7 Regulatory Changes to Be Aware of before Tax Reporting Season Arrives

Paul Ogawa
November 20, 2018

If there’s one lesson to take from 2018, it’s that tax information reporting isn’t getting any easier. Tightened deadlines, new forms and the end of the extension of time for reporting form 1099-MISC with nonemployee compensation are sure to cause some chaos when reporting season kicks off in January.

In fact, 2018 ushered in a raft of regulatory changes. Based on a recent webinar, here are seven regulatory changes tax and finance professionals should know about heading into the January reporting season.

1. 1099-MISC with nonemployee compensation (Box 7)

What has changed?

The 30-day automatic deadline extension—or EOT, for extension of time—for 1099-MISC with nonemployee compensation (Box 7) is gone for Tax Year 2018. Previously, with an extension that pushed the deadline out a month, 1099-MISC Box 7 forms were not due until early March. Now, the extension is gone, and 1099-MISC Box 7 forms are due Jan. 31 no matter what, except in a few rare, extenuating circumstances.

Also, the IRS said that any late Box 7 original forms (due Jan. 31) that are filed with non-Box 7 forms (due March 31) could cause the IRS to count all non-Box 7 forms as late, even if they are filed on time. For example:

  1. A filer sends Box 7 original forms to the IRS by Jan. 31, meeting the deadline.
  2. Some late Box 7 originals trickle in after Jan. 31.
  3. The filer sends non-Box 7 forms by March 31, meeting the non-Box 7 deadline.
  4. In the same batch as the non-Box 7 forms, the filer sends late Box 7 forms.

Step 4 causes the problem. Because late Box 7 forms arrive with non-Box 7 forms, all forms—including non-Box 7 forms sent on time—could be considered late and subject to penalties.

What does it mean?

The end of EOT will cause a crunch for tax reporting professionals. Fully 73 percent of all 1099-MISC Box 7 forms in tax year 2017 were filed with a 30-day extension of time, which means only 27 percent of organizations are prepared to file 1099-MISC (NEC) in January.

And the change in guidance on mixing Box 7 and non-Box 7 forms is likely to lead to an increase in penalty warnings and notices.

Discover more about the present and future of 1099-MISC Box 7 reporting in this comprehensive report.

2. New form types

What has changed?

There are three new form types.

Form 1099-LS: Reportable Life Insurance Sale

  • Filed by acquirers of life insurance contracts, or any interest in a life insurance contract, in a reportable policy sale
  • Due to IRS by 2/28/19, 4/1/19 electronically

Form 1099-SB: Seller’s Investment in Life Insurance Contract

  • Filed by issuers of life insurance contracts/policies to report seller’s investment in the contract, surrender amount due to transfer in a reportable policy sale
  • Filing required when issuer receives Copy C of 1099-LS, other notice of transfer to a foreign person
  • Issuer must furnish Copy B to seller by 1/31/19
  • Copy A due to IRS by 2/28/19, 4/1/19 electronically

Form 1098-F: Fines, Penalties and Other Amounts

  • Report amounts paid in relation to violation of law, investigation into violation of law, or amount paid pursuant to a court order
  • Distinction: “Payer” is the recipient of the form

What does it mean?

Both forms act to close the loophole on reporting the sale of a life insurance policy/contract. Payment of death benefit requires the insurance company to report to the IRS and the investor via the 1099-R: Box 7, Code C.

3. Proposed regulations

What might change?

The current threshold for requiring electronic filing is 250 forms, but that refers to form types filed and not total forms filed. A change would shift the meaning to total forms filed. For example:

Currently, a filer with 200 1099-INT forms and 300 1099-MISC forms would only be required to file 1099-MISC forms electronically. Under the proposed change, a filer with 200 1099-INT forms and 200 1099-DIV forms (for a total of 400 forms) would have to file ALL forms electronically.

States are leading the way in this trend: Wisconsin and Kentucky have both lowered e-filing thresholds to 25 or more forms; Oregon no longer accepts paper returns, and Minnesota is phasing out paper returns by 2020.

What does it mean?

Payers need to shift to electronic filing now. Already, two-thirds of 1099-MISC forms are filed electronically. Electronic filing offers increased security for customer and vendor data, known IRS file acceptance and complete audit trail history. And it will likely be completely mandatory at some point.

4. ACA reporting

What has changed?

In the wake of weakening federal ACA standards, states have begun to impose individual mandates, with New Jersey and Vermontfollowing in the path of Massachusetts.

Also, the ACA employer mandate is still the law of the land, and failure to comply with ACA regulations could still cost organizations money. The IRS has been issuing letter 226Js to organizations that do not comply with the ACA. Letter 226J is a notice to eligible employers that they might be liable for an Employer Shared Responsibility Payment, or financial penalty for non-compliance.

What does it mean?

If state-by-state mandates become a trend, companies will face a challenge exponentially greater than the federal reporting that has already begun to cause problems with compliance. Even the addition of 10-15 new jurisdictions could cause problems for HR departments.

State-by-state reporting wouldn’t really be ACA reporting at all, given that the ACA is federal law. But the prospect of ACA-style reporting in multiple jurisdictions, each with changing sets of regulations, could make health-insurance reporting a major headache for HR professionals.

If states do indeed take this path, companies will have to respond by sharpening reporting processes.

On the federal level, the IRS has demonstrated that it will continue to enforce penalties for non-compliance, so companies cannot ignore ACA regulations. Reporting is still required for companies with 50 or more employees.

5. Quarterly reporting

What has changed?

With New York leading the way, states are switching from annual to quarterly reconciliation and reporting. For 2019, institutions in New York must file a form 1099-R for each person who received a distribution of $10 or more from programs such as profit-sharing or retirement plans, IRAs, annuities, pensions, insurance contracts and survivor income benefit plans.

Current rules in New York require paying institutions to submit a withholding filing on a quarterly basis to confirm timely and complete payments. In the fourth quarter of the year, payers add 1099-R information for the whole tax year in part C, section D and E of form NYS-45 in order to reconcile withholding payments, returns, and 1099-R information reporting. State revenue officials then review all four quarters of NYS-45 to make sure payments match those reported on form 1099-R.

Beginning in 2019, however, the state will require the NYS-45 to be completed and submitted quarterly. Essentially, the new rule requires organizations to reconcile 1099-Rs and withholding payments on a quarterly basis rather than on an annual basis. Illinois and Hawaii are now taking similar steps.

What does it mean?

Quarterly reporting could be a problem for financial institutions in which the accounting department handles payments and withholding returns, while the tax department deals with 1099-R information reporting. Companies need to start allocating financial and talent resources for the New York change and preparing for changes in other states.

Organizations should familiarize themselves with state portals before the due date. Some states will return validation errors if reporting is not properly reconciled to payments and returns. That’s the last thing companies want to happen when bumping up against new deadlines.

6. Paid family leave

What has changed?

Paid family leave (PFL) is taxable at the federal level and exempt at the state level—but reporting is still required in a few states. The number is growing.

Reporting is required via form 1099-G, except in New York, where either form 1099-G or form 1099-MISC is required depending on nature of the payment. For state insurance payment funds, payers use form 1099-G in New York. For private payers and self-insured employers, 1099-MISC is the correct form. New York does not have a method for filing either form electronically.

States currently requiring PFL reporting are California, New Jersey, Rhode Island and New York. Washington, DC, will have an active mandate as of July 1, 2020, and the state of Washington will likely begin requiring reporting in 2020.

What does it mean?

More forms and more mandates in more states generally equals more potential confusion for tax reporting professionals. New York in particular is a challenge, and the number of states in which PFL reporting is required is likely to grow. Companies need to automate reporting processes in order to keep up with growing form volume.

7. State reporting

What has changed?

States are aggressively seeking revenue by changing thresholds for form 1099-K, which third-party settlement organizations such as rideshare and home-share services use to report payments to service providers.

Under IRS regulations, a 1099-K is only required if a service provider has logged minimum of 200 transactions and earned at least $20,000 in a tax year. However, in mid-2018, Massachusetts and Vermont lowered the reporting threshold all the way to $600 with no minimum number of transactions. Now, 1099-K filers in the two states will have to report a far larger number of forms than previously. States such as New York and California are considering similar measures.

Also, states are following the federal lead in moving up deadlines for reporting. For TY 2016, 62 percent of direct state reporting was due in January. For TY 2018, the number is 87 percent.

What does it mean?

For states, lowering the 1099-K threshold drives revenue. Massachusetts expects to narrow the tax gap with its new 1099-K threshold by raising $20 million dollars with the new reporting mandate. Vermont, one of the smallest states in the country in terms of both population and size, expects to raise $1.5 million.

For organizations, a raft of states adopting new 1099-K thresholds would lead to far more forms filed—and possibly with different thresholds in different states, increasing complexity enormously. At the same time, state deadlines moving up in concert with federal deadlines puts the squeeze on tax professionals to get reporting done more quickly and efficiently than ever before.

Discover much more about the present and future of state reporting in this comprehensive report.

Sovos enables companies to stay ahead of regulatory changes

With regulations changing so rapidly and risks of penalties and other negative consequences so high, companies need to centralize and automate tax information reporting processes. Sovos has more than three decades of experience keeping companies in compliance and is the largest private filer of 1099 forms in the United States.

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Learn more about how Sovos takes the surprises out of tax information reporting. Watch the webinar on this topic on demand.

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Paul Ogawa

Paul Ogawa is a Senior Regulatory Counsel at Sovos Compliance. As part of the Regulatory Analysis team, his main areas of focus are state and federal tax withholding, the Affordable Care Act (ACA), and Canadian tax information reporting. Prior to Sovos, Paul worked as a litigation attorney in Boston area law firms, representing clients in insurance subrogation claims, family law matters, and employment disputes. Paul is a member of the Massachusetts Bar, earned his B.A. from Brandeis University and his J.D. from the Suffolk University Law School.
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