Avoiding IRS Penalties
IRS Form 972-CG proposed penalty notices are typically issued each year in August. But waiting to prepare until you get a notice is a huge mistake. Don’t wait. There are a number of steps you can take ahead of time that will dramatically lessen your chances of getting penalized. Learn what action to take NOW by following IRS due diligence rules to reduce, if not eliminate these fines.
Please join us on for 100-information packed minutes as tax expert Steven Mercatante, Esq. explains how to:
• Identify W-9 document collection and validation steps that will lessen the chance of incurring penalty
• Discover how to use the IRS TIN Matching Program and TEOS tool to validate problematic and potentially 1099 reportable payees before you file
• Get an overview of the IRS "reasonable cause" test so you know what documentation to have on file if a penalty is ever proposed
• Sharpen your backup withholding and B-Notice processing procedures to avoid penalty
• Reduce the chances payments to highly problematic LLC and Sole Proprietor payees will lead to penalty
• Respond to filing mistakes by following proper corrections procedures
Todays Regulatory Climate 00:01:06
What’s New - The 1099-NEC 00:05:40
Avoiding Penalties Starts with the W-9 00:13:39
Make Sure To Use the W-9 to Solicit Payees TIN’s for 1099 Reporting 00:22:49
Form W-9 Solicitation Tips To Ensure You Capture Form 1099 Payee Data 00:23:44
Name and TIN “Cheat Sheet” 00:26:52
Name and TIN “Cheat Sheet” (cont.) 00:27:25
Your Payee Refuses to Provide Their TN on the W-9 - Here’s What To Do 00:28:04
Avoiding Penalties Starts with the W-9: Watch Out for Corporations and LLC’s 00:30:56
Avoiding Penalties Starts with the W-9: LLC’s 00:32:42
Avoiding Penalties Starts with the W-9: LLC’s (cont.) 00:35:27
Watch Out for Payment Ostensibly Exempt From Form 1099 Filing 00:37:19
Tips on Identifying Your 1099 Reportable Payee 00:40:26
Validating Data - Evaluating Claims Your Payee id Exempt From 1099 Reporting 00:43:47
Validating Data - Evaluating Claims Your Payee id Exempt From 1099 Reporting (cont.) 00:46:37
Using the IRS TIN Match Program to Clean Up Your Files Prior to Form 1099 Reporting 00:49:57
TIN Match Program Tips 00:51:33
TIN Matching and Policies and Procedures 00:52:16
TIN Match Program 00:53:07
Three or More Parties Involved in the Potential 1099 Reportable Transaction: Be Careful 00:53:46
Backup Withholding 00:57:22
Backup Withholding (cont.) 00:58:30
Backup Withholding (cont.) 00:59:46
Backup Withholding (cont.) 00:59:56
Backup Withholding (cont.) 01:01:24
Backup Withholding: The Form 945 01:40:33
Backup Withholding: The Form 945 (cont.) 01:06:01
B-Notice Response Best Practices 01:08:27
B-Notice Response Best Practices (cont.) 10:25:01
B-Notice Response Best Practices: 1st Notice 01:13:07
B-Notice Response Best Practices: 2nd Notice 01:14:19
IRS Form 972-CG Proposed Penalty Notice and Reasonable Cause 01:18:13
IRS Form 972-CG Proposed Penalty Notice and Reasonable Cause (cont.) 01:22:16
IRS Form 972-CG Proposed Penalty Notice and Reasonable Cause (cont.) 01:25:30
IRS Form 972-CG Proposed Penalty Notice and Reasonable Cause (cont.) 01:28:48
- 1099-NEC 00:05:57, 01:04:47
- 501(c)(3) 00:37:19
- Audit 00:02:39
- Backup Withholding 00:23:23, 00:57:25
- B-Notice 00:23:29, 00:50:34, 00:58:55, 01:19:10
- C-Notice 00:59:07
- CP-2100 01:08:27
- CP210-A 01:08:27
- Disregarded Entity 00:16:14, 00:35:35
- EIN 00:27:42, 01:10:51
- Exempt Payments 00:37:23
- Form 1042-S 01:19:47
- Form 1099 00:22:49
- Form 1099-B 00:49:57
- Form 1099-DIV 00:49:57
- Form 1099-INT 00:49:57
- Form 1099-K 00:49:57
- Form 1099-MISC 00:01:06, 00:06:27, 00:23:10
- Form 1099-OID 00:49:57
- Form 1099-PATR 00:49:57
- Form 8832 00:33:05
- Form 945 01:40:42
- Form 945-A 01:40:33
- Form W-9 00:14:25, 00:22:52
- Garnishment 00:54:05
- IRC 6050W 00:40:00
- IRC Section 3406(a) 00:01:06, 00:28:37
- IRC Section 6041(a) 00:01:06
- IRC Section 6109(a)(2) 00:01:06
- IRS Notice 972CG 00:04:37, 01:18:13
- Levy 00:54:09
- Limited Liability Company (LLC) 00:27:18, 00:32:42
- PATH Act 00:07:20
- Tax Exempt Organization Search Tool 00:44:03
- Tax Gap 00:01:43
- TIN 00:14:27
- TIN Match Program 00:50:04
1099-NEC: In the context of 1099 tax filing, NEC stands for “Nonemployee Compensation” (the first letters of the three words None, Employee and Compensation). Most tax payers recognize NEC as box 7 on Form 1099-MISC. NEC is used to report income paid to independent-contractors / the-self-employed (referred to as 1099 employees for simplification purposes). So, while employers report income that gets paid to employees on Box 1 (Wages, tips, other compensation) of the W2 form, payers report income that gets paid to none-employees on Box 7 (NEC) of the 1099-MISC form. As an individual if you received form 1099-MISC instead of Form W-2 then the payer did not consider you an employee and did not withhold income tax or social security and Medicare tax.
501(c)(3): A 501(c)(3) organization is a corporation, trust, unincorporated association, or other type of organization that is exempt from federal income tax under section 501(c)(3) of Title 26 of the United States Code. It is the most common type of the 29 types of 501(c) nonprofit organizations in the United States. (en.wikipedia.com)
Audit: A formal examination of an organization's or individual's accounts or financial situation
Backup Withholding: Backup withholding is the tax that is levied on investment income, at an established tax rate, as the investor withdraws it. Backup withholding helps to ensure that government tax-collecting agencies (such as the IRS or Canada Revenue Agency) will be able to receive income taxes owed to them from investors' earnings. (www.investopedia.com)
B-Notice: A notice from the IRS stating that one or more tax ID numbers were missing from a 1099 or do not match the IRS records.
C-Notice: Backup withholding notice from the IRS stating that the non-employee has understated income and is subject to backup withholding.
CP-2100: It is a notice that tells a payer that he or she may be responsible for backup withholding. It is accompanied by a listing of missing, incorrect, and/or not currently issued payee TINs. Large volume filers will receive a CD or DVD data file CP2100, mid-size filers receive a paper CP2100, and small filers receive a paper CP2100A.
CP2100-A: It is a notice that tells a payer that he or she may be responsible for backup withholding. It is accompanied by a listing of missing, incorrect, and/or not currently issued payee TINs. Large volume filers will receive a CD or DVD data file CP2100, mid-size filers receive a paper CP2100, and small filers receive a paper CP2100A.
Disregarded Entity: A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner. A single-member LLC ( “SMLLC”), for example, is considered to be a disregarded entity. (www.pntax.com)
EIN: The Employer Identification Number, also known as the Federal Employer Identification Number or the Federal Tax Identification Number, is a unique nine-digit number assigned by the Internal Revenue Service to business entities operating in the United States for the purposes of identification.
Exempt Payments: Most taxpayers are entitled to an exemption on their tax return that reduces your tax bill in the same way a deduction does. Federal and state governments frequently exempt organizations from income tax entirely when it serves the public, such as with charities and religious organizations.
Form 1042-S: Form 1042-S is used to report amounts paid to foreign persons (including persons presumed to be foreign) who are subject to income tax withholding. For an individual taxpayer, Form 1042-S is a document provided to you (and the IRS) by the payer of the income reported.
Form 1099: Form 1099 is one of several IRS tax forms used in the United States to prepare and file an information return to report various types of income other than wages, salaries, and tips (for which Form W-2 is used instead). - Wikipedia (https://en.wikipedia.org/)
Form 1099-B: Proceeds From Broker and Barter Exchange Transactions is an Internal Revenue Service (IRS) tax form that is issued by brokers or barter exchanges. The form lists the gains or losses of all broker or barter exchange transactions.
Form 1099-DIV : Form 1099-DIV: Dividends and Distributions is an Internal Revenue Service (IRS) form sent to investors who receive distributions from any type of investment during a calendar year. Investors can receive multiple 1099-DIVs. Each Form 1099-DIV should be reported on an investor's tax filing.
Form 1099-INT: Form 1099-INT is the IRS tax form used to report interest income. The form is issued by all payers of interest income to investors at year end and includes a breakdown of all types of interest income and related expenses. Payers must issue Form 1099-INTs for any party to whom they paid at least $10 of interest during the year.
Form 1099-K: A payment settlement entity (PSE) must file Form 1099-K for payments made in settlement of reportable payment transactions for each calendar year. A PSE makes a payment in settlement of a reportable payment transaction, that is, any payment card or third party network transaction, if the PSE submits the instruction to transfer funds to the account of the participating payee to settle the reportable payment transaction.
Form 1099 MISC: The Form 1099-MISC is an Internal Revenue Service (IRS) tax return document used to report miscellaneous payments made to nonemployee individuals, such as independent contractors, during the calendar year. (www.shrm.org)
Form 1099-OID: Form 1099-OID is a tax form intended to be submitted to the Internal Revenue Service by the holder of debt instruments which were discounted at purchase to report the taxable difference between the instruments' actual value and the discounted purchase price.
Form 1099-PATR: File Form 1099-PATR, Taxable Distributions Received From Cooperatives, for each person to whom the cooperative has paid at least $10 in patronage dividends and other distributions described in section 6044(b), or from whom you withheld any federal income tax under the backup withholding rules regardless of the amount of the payment.
Form 8832: Form 8832 is the Entity Classification Election form from the IRS. It is filed to elect a tax status other than the default status for your entity. For example, an LLC can elect to be taxed as a C Corporation.
Form 945: IRS Form 945 is titled Annual Return of Withheld Federal Income Tax. Form 945 is used to report withheld federal income tax from nonpayroll payments, including distributions from qualified retirement plans.
Form 945-A: Use this form to report your federal tax liability (based on the dates payments were made or wages were paid) for the following tax returns. *Forms 945 and 945-X for federal income tax withholding on nonpayroll payments. *Forms CT-1 and CT-1 X for both employee and employer Tier I taxes and employer Tier II taxes. *Forms 944 and 944-X for federal income tax withheld plus both employee and employer social security and Medicare taxes.
Form W-9: Form W-9 (officially, the "Request for Taxpayer Identification Number and Certification") is used in the United States income tax system by a third party who must file an information return with the Internal Revenue Service (IRS). It requests the name, address, and taxpayer identification information of a taxpayer (in the form of a Social Security Number or Employer Identification Number). - Wikipedia (https://en.m.wikipedia.org/)
Garnishment: A legal summons or warning concerning the attachment of property to satisfy a debt
IRC 6050W : Section 6050W requires information returns to be made for each calendar year by merchant acquiring entities and third party settlement organizations with respect to payments made in settlement of payment card transactions and third party payment network transactions occurring in that calendar year.
IRC Section 3406(a): Requires that, under certain circumstances, including the payee's failure to provide a TIN, the payer must perform backup withholding.
IRC Section 6041(a): Provides that persons engaged in trade or business must report certain payments on an information return.
IRC Section 6109(a)(2): Requires that a payee provide a TIN to the payer when the payment will be reportable on an information return.
IRS Notice 972CG: The IRS started mailing 972CG penalty notices in July 2013 regarding 1099's with missing or incorrect TIN/Name Combinations. A 972CG is a NOTICE OF PROPOSED CIVIL PENALTY. A simple way to prevent this costly penalty is to verify that your information is correct prior to filing.
Levy: A tax levy, under United States Federal law, is an administrative action by the Internal Revenue Service under statutory authority, generally without going to court, to seize property to satisfy a tax liability. The levy "includes the power of distraint and seizure by any means".
Limited liability company (LLC): An LLC is a corporate structure where members cannot be held accountable for the company’s debts or liabilities. This can shield business owners from losing their entire life savings if, for example, someone were to sue the company. Can be a single member (much like a sole proprietor) or a multi-member. It shares certain traits of both corporations as well as partnerships or sole proprietorships. It is not a corporation.
PATH Act: The Protecting Americans from Tax Hikes (PATH) Act was created to protect taxpayers and their families against fraud and permanently extend many expiring tax laws. The law, which was enacted in December of 2015, affects the timing of certain refunds filed before February 15, 2017.
Tax Exempt Organization Search Tool: Tax Exempt Organization Search helps users find information about a tax-exempt organization’s federal tax status and filings.
Tax Gap: The gross tax gap is the difference between true tax liability for a given tax year and the amount that is paid on time. It is comprised of the nonfiling gap, the underreporting gap, and the underpayment (or remittance) gap.
TIN: A Taxpayer Identification Number is an identifying number used for tax purposes in the United States and in other countries under the Common Reporting Standard. In the United States, it is also known as a Tax Identification Number or Federal Taxpayer Identification Number.
TIN Match Program: TIN Matching is part of a suite of Internet-based pre-filing e-services that allows “authorized payers” the opportunity to match 1099 payee information against IRS records prior to filing information returns.
Steven Mercatante is the principal and founder of TIR Consulting, LLC. He is a nationally recognized leader in tax reporting education and consulting on specialized compliance issues. He has conducted on-site consultation for corporate clients from across the world and led countless seminars and webinars for Convey Compliance Systems, IAPP, Balance Consulting, The Accounts Payable Network, Accounts Payable Now and Tomorrow, Progressive Business Conferences, The Center For Competitive Management,... View Full Profile