Financial services and institutions are especially vulnerable to the increased risks that come with handing significantly more Forms 1099 due to new IRS regulations. If you‘re tasked with managing compliance or managing fraud for your organization, this burden may very well fall into your lap. It’s important to be proactive in safeguarding your organization from these new opportunities for the IRS to penalize you.
IRS changes 1099-K reporting thresholds for gig companies and TPSOs
As a result of changes in section 9674 of The American Rescue Plan Act of 2021 (ARPA), gig platform companies and other Third-Party Settlement Organizations (TPSOs) will need to report significantly more Forms 1099-K Payment Card & Third Party Network Transactions for payments they make to recipients in 2022. Effective with returns filed in early 2022, TPSOs will need to file Form 1099-K when they pay a single recipient at least $600 or more during the calendar year. Previously, reporting was only required by these businesses when they paid a single recipient at least $20K during the calendar year and when those amounts were paid over at least 200 transactions.
With a lower threshold, organizations will have more backup withholding taxes and an increased volume of forms that need to be issued and filed with government agencies. It will also increase the risk of IRS and state penalties.
In order to minimize risk, organizations need to plan their tax reporting operations early on; below are three tips to help you change your tax reporting processes to remain compliant.
- Clean up TIN information before you issue Forms 1099
One of the most common mistakes the IRS will penalize you for is submitting Forms 1099 with missing or incorrect taxpayer identification number (TIN) information. To reduce the risk of making this mistake, take proactive measures to identify and remediate errors before the data is submitted to the IRS and states. Compare the names and TINs that will be reported on Forms 1099 directly to the IRS database. This allows time to identify the errors and solicit new information from the payee before issuing and filing the 1099s.
The IRS offers TIN matching solutions for matching business and individual TINs and names to their databases. Using this tool is important because while some solutions in the market may claim to validate TIN information, often it is not being compared directly to the IRS database and instead to other business sources of information. And if you match a name and TIN combination using the IRS database, it may qualify you for a penalty abatement in the future.
- Prioritize Form 1099-K state reporting
Most states require businesses to submit Form 1099 information for their residents regardless of where the business is “doing business.” State tax reporting processes often do not align with the IRS requirements for the same income; resulting in different submitting formats, due dates and thresholds.
Over the last few years, many states adopted direct state filing requirements for Form 1099-K that are at much lower thresholds and transaction limits. The graphic below depicts the variances amongst the states.
With significantly more Forms 1099-K qualifying for reporting, you need to consider if your tax reporting process can produce these varying outputs to different tax authorities following their specific rules.
- Evaluate current reporting solutions, then fill in the gaps.
Technology is key to efficient tax information reporting. It automates the transformation of data into the different required filing formats for the states and the IRS and validates that data for accuracy and for delivering statements to the recipients. A common method to minimize costs and improve customer experience when delivering 1099s is to utilize electronic statements. Though the IRS has specific requirements for obtaining consent, maintaining the information and statement delivery, having an electronic statement process can reduce risks that come with printing and mailing private tax information to recipients.
Contact us to learn more about how real-time TIN matching can help your organization stay compliant.