Take Time Now to Prepare for New Tax Form Filing Rules
By Irene Wachsler, CPA, MBA
While 2012 may sound far off, its not too early for nonprofits to prepare their accounting systems to track all payments over $600 during a calendar year to any vendor in advance of filing the required 1099 tax forms.
When Congress passed the 2010 Patient Protection and Affordable Care Act, one provision of this law was to require all businesses, including nonprofit organizations, to submit the Form 1099-MISCs to any vendor who was paid $600 or more during the calendar year.
Most organizations already submit 1099s for individuals and independent contractors who perform specific services. However, this law expanded the 1099 requirement to include all non-exempt vendors (i.e., office supply stores such as OfficeMax, Staples, W.B. Mason, University Stationary, etc.).
Businesses, including nonprofit organizations, are not required to submit the form 1099-MISCs to exempt vendors (i.e., other nonprofit organizations) and government agencies (i.e., Mass. Turnpike Authority).
Also, this past May, IRS Commissioner Doug Shulman indicated in his remarks before the American Payroll Association and the American Accounts Payable Association that transactions conducted using credit and debit cards may not be required to file a 1099. The primary reason for this waiver is because the merchant card vendors are already required to file 1099s for all card purchases (i.e., debit, credit, etc.) and the IRS is concerned about the potential double-reporting of income.
The effective date for the new 1099 reporting requirement is for all payments starting on January 1, 2012.
This means that each organization must file a 1099 for most payments made during 2012. Even though this date is more than a year away, organizations should start planning to implement and/or update their processes now to ensure a smooth transition in order to meet the new reporting requirements.
Why is the IRS Expanding the Information Reporting Requirements?
The IRS believes that third-party information reporting is a powerful tool to maintain taxpayer compliance. The new 1099-MISC reporting requirement is simply another tool in the IRS arsenal to detect underreporting of income.
What Types of Information Do I Need to Keep Track Of?
Consider the following examples. What will your organization have to report to the IRS in order to comply with the new informational reporting requirements?
Each Friday, the executive director purchases donuts & coffee for the office from Annies, local coffee shop. She spends an average of $15 each week. Annually, this cost is budgeted at $750. Since the organization spent more than $600 in a calendar year of goods from Annies, as the informational reporting provision stands now, the organization must issue a Form 1099-MISC to Annies.
An organization decides to send four employees to training in New York City. The organization purchases four round-trip tickets, totaling $320, from Greyhound. Since the organization spent less than $600 in a calendar year for services from Greyhound, the organization does not have to issue a Form 1099-MISC.
An organization uses its credit card to purchase a computer costing $1,200 from Best Buy. Even though the organization spent more than $600 in a calendar year for goods from Best Buy, based on IRS Commissioner Doug Shulmans remarks, it is most likely that the organization will not have to issue a Form 1099-MISC to Best Buy.
John is the program manager for the organizations Workforce Development Program. His expertise is in high demand and he frequently travels throughout New England offering two-day workshops. John pays upfront for his travel expenses and then he submits an expense report for reimbursement of his expenses. To comply with the new information reporting requirements, the organization must issue a Form 1099-MISC to any vendor whose total purchases for goods and services exceeds $600 in the calendar year.
Suppose that John is a member of the Marriott Rewards program and he tries to stay at a Courtyard Marriott whenever possible. If John charged his hotel expenses, then the organization does not have to issue a Form 1099-MISC. If, on the other hand, John paid his hotel bill by cash or check and this aggregate amount exceeds $600 in the calendar year, as the provision stands now, the organization must issue a Form 1099-MISC to the Courtyard Marriott.
The organization purchases its office supplies from ABC Office Supplies Inc. ABC refuses to provide the organization with its federal tax ID. Before the organization pays ABC, the organization must withhold 28% of the monies owed to ABC Office Supplies and remit this amount to the IRS. If the organization paid ABC more than $600, as the provision stands now, then the organization must issue a Form 1099-MISC to ABC Office Supplies.
What Happens if an Organization does not Comply with the New Reporting Requirements?
If a business, including a nonprofit organization, fails to provide the required informational returns, the organization could face a $50 penalty for each informational return. This penalty could be doubled if the IRS believes that the organizations failure to comply is intentional.
There is also a $50 penalty for each informational return that contains either incomplete or incorrect information.
Practical Challenges in Implementing the New Reporting Requirements
While the new reporting requirements may present some challenges, to further complicate matters, the IRS has not addressed many situations in which it may be impractical or an administrative burden for an organization to collect the required information.
For example, Dunkin Donuts has both store-owned shops and franchise restaurants located throughout the country. Each franchise owner has their own federal tax id. To further complicate matters, some franchise owners have a separate federal tax id for each restaurant that they operate. Will the IRS require that the organization must now keep track of each separate Dunkin Donuts restaurant in which food was purchased?
Additional Factors to Consider
It will take time for each organization to update its accounting processes in order to comply with the new requirements. For that reason, it is recommend that each organization take advantage of the upcoming year in order to test and refine its processes. As a minimum, nonprofits should consider implementing one or more of the following steps:
Start to Collect W-9s from Everyone
Your organization should start collecting W-9s from everyone that it does business with - individuals, independent contractors and vendors. It is recommended that organizations withhold payments until they receive a W-9.
If one or more of the collected W-9s may contain an individuals social security number, these W-9s may be subject to the regulations covered by the new Massachusetts Privacy Act. (For more, click here.) To maintain compliance with the Privacy Act, it is recommended that organizations place W-9s in a locked area (i.e., a locked filing cabinet) and restrict access to these documents.
Write Checks to Pay Your Vendors
Paying your vendors with checks provides a much stronger internal control system than using a debit or credit card. Of course, there may be instances in which you need to use a debit or credit card to pay for a product or service (i.e., purchasing a book online at Amazon.com or buying an airline ticket to a conference). However, it is best to minimize these purchases.
Keep Track of Each Vendor for Reimbursement of All Employee Expenses
While some organizations do not require receipts for expenditures under a certain threshold, it is best if organizations require a receipt for each expense. This practice should be followed by all organizations, regardless of size.
Irene Wachsler is managing partner with Tobolsky & Wachsler CPAs LLC, which specializes in audits, reviews, and compilations for nonprofit organizations. Contact her at email@example.com or call 781-883-3174.
SUBSCRIBE FREE – Keep current with the Wednesday Report emailed to you free each week. Click here.