March 26, 2010

TO: Distribution

FROM: Burt, Staples and Maner, LLP

RE: Vendor Payment Reporting Significantly Expanded

The Patient Protection and Affordable Care Act amends § 6041 (Form 1099-MISC reporting) in two ways: (1) it requires reporting of payments made to corporations, other than tax-exempt corporations, by treating them as non-exempt recipients; and (2) it requires reporting of payments made for property by adding the phrases “amounts in consideration for property” and “gross proceeds” to the list of reportable items. The changes represent a significant expansion of information reporting, with the burden falling on the accounts payable function.

What does this mean? It means that if your firm is engaged in a trade or business, it will be required to make an information return and provide payee statements if it makes payments of $600 or more to a vendor, including a corporate vendor, for property or services. You will also have to obtain an EIN or backup withhold on those payments.

When does the amendment to § 6041 become effective? The new rules apply to payments made on or after January 1, 2012.

Does the amendment to § 6041 affect broker proceeds reporting for securities and dividend and interest reporting? Gross proceeds, interest, and dividends paid to corporations continue to be exempt from reporting under the specific provisions applicable to those payments (§§ 6042, 6045 and 6049). The amended version of § 6041 is, however, broad enough to require those items to be reported under its provisions even though reporting would be excluded by the sections that relate specifically to those items. The Joint Committee on Taxation Technical Explanation, nevertheless, states that “[amended § 6041] does not override specific provisions elsewhere in the Code that except certain payments from reporting, such as securities or broker transactions as defined under section 6045(a) and the regulations thereunder.” The regulations under § 6041 will hopefully follow the Technical Explanation so that gross proceeds, interest and dividends excepted from the specific reporting provisions that apply to those items are not required to be reported under § 6041, but the issue bears watching.

Do I have to report vendor payments for goods and services to a corporation if I pay with a credit card or through an accounts payable contractor? There is no clear answer, yet. Corporations are subject to reporting under § 6050W so the possibility of double reporting under §§ 6041 and 6050W exists. The proposed regulation under § 6050W would minimize the problem somewhat because it states that if a payment is made by “payment card” (e.g., credit card), the payor (the recipient of the goods or services) does not have to report the payment because it will be reported by the payment card company. The exception to reporting does not apply, however, to payments made through “third-party settlement networks,” such as accounts payable contractors. How the final §§ 6041 and 6050W regulations will treat the overlap between those sections is another issue that bears watching.

Are there any exceptions for payments to widely-held corporations or foreign corporations? The legislation does not grant relief for payments to widely-held or foreign corporations. The Technical Explanation is silent on this matter as well. It is difficult to see what reporting in these situations would achieve, however. Future regulations will hopefully carve out a corporation that has a sufficient number of shareholders to ensure the accuracy of its books and a foreign corporation that is not subject to U.S. taxation.

Why was the change made? The Technical Explanation does not state a reason for the changes, but the taxpayer advocate and others have been calling for some time to have reporting on payments for goods and services made to corporate independent contractors as a way to reduce the tax gap arising from the cash economy.

What do I need to do now? You should make sure that your accounts payable people are aware of the changes. The changes may require your firm to modify its vendor master and/or your tax reporting tool. You should also take the new reporting requirements into account as you develop implementation plans for the various information and withholding provisions that come into effect over the next few years (e.g., basis reporting on securities and reporting and withholding under the new FATCA provisions (see www.bsmlegal.com/FATCA.asp.) You should also consider how to approach the government and encourage them to limit reportable transactions to situations where the information is useful to the IRS while keeping reporting burdens to a minimum.

How can I stay abreast of these changes? Please visit the BSM website (www.bsmlegal.com) for client letters and/or Compliance Technologies International, LLP for operational and systems guidance (www.cticompliance.com).