proactive Reactive

TIN Matching

• IRS E-Services

– Interactive TIN Matching

– Bulk TIN Matching

– Publication 2108A

– Backup Withholding Forms Signing up takes time, requires SSN, AGI, Officer of Company

Proactive Process

• Identify Incorrect Information

• No Rules on How to Solicit or Collect Data

• Multipronged Approach

Solicit

Collect Responses

Update Data

TIN Match

The IRS has strict phishing rules. A violation leads to a 96 hour lockout!

State Reporting Overview • Most States have reporting requirement for filing Forms 1099

(i.e. Form 1099-INT, -DIV, -MISC, -R) for activity performed in state.

• The reporting requirements differ significantly by State

– Certain States only require Forms 1099 to be filed if withholding was performed.

– A number of States only require certain types of Forms 1099’s be submitted to the State (i.e. only 1099-R)

– Many States participate in the Combined Federal/State (CFS) filing program

New Requirements for Sate Reporting

• More Federal forms with State withholding – 1099K now requires backup withholding, requiring state

reporting

• More states requiring direct reporting – Wisconsin just updated requirements

• 1099R, W2 and 1099MISC must be filed

• CFS has added – 1099B and 1099K

• Watch out though… Most all have direct reporting if there is withholding

– Michigan and Vermont added

So Many States, So Many Requirements

One of the Biggest Headaches…

And by the way…. A reminder

5 States = $2.2 Billion

Withholding Overview

Withholding types

• Typical Types of Withholding

– Life & Annuity (Typically 1099-R)

– Backup (B, DIV, INT, MISC, OID, PATR, K)

– NRA (1042-S)

– Sick Pay

– Gambling Winnings

Certain Payees may be exempt from Backup Withholding – they include tax-exempt

organizations, government agencies, corporations, and other entities listed on page 3 on

Form W-9

When Backup Withholding Applies • The payee fails to furnish his or her taxpayer identification number (TIN)

to Payor,

• For interest, dividend, and broker and barter exchange accounts opened or instruments acquired after 1983, the payee fails to certify, under penalties of perjury, that the TIN provided is correct,

• The IRS notifies Payor to impose backup withholding because the payee furnished an incorrect TIN,

• For interest and dividend accounts or instruments, Payors are notified that the payee is subject to backup withholding (under section 3406(a)(1)(C)), or – For interest and dividend accounts opened or instruments acquired after 1983, the

payee fails to certify to Payor, under penalties of perjury, that he or she is not subject to backup withholding.

If a Payor does not backup withhold and pay as required, that

Payor becomes liable for any amount that was not withheld and

paid.

YOU CANNOT ELECT NOT TO PAY A PAYEE

YOU ARE STILL LIABLE FOR THE WITHHOLDING

Why this matters?

• Getting it wrong has consequences

– Upset clients

– Fines

I have to withhold, where does the money go?

• Find out your payment

frequency

– Set up a process to track

payment cycle changes

• Get your reporting in

order

• Reconcile regularly

– At least quarterly

Knowing Who To Work With…

Typical Tax Information Reporting (TIR)

Organizing the Process

Data Issues:

Multiple file formats

Multiple sources

Formatting (Data Converter)

Consolidation

Mapping

Cleansing

B-Notices (CP2100)

Penalty Notices

Backup Withholding

Annuity Withholding

Multiple Processes

(1099-A, 1099-C, 1042-S)

Hardware & Software

Maintenance

Staff & IT Time

Understanding Compliance

Obligations

Time Consuming Research

State & Federal

Compliance Advice - $$

Compliance Programming

Data Security / User Access

Penalty Abatement

Monitoring Thresholds (Federal

De Minimis)

Payment Scheduling (State &

Federal)

Corrections

Audits

Lack of visibility for Customer

Service

Extension of Time (8809)

Print and Mail Tax Forms

Managing Transmittals State

IRS

Canadian

Puerto Rico

Internal Reports

Prior Year Corrections

Electronic Statements

How we view TIR

Takeaways

• IRS is closing the Tax Gap and the 1099-K is a big focus

• Scrutiny is high and they are not likely to give additional passes

• Organizing you process will be necessary to meet compliance obligations

• The IRS is NOT the ONLY agency that requires this information

Previous Webinars

Learn about Trends in Penalty Abatement

and ways that you can Eliminate “B”

Notices and Penalties by watching our

previously recorded webinars at:

www.convey.com/education-center/on-

demand-webinars

Questions?

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