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IRS 1099 Reporting

Linda McGee, Vice PresidentCommercial Solutions Visa USA, Inc

September 20 , 2007

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Objectives of the Session

• To understand 1099 Compliance and the basics of 1099 reporting• Discuss challenges relating to 1099 reporting• Discuss and understand the QPCA Program

– Parameters of QPCA Program– QPCA Timeline– QPCA Benefits

• Discuss how US Bank delivers the information

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Reporting - The Beginning

• IRC section 6041 passed in 1942 to help fund WWII• Scope is very broad• Regulations adopted in 1950’s• TIN requirements added 1980’s

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Basic Concept

• Statute: Report when you pay anyone anything for any purpose unless you know an exception applies

• Regulations provide some exceptions– for merchandise– for freight, telephone– for corporations (unless payor is a federal agency)

• If part of a payment is reportable and part is not, report everything• When in doubt, report

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Paid or Credited

• You must report all payments made in a calendar year if total is at least $600– For cash, when given or made available– For check, when sent or made available– For card, date of transaction

• Aggregate all transactions to see if $600 or more• Challenge: Late-year transactions not billed until January but reportable for

earlier year– Run reports after January 7 2008

• Challenge: Aggregating checks and card transactions– If aggregating only have to file for those over the threshold; if not aggregating must file

all

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Merchandise/Service

• You must report all payments unless you KNOW that the payment was for merchandise

• Challenge: How to tell if card transaction was for merchandise?– review paperwork– use MCC

• IRS has released optional list of Merchant Category Codes to be used as an indicator of whether the payment was for merchandise or service

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Payees

• Report payments to all types of payees unless you know an exception applies

• Exceptions include payments to– tax-exempt organizations, – government entities– Challenge: How to tell what type of entity the payee is?

• Information provided by Visa and delivered through U.S. Bank

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Sole Proprietorships, Partnerships and LLCs

• Sole Proprietorships• No exception applies--report all service payments• Use name of the owner, not the business name• Use SSN if you can; IRS will accept EIN• Partnerships and LLCs• Report all partnership transactions• Report most Limited Liability Company transactions• LLCs not reportable if they tell you they are treated as a corporation

(and cardholder is not a federal agency)

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Names and Addresses

• Payee’s legal name--not DBA name-- is the one IRS wants• Sole Proprietor = individual’s name (1040)• Entities = name as shown on SS4 when applied for EIN• IRS prefers the legal address (one shown on taxpayer’s tax return)

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Accurate TINs

• IRS matches name/TIN combination on info return with master file• First four letters of name are critical• Some typos tolerated• If no match, “B Notice” generated • Challenge: How to ensure accuracy of TINs?

– Utilize data provided by QPCA

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B Notices—Frequent Causes

• The IRS will issue a B Notice if the payor’s name does not match the TIN on IRS files

• Frequent causes for a mismatch– DBA name used instead of sole proprietor name– Name misspelled or abbreviated– Missing TIN– TIN not 9 digits long– TIN contains alpha characters or hyphens– Paper reporting IRS scanning errors

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Payee Statements

• Must be sent to payee by January 31 or penalties apply• Extension of time (EOT) available• Penalties may apply

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Information Returns

• Due to IRS by February 28 if filing on paper or magnetically• Due by March 31 if filing electronically• Penalties apply for late or inaccurate filing• Challenge: How to meet this deadline and deal with penalty notices

– IRS Martinsburg West VA Payor Call Site– (866) 455-7438 or (304) 263-8700– 8:30 – 4:30pm EST– No Charge for Service– Anonymous

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Why Visa Sought Changes to IRS Regulations for 1099 Reporting

• Needed a method to easily determine which transactions are subject to 1099 reporting.

• Access to IRS TIN (Taxpayer Identification Number) Matching Program• Current IRS Regulations do not provide a waiver for the backup

withholding requirement on card payments.• Payment Card systems unable to meet backup withholding

requirements.• Visa Merchant Profile Database created to support the commercial card

product regulatory reporting needs.

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Fundamentals of the QPCA Program

• QPCA relieves cardholders of certain IRS burdens and opens card programs to full benefits.

– QPCA authorizes card brand companies to obtain and validate TIN on behalf of p-card customers.

– Provides a back-up withholding waiver when transacting with validated merchants.

• Only a Card Brand Company (Visa, MasterCard, American Express) can become a QPCA, NOT the Bank/Issuer.

• Currently, you should be doing exactly what you have always beendoing to comply with 1099…until IRS approves QPCA applications.

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What QPCA is Not

• QPCA does not create more Form 1099-MISC requirements or hurdles for purchasing card customers

– Provides resources, clarity, and a framework to comply

• Nothing changes until a QPCA exists– The reporting requirements are the same

– P-Card customers should currently do the same thing they have been to comply

• QPCA is NOT mandatory for either cardholders or the Card Associations

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QPCA Definition

• Qualified Payment Card Agent (QPCA) is an IRS designation granted to payment card organizations which meet IRS Standards surrounding:

– Data Collection– Validation– Maintenance– Distribution

• Affiliates, members, licensees (including Acquirers, Issuers, and Processors) assist the QPCA in meeting IRS requirements but are not the QPCA

• No timeframe for IRS to make determinations

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Basic QPCA Duties

• Apply to IRS• Notify Merchants about QPCA program• Notify cardholder entities about QPCA program• Process opt-out responses• Do TIN Matching• Send cardholder entity’s Merchant data reports indicating qualified vs.

non-qualified merchants• Provide telephone number for merchant and cardholder entity’s

questions• Respond to IRS audit requests

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Basic Cardholder Entity (Agency) Duties

• Opt out if so desire• If participating / monitor merchant status through reports delivered by

QPCA• If notified of a “non qualified merchant”, solicit name/TIN within 2

months• If unsuccessful in solicitation, either B/W on future transactions or stop

doing business with that merchant• You may choose to stop doing business with “non qualified” merchants. • If continued to use a non-qualified merchant must B/W, take own

money and deposit with IRS• File Information returns annually (no change)

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Basic Merchant Duties

• Provide name/TIN to Acquirer• Opt out if unwilling to have QPCA validate TIN info

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Backup Withholding Under QPCA

• Simplest way to state this rule is:

– Companies under QPCA never have to B/W on P-Card transactions unless notified by QPCA that merchant is “non qualified” and two month solicitation period expires unsuccessfully.

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Cardholder Merchant Qualification Reports

• QPCA must send reports to cardholder entities about merchant data including non-qualified merchant list

• Reports required no later than 4 months after transactions occur• Visa will report on quarterly basis – quarterly report due one month

after end of quarter

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Cardholder Merchant Qualification Reports

• Cardholder entity will receive and process merchant qualification reports

• Records data provided to use for year-end filing• Solicit “Non Qualified Merchants”

– Must do within 2 months of being notified– Solicitation must be done in accordance with current procedures

• If get TIN within 2 months—great, continue to use merchant, no B/W needed

• If not, must either B/W or stop doing business with that merchant

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QPCA – Agency Benefits

• Provides grace period before any backup withholding required• Most merchants not subject to B/W• TIN matching will be done by Visa• TIN solicitation requirements – minimal• Receives status of merchant’s TIN qualification on Form 1099-MISC

report• Expanded penalty protection by relying on QPCA’s data

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QPCA Milestones

• Presented a proposal to IRS requesting reporting and withholdingguidance for purchasing card transactions – November 1999

• IRS issues Regulations and a Revenue Procedure detailing QPCA -August 2004

• Visa submits QPCA application - March 2005• Formed a Steering Committee of largest acquirer organizations -

October 2005• Visa forms working group with Master Card and American Express to

address common issues with IRS Revenue Procedures - January 2006

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QPCA Milestones (con’t)

• Joint conference calls with card associations and IRS - April 2006 • Formal request for QPCA Project to remain in FY07 IRS Business Plan

- May 2006• IRS releases revised Regulations and Revenue Procedures with

effective date of January 1, 2008 in July 2007. Hearing scheduled for November 2007.

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The Bottom Line for Reporting Year 2007

• Questions for payor to to ask:– When was payment? – For how much?– Is the transaction for merchandise or services?– Is the merchant a corporation (except federal agencies) or other exempt

recipient?• To meet IRS requirements, you need:

– merchant’s legal name– merchant’s address– merchant’s TIN– annual totals

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Socio-Economic Reporting

• Data maintained in the Visa Merchant Profile Database• Data collected post transaction

– Use third party data providers– Austin Tetra, SBA– Not validated against CCR

• Utilize Federal designations• Some fields are a combination of “Certified and Self-Certified” data (i.e,

woman owned)• In future data will be provided to FPDS on a quarterly basis

– Excluding Minority categories

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Questions?