Take 5 Minutes to Learn This Year’s Last Minute Tax Information Reporting Changes

Tax time is upon us, which means last minute IRS and state tax information reporting changes are keeping us on our toes. Take five minutes to learn what these changes are and what you need to do to protect your business from penalties.

1. California’s last-minute change

On December 9th, the Franchise Tax Board posted a change to the definition of when information returns need to be filed with the state.  Information returns are now due to be filed when:

• The recipient is a California resident or part-year resident;

– OR –

• The source of the transaction was in California.

Previously, the language was more general and required information returns that were filed with the IRS to be filed with the state or to be filed through the Combined Federal State Filing program.

What does this mean for filers? 

Depending on how the previous requirement was interpreted, filers may need to alter the processes associated with filing information returns for California recipients. 

For filing information for California residents, some filers rely on the address that is on the account as of December 31st of the calendar year for purposes of state tax information reporting.

Some filers use solutions that track the state of tax residency provided by the recipient and those fields are used for tax reporting purposes at the state level. This is particularly helpful for recipients domiciled in different states or even between different countries. For example, snowbirds from Canada that come to Arizona for part of the year have different tax consequences than full-time Arizona residents.

Tracking where transactions occurred is a different issue. Payment solutions would need to be able to capture and track the locations. And processes would have to be updated to capture the information within the operating system at the time of payment.  At year-end, tax reporting could be achieved by pulling records from the operating system that were tagged as California sourced payments no matter where the recipient’s address is located.

2. Tax Extenders Require Retroactive Tax Reporting

Included in H.R. 1865 Further Consolidated Appropriations Act of 2020, more than 42 tax breaks were extended to December 31, 2020, and some of them will require retroactive tax reporting by 1099 filers to cover the 2018 season.

In late February, the Senate introduced the Tax Extender & Disaster Relief Act of 2019 to retroactively extend provisions that expired at the end of 2017, 2018 and those that will expire as of December 31, 2019.  Around two dozen tax breaks expired at the end of 2017 and only a handful were renewed in February 2018; and then they expired again at the end of that year. The Senate’s version of the bill called for restoring the dead tax provisions and it also called for bipartisan task forces to examine the more than 42 expired or expiring provisions included in the bill.

For the last 30 years, Congress has routinely extended tax provisions as part of a larger budget or spending bill; a practice that opponents say is bad tax policy. Ranking Senate Finance Committee Member Grassley (R-IA) scolded fellow lawmakers earlier this year when introducing the bill. According to Grassley, “Congress needs to get out of this bad habit of regular retroactive extensions of these tax provisions. The whole point of these federal tax incentives is to encourage certain behaviors, especially investments in alternative energies, energy efficiency and transportation. The best way to do that is ahead of time, not retroactively.”. 

Congress has not permanently enacted these tax provisions because they would be difficult to pay for. Deductions for mortgage insurance premiums paid, gross income for qualified tuition and fees for college, exclusion from income of debt forgiven on a qualified principal residence and several tax credits for renewable energy initiatives are just some of the more than $34 billion these breaks add to the national deficit. Hopefully, congress can figure this out in 2020.

What does this mean for filers? 

Filers of Form 1098 Mortgage Interest Statement may need to reissue forms for 2018 because the tax extender bill allows mortgage borrowers to treat mortgage insurance premiums paid during 2018 as qualified interest for tax purposes, which is deductible on their annual income tax return. Filers that issued Forms 1098 for calendar year 2018 for which no value was reported in Box 5 will need to retroactively issue forms to borrowers and/or the IRS that include those amounts. Additionally, reporting of MIP is required for 2019 and 2020 as part of the act. This means filers need to move quickly to comply this reporting season.

For filers of Form 1098-T, the deduction of qualified tuition and fees for individual taxpayers did not impact the requirement to report Form 1098-T in prior years. This means borrowers should be able to use those previously issued statements to take advantage of the extender bill. However, filers should note that they may receive an unexpected burst of requests from taxpayers for copies of those prior year 1098-T forms as they may have misplaced the previous version. 

And for filers of Form 1099-C, the extension of the provision that allows for an exclusion from gross income for debt forgiven on a qualified principal residence does not change the obligation to issue Form 1099-C. Individual taxpayers will still need to utilize the 1099-C information through the annual income tax return process, following the instructions in Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments (for Individuals) in order to take advantage of the tax extender for 2018 and for future years. 

3. Illinois enacts 1099-K reporting requirements

The gig economy has made headlines all year long due to gaps by gig workers in payments of self-employment taxes as well as potential worker classification issues by gig employers, including  California AB-5. However, the Treasury Inspector General for Tax Administration (TIGTA) uncovered the potential scope of the income tax gap problem during an audit earlier this year. Although the audit was initially aimed at self-employment tax compliance, TIGTA found significant income tax gaps associated with the existing $20k and 200 transaction threshold limits afforded to Third Party Settlement Organizations (TPSO’s) like Uber, StubHub and DoorDash. These organizations are generally responsible for reporting Form 1099-K related to gig economy activity. 

Congress introduced S.700 The New Gig Act of 2019, which would have reduced the Form 1099-K reporting threshold at the federal level to $1,000 and eliminated the transaction threshold. However, the bill has been sitting in the Senate Finance Committee since March. 

Given such a tremendous gap, many states began enacting or contemplating legislation to change the 1099-K reporting thresholds and transaction limits.  In 2017, Massachusetts and Vermont aligned reporting requirements with the Form 1099-MISC thresholds which is $600 and no transaction limit. In 2018, the District of Columbia added the 1099-K to the list of all 1099’s required to be reported at a $600 threshold and no transaction limit.  Earlier this year, Illinois introduced legislation but the bill stalled for several months. In true last-minute fashion in early December, Illinois lawmakers added the 1099-K requirements to the FY20 Budget Implementation Act requiring filers to submit Form 1099-K directly to the state following the threshold of $1k and at least 4 transactions for calendar year 2020.  Additionally, for 2019 reporting the state requires direct filing of Form 1099-K at the federal thresholds {notable because the state did not require any 1099-K reporting previously}.

What does this mean for filers?

Form 1099-K filers utilizing the federal thresholds must create separate state reporting files for each of the states requiring direct reporting. For 2019, Illinois filers must register to file the 1099 information directly with the state along with creating a separate file of Forms 1099-K at the federal thresholds and transaction limits that were issued to IL residents. For 2020, Form 1099-K filers will need to create a file of Forms 1099-K following the $1k and four transaction limit rules.

4. Crypto tax enforcement

There is no doubt that 2019 has been a pivotal year for cryptocurrency tax enforcement by the IRS. As the 2018 tax season wound to a close in April, Congress wasted no time in sending yet another letter to IRS Commissioner Rettig demanding that guidance related to calculating gains and losses related to cryptocurrency transactions be released. In response to congressional pressure, the commissioner committed to forthcoming guidance. But first, the IRS unveiled taxpayer enforcement initiatives a couple of months later.

In late August, the IRS issued penalty notices to thousands of U.S. taxpayers demanding amended returns and income tax payments related to crypto assets. Filers were given a due date by which they needed to respond, including providing a signature under penalties of perjury.

Some taxpayers received milder toned letters in response to inquiries they had made or explanations they had submitted with their annual income tax returns. These educational notices directed taxpayers to existing Publication 544, Form 8949 and others for help in calculating gains and losses related to specific transactions. 

In October, the IRS added a Yes/No checkbox question to the Form 1040 that asks “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”. And in the instructions, the IRS again points to Publication 544, Form 8949 and other traditional information related to the sales and disposition of assets.

In November, the IRS released long-awaited updated guidance in Revenue Ruling 2019-24 and the related Frequently Asked Questions (FAQs). The last guidance issued was in Notice 2014-21, which was old news in the crypto industry given the onslaught of new products we’ve seen these last few years,including interest earned on crypto assets, retirement plans invested in crypto assets, and bitcoin ATMs. In December, the IRS added two more FAQ’s to the list related to charitable contributions made and/or received using cryptocurrency.

Legislation has been very active this year too, with the most recent being the introduction of the Crypto-Currency Act of 2020 in December, which requires the government to clarify which federal agencies will regulate digital assets. Once clarified, the act requires federal agencies to issue procedures and licensing, certification or registration details related to businesses that operate in the digital asset industry. Although not directly impacting the IRS, the type of framework that is required in this bill sets the groundwork necessary for the IRS to administer clearer distinctions for withholding tax, Form W-2 and 1099 withholding obligations for filers.

What does this mean for filers?

For 2019 reporting, the IRS guidance and existing tax law makes it clear that businesses do have a Form 1099 or W-2 reporting obligation for transactions involving cryptocurrency trading, using cryptocurrency to pay for goods and services, when cryptocurrency is gifted to taxpayers such as airdrops or charitable donation, and more.

Although the guidance may not contemplate all the exact transaction scenarios found in the cryptocurrency industry, Sovos clients report Forms 1099-K, 1099-B, 1099-MISC and W-2 related to cryptocurrency transactions. Ongoing clarity of the withholding and reporting requirements will continue to impact all parts of tax operations and tax compliance in the digital asset industry in 2020 and beyond.

5. Retirement System Overhaul

The Setting Every Community Up for Retirement Enhancement Act (SECURE) and Retirement Enhancement & Savings Act of 2019 (RESA) propose significant changes that impact the retirement system. Some of the largest life and annuity and retirement plan administrators will continue to be impacted by these sweeping changes in 2020.

In true eleventh-hour fashion, provisions from the RESA and SECURE Acts were included as riders in H.R. 1685 Further Consolidated Appropriations Act of 2020 which was signed by the President on December 20th.

Below are some of the more notable impacts to retirement accounts that are included in the 700+ page bill:

• Creation of multi-employer plans (MEPs);

• Minimized plan sponsor liability associated with offering defined benefit contribution plans, otherwise known as “guaranteed lifetime income” plans;
• Increased penalties to filers for failure to file plan returns;
• raised the age for Required Minimum Distributions (RMDs) to 72 years as of 2020.

What does this mean for filers?

The addition of MEPs will likely impact distribution codes on Form 1099-R.Currently there are 29 codes used interchangeably, and presumably new codes will need to be added for these new plan types. Access for small business employers to offer plans means more Forms 5498 and 1099-R will need to be issued and filed. Changes to life expectancy and RMD ages affects calculations for related contribution details in Boxes 12a and 12b of Form 5498. Removing contribution limits impacts boxes 8, 9, 10 and 11a of the Form. RMD distributions  impact the amounts reported on Form 1099-R to IRS and states. Increased penalties for failure to file plan returns means heightened diligence in plan administration to ensure filing requirements are being met. 

Filers of Forms 1099-R and 5498 must update core operating systems, tax information reporting processes and business operating procedures associated with the retirement plan administration process in order to avoid penalties and remain compliant.