This blog was last updated on June 27, 2021
Tax information reporting presents many challenges for organizations due to the high demands of compliance regulations in addition to the frequent changes that need to be continually monitored and absorbed into current systems and processes. How organizations approach these challenges and the priority they place on tax compliance activity is a critical component to managing risk and building long-term, sustainable, and successful tax compliance processes. Given these driving factors, here are some 1099 best practices that we at Sovos believe organizations should consider implementing in order to combat their reporting challenges, mitigate risk, reduce errors, and improve client experience. Streamlining Expertise: Create Clear Accountability for 1099 Best Practices As tax information reporting regulations expand and become more complex, organizations that do not utilize a dedicated team to handle these processes will face increased risk for potential errors and penalties due to all the different departments tasked with helping fulfill these obligations becoming overburdened or simply not having the time to monitor and interpret all of the relevant regulatory changes. See our Smart Brief on Tax Centralization for more information. Therefore, it is a recommended best practice that organizations establish a dedicated tax and compliance resource or team in order to ensure they meet all their reporting obligations every year. If a dedicated team is not an option, then at minimum, there must be a clear line of proactive accountability for understanding regulatory requirements. With a clear owner and line of accountability, employees will become more confident in their ability to keep up with all new and existing reporting requirements even as they change throughout the year and right up to deadlines for filing during tax season. More importantly, organizations will avoid unnecessary reporting errors and penalties due to overburdened employees. This is especially important because there are significant deadlines and reporting all throughout the year, not just when 1099s are due in January. From different state reporting deadlines in January and February to transmittals, IRA reporting in May to addressing B-Notices and P-Notices later in the year, your company will continuously be impacted while also monitoring for changes that will require you to update your processes and systems. Proactive management of the process year-round allows for greater opportunity to eliminate errors by automatically validating vendors during on-boarding, soliciting documentation, and managing and correcting data issues before filing. When these activities are completed throughout the year, fewer mistakes are made during the crunch time of season. Establishing a Dedicated Technology Platform Designed for Tax Information Reporting With a dedicated tax information reporting solution, organizations’ IT departments can significantly reduce their efforts relative to data extraction, formatting, and cleansing. A dedicated system can also adapt quickly to regulatory changes without additional programming and meet unique requirements across multiple jurisdictions. A dedicated platform also offers the ability to effectively reconcile payment data across systems, and therefore eliminates a significant strain on finance teams, allowing them to focus on other business-critical priorities. Since IT departments are often one of the most expensive units of a company, it is crucial that they be able to focus on keeping the business running and core goals, not compliance. Additionally, having a centralized solution and a center of excellence established allows for:
- Standardized processes that can quickly adjust to changes where all businesses utilize the same technology, improving employee experience
- Easier to reconcile data, make corrections, update the system, and address notices
- Better communication of complex regulatory and other types of changes to key members across the business
- Increased security as data from different lines of business is transferred to populated necessary forms
- Clients have better access to statements, information, completing forms and can send inquiries to a dedicated, consistent points-of-contact, vastly improving their client experience
At Sovos, your organization’s compliance is our full-time job. Check back to learn more about how to ensure successful 1099 best practice tax information reporting compliance and avoid common challenges. We also encourage you to sign up and receive our complimentary best practices report white paper. We’re here to help you get through tax season the right way.
