IRS notice 2010-51: business 1099s - information reporting under section 6041 for payments to corporations and payments of gross proceeds and with respect to property.

September 29, 2010

On September 29, 2010, Tax Executives Institute submitted the following comments to the Internal Revenue Service in respect of Notice 201 0-51, relating to expanded 1099 information reporting for payments to corporations and for payments of gross proceeds and with respect to property. The expanded information reporting is mandated by changes to section 6041 of the Internal Revenue Code that were in the Patient Protection and Affordable Care Act. TEI's submission was developed under the aegis of TEI's Federal Tax Committee, whose chair is John A. Mann of Walgreen's Co. Contributing substantially to development of TEI's comments were David E. Sherwood of Microsoft Corporation, chair of TEI's Subcommittee on Employee Benefits and Payroll Taxes, and Robert J. Birch of Wellmark, Inc. Also contributing to the development of TEI's comments were Robert L. Howren of BlueLinx Corporation, Lynn B. Jordan of Performance Food Group, Kelly A. Nall of Hewlett-Packard Company, Mark C. Silbiger of The Lubrizol Corporation, and Nan E. Smoot of Mary Kay, Inc. Jeffery P. Rasmussen, legal staff liaison to TEI's Federal Tax Committee, coordinated the preparation of the comments.

On July 2, 2010, the Internal Revenue Service (IRS) issued Notice 201051 requesting comments from the public in respect of information reporting requirements under section 6041 as amended by the Patient Protection and Affordable Care Act of 2010 (PPACA).1 The revised statute expands current information reporting requirements to encompass (1) payments of "gross proceeds" and "amounts in consideration for property" and (2) payments to corporations (other than certain tax-exempt corporations). The Notice was published in the July 19, 2010, issue of the Internal Revenue Bulletin (2010-29 I.R.B. 83).

Tax Executives Institute

Tax Executives Institute is the preeminent association of business tax executives in North America. Our approximately 7,000 members represent 3,000 of the leading corporations in the United States, Canada, Europe, and Asia. TEI represents a cross-section of the business community, and is dedicated to developing and effectively implementing sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply in a cost-efficient manner.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises, including information reporting under various provisions of the Internal Revenue Code. We believe that the diversity and professional training of our members enable us to bring a balanced and practical perspective to the issues raised by the Notice and information reporting on payments to businesses.

Background

Section 6041 requires information returns to be made by every person (payer) engaged in a trade of business that makes payments that aggregate $600 or more in any taxable year to another person (payee) in the course of the payer's trade or business. The information is included on Form 1099-MISC, Miscellaneous Income, returns filed with the IRS; corresponding statements are sent to the payees. Section 9006 of the PPACA amended section 6041(a) of the Code to add payments of "amounts in consideration for property" and "gross proceeds" to the list of payments subject to reporting. The PPACA also added section 6041(h), which provides that notwithstanding any regulation prescribed before the date of enactment, the term "person" includes any corporation other than organizations exempt from tax under section 501(a). Thus, "payments to corporations that are not tax exempt may be subject to information reporting." (2)

Finally, the PPACA added section 6041(i), which authorizes the IRS to issue guidance to carry out the purposes of the act, including rules to prevent duplicative information reporting. To this end, the IRS has issued Notice 2010-51 requesting comments on ways to minimize administrative and compliance burdens and avoid duplicative reporting. For example, the IRS recently issued final regulations in respect of the new information reporting requirement under section 6050W that provide a broad exception from section 6041 information reporting for payment card and third-party network transactions. (3) Consequently, business purchases made with payment cards are reported under section 6050W and are exempt under section 6041.

TEI commends the IRS for issuing Notice 2010-51 and seeking public input in order to minimize duplicative information reporting requirements under section 6041 and other Code sections. We also commend the IRS for providing relief from potentially duplicative reporting under section 6050W where payments are made by credit or debit cards.

Regrettably, the statutory changes to section 6041 were adopted with scant public input and the best course would be for Congress to repeal them. Absent such congressional action, careful regulatory guidance is needed because the expanded information reporting requirements will substantially increase payer reporting burdens while in many cases providing the IRS with precious little useful information. We believe the comments and recommendations below will aid the IRS in crafting an administrable and usable information reporting system.

Summary of TEI Recommendations

The Institute recommends the following provisions be adopted to avoid imposing undue burdens on taxpayers:

1. Expansive Payee Exceptions. No Form 1099-MISC should be required for payments to publicly traded entities (including subsidiaries and affiliates in the publicly reported group), publicly regulated entities, private companies with audited financial statements (including subsidiaries and affiliates within the reported group), and intercompany payments between affiliated groups because there is little or no risk of unreported income for such payments.

2. Limited Scope of Gross Proceeds: The term "gross proceeds" should be limited to gross payments (in cash or check) paid in consideration for goods or property (i.e., for merchandise) or services, and excluding all payments that are either (a) covered by another information reporting requirement (including other Form 1099 series) or (b) expressly exempt from information reporting requirements.

3. TIN Matching and Backup Withholding Transition Relief: The TIN matching program should be revised to facilitate corporate reporting and "soft" B notices (with no obligation to implement backup withholding), and a good faith standard for reporting and withholding penalties should be used for a reasonable transition period through the later of December 31, 2013, or two years after the issuance of final regulations.

4. De Minimis Exceptions for Reporting and Back-Up Withholding: The backup withholding rules should not apply to small payments (e.g., less than $600), and the rules for Form 1099-MISC reporting for corporations should similarly include an exception for de minimis payments (e.g., less than $150) for non-recurring payments made outside the accounts payable system.

   By Ameliorating Taxpayer Reporting Burdens, the IRS Will Reduce its Administrative Burdens and Improve the Prospects for Increased Compliance

   Currently, the bulk of commercial transactions are for purchases of merchandise or for payments to corporations, transactions that have been exempt from information reporting requirements. Thus, the changes to section 6041 dramatically increase the scope of reportable payments. Moreover, the revised statute applies to businesses of all sizes, charities and other tax-exempt organizations, and government entities. According to the Taxpayer Advocate's 2010 Report to Congress, this will include "26 million nonfarm sole proprietorships, four million S corporations, two million C corporations, three million partnerships, two million farming businesses, one million charities and other tax-exempt organizations, and probably more than 100,000 federal, state, and local government entities." (4) The IRS's own advisory committee on payroll tax matters has suggested that the expansion of the statute will exponentially increase the volume of information reported to the IRS in both paper and electronic media. (5) Although legislative proposals have been introduced to exempt payers with 25 or fewer employees from the reporting requirement and increase the dollar threshold for reportable "gross proceeds" and "amounts in consideration for property" to $5,000, the proposals will provide no relief to business payers with 25 or more employees. Hence, absent effective payee exemptions and other administrative relief, affected payers will likely see a monumental increase in their reporting obligations.

   TEI is proud of its record of working with congressional tax-writing committees, the IRS, and the Department of the Treasury to devise and fine-tune diverse strategies for enhancing compliance in a cost-effective and equitable manner. While information reporting can be a valuable tool for combating the tax gap in many circumstances, we have significant reservations about the efficacy of the business 1099 reporting requirement enacted by Congress. In addition to the undue compliance burden it would impose on already compliant payers and on payees who have already demonstrated an extraordinarily high level of compliance, (6) we do not believe that the IRS, even with a significant increase in its resources, will be in a position to effectively collect and process information on the dramatically increased volume of reportable transactions.

   Absent broad payee exemptions and other ameliorative guidance, compliant businesses that receive the Forms 1099 will have to...