© 2011 Financial Operations Networks LLC

The Critical Role of AP in 1099/1042-S Regulatory Compliance

John Foertschbeck, CPA Lynda Foertschbeck IRSCompliance, Inc.

Tuesday, April 12, 2011

Accounts Payable

Accounts payable is the one common department that exists in all organization’s • Accounts payable is the most important connection to the vendor — Opens account with vendor — Has the opportunity and the responsibility to know the vendor and certify their tax information such as TIN (TIN = Tax Identification Number), name and tax status — Controls the flow of the first payment and continuing payments — Has continuing communication with vendor — Focus of attention by the IRS — Must understand regulatory requirements — Understand the relationship of the payment process and data collected/retained on the payment and understand the vendor master data collected/maintained for vendors www.TheAPNetwork.com Page 2

Accounts Payable

(Cont’d.)

Accounts payable is the one common department that exists in all organization’s

(Cont’d.)

• Increase efficiencies and effectiveness of payment processing, maintain the vendor master and apply regulatory procedures consistently with regard to the issuance of payments • Must identify payees as

U.S. or foreign vendors

—

U.S. vendors (U.S. citizens and resident aliens):

• Determine if payee is U.S. if the payment is reportable • Determine if the payee has provided their TIN, name and tax status and if that information has been accepted • If the payee has not provided the information – withhold 28% federal tax • State withholding may also apply www.TheAPNetwork.com Page 3

Accounts Payable

(Cont’d.)

Accounts payable is the one common department that exists in all organizations

(Cont’d.)

• Accounts payable operations — Compliance in this area can directly impact officers of the company should significant failures in withholding and/or reporting occur — Non-compliance can become public knowledge and impact shareholders — Knowledge of an existing failure can lead to “Intentional Disregard” if the problem was known and not addressed —no limit on penalties!

— Continuing education empowers your department to comply with changing regulations www.TheAPNetwork.com Page 4

Accounts Payable

(Cont’d.)

• Foreign payees — Determine whether foreign vendors earned

U.S. source

determinable income and

how much

fixed or U.S. source income they earned —

Obtain documentation

from foreign vendors who earned U.S. source fixed or de terminable income • Form W-8 • Validate the information provided by the foreign payee on the W-8 • Must include a U.S.-issued TIN • If W-8 is completed correctly and includes a U.S. TIN and if tax country declared has treaty with the U.S., withhold the rate of tax specified in the treaty for the type of income paid www.TheAPNetwork.com Page 5

Accounts Payable

(Cont’d.)

• Foreign payees

(Cont’d.)

— For each type of income paid a completed W-8 is required — Additional documentation may be acceptable — When are you required to withhold 30%?

• When the payee does not provide or provides an incomplete Form W-8 • The Form W-8 does not include a U.S.-issued TIN • The tax country of the foreign payee does not have a treaty with the U.S.

• The tax country has a treaty with the U.S. but does not provide for a reduced rate of withholding for the type of income paid • The Form W-8 has expired (3-year rule) • There has been a change in the status of the foreign payee which invalidates the existing Form W-8 www.TheAPNetwork.com Page 6

TIN Solicitations

U.S. resident and non-resident aliens • Payers are required to withhold 28% if the payee fails to provide a TIN or a certified Form W-9, and the payer can be reasonably assured that the payee is a U.S. resident • A payer or withholding agent is required to withhold 30% on any payment made to a payee who is a

foreign person

, if the payer cannot establish that the payee is a foreign person entitled to a reduced rate of withholding (Form W-8 or other information) • In general, if you receive a Form W-9 from the payee, you will report this information on a Form 1099. If you receive a Form W-8, you may have to file a Form 1042-S and withhold under the rules applicable for payments made to a foreign person www.TheAPNetwork.com Page 7

TIN Solicitations

(Cont’d.)

• Form W-8 Series: — Form W-8BEN: Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding — Form W-8 ECI: Certificate of Foreign Person’s Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States — Form W-8EXP: Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding — Form W-8IMY: Certificate of Foreign Intermediary, Foreign Partnership, or Certain U.S. Branches for United States Tax Withholding • Form 8233 – Exemption from Withholding on Compensation for independent (and certain dependent) personal services of a non-resident alien individual www.TheAPNetwork.com Page 8

Important Facts

• Form W-9 must contain the payees signature and contain specific statements per IRS regulations —Can be scanned or faxed —Is valid until you have reason to believe the payee’s information is incorrect —Any change in payee’s status (address change to a different country, Name, TIN or Status) requires re-certification —A U.S. payee may have a foreign address —U.S. payees are taxed on their worldwide income—must report on a 1099 —A U.S. payee could become a foreign payee www.TheAPNetwork.com Page 9

Important Facts

(Cont’d.)

• • Form W-8 must be the original document and contain a “wet” signature • Address change which includes a change in country requires re-certification • A Form W-8 may be required for each type of income paid and/or for each tax country declared

Electronic Form W-8 and Form W-9

may be allowable for your specific company if a MOU (Memo of Understanding) is obtained from the IRS • Proper withholding is required on payments to foreign payees and aggressively enforced by the IRS • U.S. state withholding if the U.S. source income was earned in requiring states • Form W-8 certifications generally expire every 3 years and must be re-certified www.TheAPNetwork.com Page 10

Important Facts

(Cont’d.)

• Withholding payments while waiting for TIN certification —

Cannot

avoid withholding on reportable payments issued to foreign payees — Withholding payments to U.S. payees may violate state law and penalties and interest may apply for failure to pay timely • In addition to determining federal reporting requirements, you must also determine the state requirements to file and withhold state tax — The state tax is determined by the type of payment — Several states have requirements in addition to annual requirements — States obtain copies of returns filed to cross-check payer compliance and the payees compliance in claiming income earned www.TheAPNetwork.com Page 11

The “Holy Grail”

The “Holy Grail” of documenting payees, reporting and withholding requirements: • Payment origination • Identifying payee • TIN and name solicitation/certification of the payee • Reporting and withholding requirements apply to federal and most states • Backup withholding requirements www.TheAPNetwork.com Page 12

Basics for Compliance with the Reporting Requirements

• Establishing procedures and documenting reasonable cause • Compliance with TIN solicitation and certification requirements • Reporting and maintaining TIN compliance history • Withholding when required • Information reporting to the IRS and states • Documentation – record keeping www.TheAPNetwork.com Page 13

Form Types Required

• W-2 • 1098 • 1098-C • 1098-E • 1098-T • 1099-A • 1099-B • 1099-C • 1099-CAP • 1099-DIV • 1099-G • 1099-H • 1099-INT • 1099-K www.TheAPNetwork.com • 1099-MISC • 1099-SA • 1099-OID • 1099-PATR • 1099-Q • 1099-R • 1099-S • 5498 • 5498-ESA • 5498-SA • W-2G • 1042-S • 3921 • 3922 Page 14

IRS Focus

• The IRS estimates that for each dollar invested in enforcement it will return four dollars in additional enforcement revenue • IRS conducting “full” information and withholding/ deposit history www.TheAPNetwork.com Page 15

IRS Focus

(Cont’d.)

• Improving workload selection techniques in examination and collection. Some examples of these improvements include: ― Increased efficiency of LMSB examination process • Improve identification of risks • Enable earlier issue resolution • Reduce audit cycle time ― More than 4,000 additional agents hired ― Resolve simple cases quickly ― Maintenance of audit coverage for large organizations ― Expedite compliance checks to place returns with agents more quickly ― Processes and procedures examined – including card transactions www.TheAPNetwork.com Page 16

IRS/State Reporting Relationships

• Combined Federal State (CFS) reporting program • Only eight forms ― 1099-DIV ― 1099-INT ― 1099-OID ― 1099-R — 1099-G — 1099-MISC — 1099-PATR — 5498 • States may require less or more than the above forms or different thresholds than federal • States may have exceptions to inclusion in CFS reporting such as state tax withheld, independent contractor reporting or quarterly reporting • CFS

does not address

resident/non-resident payment state reporting • Quarterly and independent contractor reporting requirements www.TheAPNetwork.com Page 17

TIN Compliance, Backup Withholding, “B” Notices and Penalties

www.TheAPNetwork.com Page 18

Backup Withholding

• Payers making certain payments to payees are required to withhold and remit to the IRS a percentage of those payments under certain conditions • Payments subject to backup withholding (Section 3406 of the IRC) • The tax withheld must be remitted to the IRS as federal income tax withheld • “B” Notices and payee’s failure to provide correct name and TIN www.TheAPNetwork.com Page 19

When is Backup Withholding Required?

• The payee has failed to provide a TIN or a certified TIN where required • You are notified by the IRS that the TIN provided by the payee is incorrect. This is known as the “B” Notice on the following forms: ―1099-B ―1099-DIV ―1099-INT — 1099-MISC — 1099-OID — 1099-PATR • You are notified by the IRS that the payee is an under reporter of income. This is known as a “C” Notice for the following forms: ― 1099-DIV — 1099-INT www.TheAPNetwork.com Page 20

“B” Notice

• CP2100/CP2100A are mailed to the payer based on EIN ― CP2100: magnetic format ― CP2100A: paper format • List of missing, not currently issued or TIN/name mismatches ― Missing TIN: none provided ― Not currently issued: not issued, less than nine numeric, redundant characters or alpha characters or ― TIN/name mismatch: TIN/name combination does not match the IRS or SSA files www.TheAPNetwork.com Page 21

TIN Solicitation Guidelines

• If you do not receive a Form W-9 or Form W-8, you must determine whether the payment should be treated as if it was made to a U.S. person or a foreign person.

• Use your history of compliance with regard to due diligence. You must keep a record of the solicitations made to each payee. This history may assist you in establishing “reasonable cause” and abate penalties.

• “Know your Vendor!” www.TheAPNetwork.com Page 22

The TIN Penalty Program (972CG)

• Penalties assessed for the following: ― Not filed in a timely manner ― Not filed on the required media ― Filed with incorrect information, missing or incorrect TINs • Applies to most Form 1099 series, Form 1098 series and Forms W-2 • 1099-R included in penalty notice since 1999 • W-2 included in penalty notice since 2004 www.TheAPNetwork.com Page 23

Compliance

TIN compliance – ensure that your process supports: • The tracking of pertinent TIN and name certification activities and dates for each payee • Function that allows you to match the CP2100 “B” Notice file to your

current

payee master file and record supporting abatement information • Generate appropriate notices and solicitations for payee/ account matches to CP2100 or 972CG • Function that allows you to match the 972CG notice to your

current

master file and TIN compliance history for supporting abatement information • Based on response (or lack thereof) initiate backup withholding and record current status www.TheAPNetwork.com Page 24

Compliance

(Cont’d.)

TIN compliance – ensure that your process supports:

(Cont’d.)

• Ability to initiate backup withholding for applicable states • Can address penalty notices that include records for Form 1099-R disbursements, generate the appropriate forms and initiate the correct wage withholding process • Can address penalty notices for Form W-2 that are present due to late filing or incorrect return media • Retains current withholding status and TIN/name information for all payee/accounts www.TheAPNetwork.com Page 25

Record Keeping

Document, document, document… Your internal record-keeping process should include the current tax year and at least three prior tax years filed. This information can be crucial in the possible abatement of penalties. The history information that should be retained for each of your payee/payment records includes: • W-9 or W-8 series solicitation history related to mailings, certification and location • First and Second “B” Notice history mailings to clients, dates, or other action taken if no response • Correction activity • Backup withholding history and status • “C” Notice history mailings to clients, including effective dates of withholding, resolution date and stop withholding dates, federal and state filing history www.TheAPNetwork.com Page 26

Requirements for Record Keeping

• It is critical that you retain the appropriate documentation relative to information returns filed with the IRS to assist you in the waiver or abatement of any penalties that you may be assessed. Returns can be filed erroneously for several reasons, therefore, you must record the types of corrections, when they occurred, and retain supporting documentation. • Your returns may have been filed with incorrect data regarding: — Payee TIN — Payee name — Payee address — Return type indicator — Dollar amount(s) — Combination of incorrect fields www.TheAPNetwork.com Page 27

IRS Compliance Reviews

• The IRS may conduct a compliance review of information forms that the IRS requires business owners to file and maintain. This may include Forms 940s, 941s, 945s, W-2s, 1099s, 1042-S or W-4s. This compliance check is not an audit or an examination. However, depending on the results of the compliance check, the IRS may initiate an examination or audit. • The IRS can make compliance checks as often as the facts and circumstances warrant. No penalties are associated with or as a result of the compliance check.

www.TheAPNetwork.com Page 28

State Reporting Compliance

• Is each payment reviewed systematically or manually to determine the state reporting guidelines that may apply?

• Do you examine both state resident and nonresident reporting criteria?

• Do you file state returns directly to the state by the required due date for the applicable state?

• Do you report the information on the correct media and in the format required by the state?

• Are original and corrected returns filed with the states that have reporting requirements?

• Do you file using Combined Federal State (CFS) program with the IRS?

• Do you comply with the additional direct reporting requirements of CFS states?

www.TheAPNetwork.com Page 29

State Reporting Compliance

(Cont’d.)

• If applicable, are you complying with the requirements to report independent contractors to the states that now require such reporting? • If applicable, are you complying with current year, quarterly or periodic state reporting/withholding requirements? • Does your current process track and report payments to U.S. territories as required?

www.TheAPNetwork.com Page 30

The Legal Stuff

"Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer for the purpose of avoiding any penalties that may be imposed on the taxpayer by a governmental taxing authority or agency."

www.TheAPNetwork.com Page 31

If you have further questions: John Foertschbeck, CPA (410) 734-0590 [email protected]

Lynda Foertschbeck (410) 734-0580 [email protected]

IRSCompliance, Inc.

www.irscompliance.org

Thank You!

© 2011 Financial Operations Networks LLC