2011 heralds the beginning of several new 1099 requirements, including the new Form 1099-K, new Form 1099-B, and new requirements for 1099-MISC.
New IRS Form 1099-K requires 3rd party settlors of merchant credit card and other payment transactions, such as Paypal, to report those payments to all payees who receive at least $20,000 per year in payments and who have more than 200 transactions per year. The new form requires reporting the totals by month, so that fiscal year filers can still be subject to IRS matching. It doesn’t matter who the payee is: a person, a corporation, an LLC, a trust, or a partnership—all of these entities will begin receiving these new forms in early 2012 for amounts paid to them in 2011.
The amounts reported on these forms MUST MATCH the amounts reported on the entity’s tax returns. A new line for reporting these totals has been inserted in all relevant IRS schedules and forms. If the amounts do not match, the payee will receive an IRS notice assessing tax on unreported income. Which, of course, was the whole purpose of this new requirement – to tap into the underground economy, and very specifically, Ebay and other on-line sellers who have long been suspected of not properly reporting their income to IRS.
Related to this new requirement is a change to the rules for reporting payments to service providers using IRS Form 1099-MISC. Beginning in 2011, payers must EXCLUDE any credit card or Paypal-type payments made to vendors when reporting their 1099 totals for 2011. This is because the vendor will theoretically already be receiving a 1099-K which includes all credit card and other 3rd party payments. IRS has modified its instructions for Form 1099-MISC to reflect this new requirement, but it is highly likely that many 1099 issuers will not bother to read this year’s instructions. That is why we expect the coming 2012 1099 season to result in many, many unmatched 1099s, and thus many IRS notices to taxpayers. More work for us accountants, yes?
In addition to these two new requirements, another new 1099 form will be required for 2011 – new IRS Form 1099-B. The 1099-B has historically been used to report gross proceeds from sales of securities. Now, the new Form 1099-B will also potentially include cost basis information, separate reporting for “covered securities”, “non-covered securities”, wash sale reporting, short sales, and a number of other items. It will mean that instead of receiving one 1099-B from your broker, investors will receive multiple 1099-Bs which must be analyzed and reconciled to year-end reports, and then must flow to new Schedule D – consisting now of potentially 6 new types of transactions, separately reported on new Form 8949: short term sales of securities with cost basis reported, short term sales of securities without cost basis reported, all other short-term securities transactions; and the same break-downs for long-term sales of securities. In addition, for EACH transaction, taxpayers must indicate one of 21 NEW CODES to tell IRS more information about the transactions.
IRS will then attempt to match the totals reported on the new Schedule D and Form 8949 to the filed 1099-B. Because these requirements are both new and highly complex, we anticipate many, many matching errors and plenty of IRS notices to deal with. In addition, investors can anticipate that their tax return preparation fees will increase substantially this year. Essentially, all broker transactions will be analyzed and reported in 6 separate ways, instead of one, and investors who have multiple brokerage accounts will want to consider whether now is the time to consolidate their accounts. CPA firms are going to be very busy. Meanwhile, are you having nightmares yet?
Update (2/24/12): IRS has now announced that they will NOT attempt to match any 1099-K payments for 2011, 2012, nor into the future. Here is the quote from their website: “IRS announced in October that separate reporting of these transactions for other business receipts or income payments is not required for 2011. Taxpayers should follow the form instructions for reporting their gross receipts or sales. Report items that qualify as a trade or business expense on the appropriate line item of Schedules C, E and F. There will be no reconciliation required on the 2012 Form 1099-K, nor do we intend to require reconcilation in future years. [Added 2/10/12]“ .