Designing a 1099 Operating Model: Where the Rubber Meets the Road

Wendy Walker
October 18, 2024

This blog was last updated on October 18, 2024

With the advent of new information reporting requirements for digital asset transactions, businesses are navigating uncharted territory. I’ve received countless invitations from industry experts to attend webinars or read white papers on interpretations of the new regulations, and guidance on what brokers are required to report.

But beyond understanding the regulations, organizations face an even bigger challenge: operationalizing these rules in their daily processes. The question isn’t just, “what should we report?” but “how do we actually implement the processes to ensure compliance?”. That’s where a well-designed 1099 operating model comes into play.

How to Create a Scalable 1099 Operating Model

For large organizations, tax reporting is not just a once-a-year activity. Transactions involving reportable U.S. tax information occur every single day in businesses around the world, often in multiple operating systems. Developing a target operating model for reporting digital asset transactions on the Form 1099-DA is important because it helps provide the blueprint to align people, processes, and systems to best achieve your vision.

Here are some key issues to consider when developing an organizational target operating model:

Organizational tax reporting requires cross-functional support.

A target operating model includes stakeholders from around the organization. Although an organization may designate some primary tax reporting functions to a specific team, that team is largely dependent on many other people in the organization. IT, operations, compliance, and tax teams are among the various departments that play an integral role in ensuring accurate reports are delivered on time and in compliance with federal and state laws.

Without strong collaboration among these departments, the likelihood of errors rises, which can lead to missed deadlines, incorrect filings, or penalties for non-compliance. To mitigate these risks, a well-designed target operating model should clearly define roles and responsibilities within these departments to streamline communication and decision-making processes.

Tax reporting requirements are complex and change frequently.

Over the last few decades, Congress has consistently expanded information reporting requirements to help reduce the tax gap. These expansions have been driven by the need for greater transparency in reporting transactions, particularly those involving high-risk areas like digital assets and other emerging financial instruments.

Every year, the IRS and states release a myriad of changes to the reporting requirements, impacting systems and processes around the organization. These changes can range from minor adjustments to existing forms and processes to significant new legislation that introduces entirely new reporting requirements—such as the Form 1099-DA for digital asset transactions.

A well-designed target operating model must account for these constant changes and incorporate rapid technology and process updates as a result. Automation plays a crucial role here, as it allows organizations to quickly integrate these changes without disrupting existing processes.

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Reportable data is collected at various times in a customer’s journey with your firm.

Reportable data collected on Forms W-8 and W-9s typically occurs during the onboarding process to establish a customer’s tax status. However, data collection doesn’t stop there. If a customer’s information changes—such as an update to their address, legal name, or tax status—or when existing tax documents expire, businesses need to secure new or updated forms to stay compliant with IRS regulations.

It is important that the operating model accounts for these various friction points to ensure an efficient and effective process. This means implementing systems that automatically flag invalid customer information, and track changes in customer data to ensure all required information is collected and updated securely.

Customer education and training is essential

Providing your customers with educational information about new and changing tax reporting requirements is vitally important to the health of your customer relationship. Alerting them on what to expect in tax reporting ensures they understand the new rules and procedures, which will help them comply. For example, ensuring taxpayers understand why it is important to provide correct taxpayer identification (TIN) information helps them comply and ultimately avoids backup withholding taxes being imposed on transactions.

Providing this expertise builds trust with customers by demonstrating your commitment to transparency, and ultimately leads to a smoother customer experience with fewer errors and complaints.

Technology is the lynchpin of tax reporting compliance.

Technology is a fundamental building block of tax information reporting compliance in any organization. Many aspects of tax compliance involve repetitive tasks, such as data collection, aggregation, and verification.  Without the right technology in place, the sheer volume of data and the complexity of tax regulations can quickly overwhelm even the most well-organized tax teams.

Technology solutions can automate repetitive tasks like data collection and aggregation, enable detection of compliance issues according to the tax reporting requirements, and can securely store all documents and information for audit purposes. Technology is used to facilitate and optimize the workflows, operational and technical processes for tax withholding and information reporting across the organization.

With the introduction of new information reporting requirements for digital asset transactions, organizations must move beyond simply understanding what needs to be reported. The real challenge lies in operationalizing these regulations to ensure compliance, accuracy, and efficiency.

Ultimately, the success of your tax reporting efforts hinges on how well your organization adapts to the demands of information reporting compliance. By integrating technology, fostering cross-functional collaboration, educating your customers, and staying ahead of regulatory updates, your business will be well-positioned to meet the challenges of Form 1099-DA reporting and beyond.

Ready to put theory into practice? Register for our webinar with Comply Exchange and Ledgible: Building a 1099 Operating Model for Success.

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Author

Wendy Walker

Wendy Walker is the Vice President of Regulatory Affairs at Sovos. She has more than 15 years of tax operations management and tax compliance experience with emphasis in large financial institutions, having held positions with CTI Technologies (a division of IHS Markit), Zions Bancorporation and JP Morgan Chase. Wendy has served as a member of several prominent industry advisory boards. She graduated with a BS in Process Engineering from Franklin University and earned her MBA from Ohio Dominican University, in Columbus, Ohio.
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