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Advanced Markets Case Study

Beginning next month The National Underwriter Company will begin its case series for wealth managers. The case studies will be in addition to our daily articles. Check back in September to see the new content.

The case studies have expert commentary and analysis to help wealth managers with common planning issues.

Here’s a sneak peak of what is to come…

Short-term gains carry an additional 20% tax cost over long-term gains, motivating the manufacturing of transactions designed to convert short-term to long-term gains. But as you’d expect, these transactions attract undue attention from the IRS and are often disregarded by the Service. The IRS recently considered the tax treatment of one of these gain-recharacterization schemes, a basket option contract, in a generic legal advice memorandum (AM 2010-005).

The IRS recharacterized the contract, viewing it as if the investor purchased the securities in a margin account, paying cash equal to 10% of the value of the securities and borrowing 90% of the value from the investment bank. Just as was the case with the “option,” the investor had almost total control over investment of the securities and would reap all appreciation and income from the securities, less interest and brokerage fees.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of options, see Advisor’s Main Library: G—Options and Futures.

Are you an employee or independent contractor of your firm? If you’re doing business in California and get the classification wrong, you could be in for criminal charges and up to a $25,000 fine.

California State Bill 459—which would impose strict recordkeeping requirements and severe penalties on firms that misclassify employees as independent contractors—passed the state senate on June 2. The bill moved to the Assembly and went on to a hearing at the Assembly Committee on Labor and Employment two weeks later. The bill is expected to come to a vote in the Assembly later this summer.

Under the bill, firms that mischaracterize employees as independent contractors can be subject to fines of up to $25,000. They also will be required to keep records verifying independent contractor status for at least two years or face a fine of $500 per employee and misdemeanor criminal charges.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of income taxation, see Advisor’s Main Library: Income Taxes.

Why is this Topic Important to Wealth Managers? This blogticle discusses requirements for the professional preparation of tax returns and the recent enforcement effort. The information presented below is especially important for those wealth managers who provide tax services.

Prior to January 1, 2011, any individual generally was allowed to prepare a tax return or claim for refund in exchange for compensation. An individual who prepares and signs a taxpayer’s return or claim for refund as the preparer may also generally represent that taxpayer during an examination of the taxable period covered by that return or claim for refund.

However, the IRS issued regulations which state that after December 31, 2010, in order to prepare a tax return for a fee, or to otherwise represent a taxpayer before the IRS, an individual must obtain a preparer tax identification number (PTIN).[1]

The IRS recommended increased oversight of tax return preparers through the issuance of regulations in 2010. The IRS first made findings and recommendations in Publication 4832, “Return Preparer Review,” concerning the results of an in-depth review of the tax return preparer industry. This increased oversight recommendation comes in the form of registration of PTINs.

Generally, in order to obtain a PTIN, the individual must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer. In addition, the preparer must pay an annual fee to obtain a PTIN.[2]

More than 700,000 tax preparers nationwide have registered with the IRS and obtained Preparer Tax Identification Numbers (PTINs). This nine-digit number must be used by paid tax return preparers on all returns or claims for refund.

“We owe it to all taxpayers and the many honest tax return preparers to remove the relatively small number of bad actors from the tax preparation industry,” said Doug Shulman, IRS Commissioner. “Just one unscrupulous tax return preparer can cause a lot of financial damage to both taxpayers and the tax system.”

Now the Internal Revenue Service is taking steps to stop tax preparers with criminal tax convictions or permanent injunctions from preparing tax returns. By comparing the new PTINs with a database managed by the IRS’ Office of Professional Responsibility, the IRS was able to identify 19 tax preparers who applied for PTINs and either failed to disclose a criminal tax conviction or have been permanently enjoined from preparing tax returns. A permanent injunction is a court order used by the Department of Justice to stop a preparer who repeatedly prepares erroneous or fraudulent federal tax returns.

The IRS has sent letters to all 19 individuals proposing revocation of their PTINs. Preparers facing revocation have 20 days to file a written response and provide supporting documentation as to why their PTIN should not be revoked.

With the end of the tax filing season, the IRS also will initiate a review of tax returns that were prepared by a preparer who used an identifying number other than a PTIN, did not use any identifying number, or did not sign tax returns they prepared. The agency will send notices to those preparers who used improper identifying numbers. The IRS is also piloting methods to help identify returns that appear to be professionally prepared but are unsigned by the preparer.

“Hundreds of thousands of tax return preparers, the vast majority, play by the rules every filing season. The IRS is committed to ensuring they have a level playing field,” Shulman said. “Compliance with regulations that require the signing of a tax return by a paid preparer and use of the PTIN is central to our enforcement effort.”

The IRS is still registering approximately 2,000 preparers a week. The PTIN registration is the first step in a multi-year effort by the IRS to provide standards for and oversight of the tax preparation industry. Starting this fall, certain paid preparers will be required to pass a new competency test. The IRS will also conduct background checks on certain paid preparers. Additionally, expected to start in 2012, certain paid preparers must have 15 hours of continuing education annually.

Certified public accountants, attorneys and enrolled agents are expected to be exempt from the competency testing and continuing education requirements because of similar professional standards already applicable to those groups.

Tomorrow blogticle will continue to address issues surrounding the private wealth management practice.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[2] Treasury Regulations §1.6109-2(d).

Why is this Topic Important to wealth managers? General classification and taxation of insurance professionals is governed by statute.  Therefore, a basic discussion of the law as it applies to wealth managers and tax is presented below.

Generally speaking common law classifications have determined under which circumstances an individual will be treated as an employee versus an independent contractor for tax purposes. Nevertheless, under statute, an individual who meets the legal common law definition of an independent contractor may still be considered an “employee” for tax purposes. “Independent contractors” who are classified statutorily as “employees” are usually referred to as “Statutory Employees”.  As the name implies, Congress created a law that states some individuals who would normally be considered independent contractors under common law are treated as employees for all purposes relating to the tax code.  Among the categorization of “Statutory Employees”, according to the Code is “full-time life insurance salesman.” [1]

A full-time life insurance salesman means “[a]n individual whose entire or principal business activity is devoted to the solicitation of life insurance or annuity contracts, or both, primarily for one life insurance company”. [2] The Treasury Regulations state that a full time life insurance salesman “ordinarily uses the office space provided by the company or its general agent, and stenographic assistance, telephone facilities, forms, rate books, and advertising materials are usually made available to him without cost.” [3]

On the contrary, an individual is not considered a full time life insurance salesman when he “is engaged in the general insurance business… the individual’s principal business activity” is not the, “solicitation of life insurance or annuity contracts, or both, for one company”.[4] Likewise, “any individual who devotes only part time to the solicitation of life insurance contracts, including annuity contracts, and is principally engaged in other endeavors, is not a full-time life insurance salesman.” [5] Also, some producer groups have contractual relationships with multiple insurance companies, so life-insurance salespeople are sometimes able to sell products for more than one company, generally excluding them from statutory employee definition.

So what’s the difference? Generally, the tax treatment of the two dissimilar arrangements is significantly different.  On the one hand employees are subject to withholding of federal income taxes on wages as well as withholding for Medicare and Social Security taxes. Generally, independent contractors operate as sole-proprietors or some incorporated or limited liability business structure.  Meeting the definition of a trade or business, generally, these individuals will have gain or loss treatment in relation to their income.

As a general rule, independent contractors will calculate taxable income by determining income minus expenses. Income in this context is included in Internal Revenue Code Section 61 “Gross Income” which includes “all income from whatever source derived,” including “compensation for services, [and] fees”. [6] Expenses or deductions from gross income for a trade or business are determined using Section 162 of the Code which states that a deduction may be taken for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”.[7]

Some expenses that the trade or business may incur include, but are not limited to:

• cost of goods sold
• compensation
• salaries and wages
• repairs and maintenance
• bad debts
• rents
• depreciation
• taxes
• travel
• interest, and
• advertising

To arrive at net taxable income, expenses are generally deducted from gross income.   The taxpayer can then determine the tax liability based on the tax rate found in IRC Section 1 or by using income and percentage charts provided by the Internal Revenue Service.

For a detailed analysis regarding independent contractors, see Tax Facts Q 814. How are business expenses reported for income tax purposes?

For a detailed analysis regarding the tax treatment of life insurance agent, see Tax Facts Q 361. Who is an owner-employee for purposes of the qualification requirements?

Tomorrow’s blogticle will continue to discuss issues related to wealth mangers and estate planning generally.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[2] 26 C.F.R. § 31.3121(d)-1.

[3] Id.

[4] Id.

[5] Id.

[6] 26 U.S.C.A. 61(a), 26 U.S.C.A. 61(a)(1).

[7] 26 U.S.C.A. 162(a)

Why is this Topic Important to Wealth Managers? This blogticle provides discussion and analysis on the alternative minimum tax and how it’s calculated in 2011. For wealth managers who are closely integrated with client planning, knowledge of the AMT and how it affects clients is integral to overall wealth management.

Present law imposes an alternative minimum tax (‘‘AMT’’) on individuals. The AMT is the amount by which the tentative minimum tax exceeds the regular income tax.[1] An individual’s tentative minimum tax is the sum of (1) 26 percent of so much of the taxable excess as does not exceed $175,000 ($87,500 in the case of a married individual filing a separate return) and (2) 28 percent of the remaining taxable excess.[2]

The taxable excess is so much of the alternative minimum taxable income (‘‘AMTI’’) as exceeds the exemption amount.[3] The maximum tax rates on net capital gain and dividends used in computing the regular tax are used in computing the tentative minimum tax. AMTI is the individual’s taxable income adjusted to account for specified preferences and adjustments.[4]

The AMT exemption amount for taxable years beginning in 2011 is (1) $74,450, in the case of married individuals filing a joint return and surviving spouses; (2) $48,450 in the case of other unmarried individuals; and (3) $37,225 in the case of married individuals filing separate returns.[5]

Generally, present law provides for certain nonrefundable personal tax credits (i.e., the dependent care credit, the credit for the elderly and disabled, the child credit, the credit for interest on certain home mortgages, the Hope Scholarship and Lifetime Learning credits, the credit for savers, the credit for certain nonbusiness energy property, the credit for residential energy efficient property, the credit for certain plug-in electric vehicles, the credit for alternative motor vehicles, the credit for new qualified plug-in electric drive motor vehicles, and the D.C. first-time homebuyer credit).

Under Sec. 202 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 [6] for taxable years including 2011, the nonrefundable personal credits are allowed to the extent of the full amount of the individual’s regular tax and alternative minimum tax.[7]

This extension of the use of nonrefundable credits replaces what would have been a much different tax treatment. In other words, the nonrefundable personal credits (other than the child credit, the credit for savers, the credit for residential energy efficient property, the credit for certain plug-in electric drive motor vehicles, the credit for alternative motor vehicles, and credit for new qualified plug-in electric drive motor vehicles) would have been allowed only to the extent that the individual’s regular income tax liability exceeds the individual’s tentative minimum tax, determined without regard to the minimum tax foreign tax credit. The remaining nonrefundable personal credits would have been allowed to the full extent of the individual’s regular tax and alternative minimum tax.

For more information on the AMT see generally AMAFX Tax Facts How is the Alternative Minimum Tax calculated?

Next week’s blogticles will present interesting planning concepts for wealth managers.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[2] IRC Sec. 55(b).

[3] IRC Sec. 55(b)(1)(A)(i)(II).

[4] See IRC Sec. 55(b)(2).

[5] IRC Sec. 55(d).

[6] Public Law 111–312.

[7] See IRC 26(a).

Why is this Topic Important to Wealth Managers? This blogticle presents discussion related to the new Health Care Act which affects both employers and employees alike. Thus, it is important for wealth managers to be informed on the changes which will begin to appear so that they may better prepare clients.

The Internal Revenue Service issued interim guidance earlier this week to employers on informational reporting on each employee’s annual Form W-2 of the cost of the health insurance coverage they sponsor for employees. The IRS emphasized that this new reporting to employees is for their information only, to inform them of the cost of their health coverage, and does not cause excludable employer-provided health coverage to become taxable; employer-provided health coverage continues to be excludable from an employee’s income, and is not taxable.

Section 9002 of the Patient Protection and  Affordable Care Act of 2010  (Affordable Care Act),[1] provides that employers are required to report the cost of employer-provided health care coverage on the Form W-2. The IRS issued a notice last fall, which made this requirement optional for all employers for the 2011 Forms W-2 (generally furnished to employees in January 2012).[2] In the newest guidance, the IRS provided further relief for smaller employers (those filing fewer than 250 W-2 forms) by making this requirement optional for them at least for 2012 (i.e., for 2012 Forms W-2 that generally would be furnished to employees in January 2013) and continuing this optional treatment for smaller employers until further guidance is issued.[3]

The new notice also provides guidance for employers that are subject to this requirement for the 2012 Forms W-2 and those that choose to voluntarily comply with it for either 2011 or 2012. The notice includes information on how to report, what coverage to include and how to determine the cost of the coverage.

Generally, Notice 2011-38 provides interim guidance on informational reporting to employees of the cost of their employer-sponsored group health plan coverage. This informational reporting is required under § 6051(a)(14) of the Code, enacted as part of the Affordable Care Act  to provide useful and comparable consumer information to employees on the cost of their health care coverage.

This reporting to employees is for their information only, to inform them of the cost of their health care coverage, and does not cause excludable employer provided health care coverage to become taxable.

Notice 2011-38 provides interim guidance that generally applies beginning with 2012 Forms W-2 (that is, the forms required for the calendar year 2012 that employers generally are required to furnish to employees in January 2013 and then file with the Social Security Administration (SSA)). Employers are not required to report the cost of health coverage on any forms required to be furnished to employees prior to January 2013.[4]

The notice also provides additional transition relief for certain employers and with respect to certain types of employer-sponsored coverage. This transition relief will continue at least through the 2012 Forms W-2 which are required to be furnished to employees in January 2013. In other words, those employers to which the additional transition relief applies (which includes smaller employers that are required to file fewer than 250 2011 Forms W-2) will not be required to report the cost of health coverage on any forms required to be furnished to employees prior to January 2014. This transition relief will continue until the issuance of further guidance by the IRS.

For additional discussion on the Affordable Care Act see Study Exposes Impact of Health Care Act’s Employer Penalties, and Health Insurance Coverage for All Americans.

The 2011 Form W-2, prior IRS Notice 2010-69 deferring the reporting requirement for 2011, and Notice 2011-28 containing the new guidance are available on IRS.gov.

Tomorrow’s blogticle will continue to discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

[2] See Notice 2010-69.

[3] See Notice 2011-28.

[4] See Notice 2010-69.

Why is this Topic Important to Wealth Managers? This discussion is focused on a hot topic in Washington and around the country.  The new 1099 reporting requirements that are expected to come into effect next year may be amended or removed all together. Wealth managers would be well served to be knowledgeable on the subject that not only affects clients and their businesses, but it also directly affects many wealth managers themselves who pay for goods and services as a trade or business. Thus, here at Advanced Markets we bring wealth managers in particular the most relevant and up-to-date information on the web.

The House of Representatives passed H.R. 4, the Small Business Paperwork Mandate Elimination Act of 2011 Thursday afternoon by majority vote (314-112, with 76 Democrats joining a unanimous House GOP).[1] The legislation, if passed by the Senate and signed into law by President Obama, would repeal an expansion currently scheduled to take effect in 2012 of information that businesses must report to the Internal Revenue Service on Form 1099.

Specifically, the new legislation would amend the Internal Revenue Code to repeal the expanded 1099 information reporting requirements on payments made to corporations, rental property expense payments, and payments for property and other gross proceeds.  The legislation would thus strike portions of section 6041 of the Internal Revenue Code which were added by the Patient Protection and Affordable Care Act of 2010 (PPA).

The PPA expanded tax information reporting requirements to require businesses to issue a Form 1099 for any payments to corporations (rather than just to individuals) and for any payments for property (rather than just for services or investment income) that exceed $600 per year per payee.  H.R. 4 would strike language requiring “amounts in consideration for property” and “gross proceeds” to be subject to 1099 reporting requirements under section 6041 of IRS Code in order to eliminate the expanded reporting requirements.  The bill would also repeal expanded information reporting requirements on rental property expense payments that are currently in effect.

According to the Joint Committee on Taxation, repealing these expanded 1099 information reporting requirements for rental property expense payments as well as certain payments of more than $600 will reduce taxes by approximately $24.7 billion over ten years. [2]

Section 6041 of the Internal Revenue Code outlines reporting requirements and generally requires information returns to be made by every person (payor) engaged in a trade or business that makes payments aggregating $600 or more in any taxable year to another person (payee) in the course of the payor’s trade or business.  The information returns must be filed with the Internal Revenue Service and corresponding statements must be sent to each payee.

Beginning in 2012, certain payments not previously subject to 1099 reporting requirements, including those made to corporations and those made for property, will become subject to the reporting requirements under the PPA.  The PPA and subsequent legislation expanded information reporting requirements of businesses for payments of $600 or more to any vendor and on rental property expense payments.  Some argue, these new requirements would likely impose a huge tax compliance burden on small businesses, forcing them to devote resources to tax filing instead of to business expansion and job creation.

Please check back with Advisorfyi and Advisorfx for more timely information on 1099 reporting.

Next week’s blogticles will present some interesting new topics including alternative risks.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[2] JCX 12-11. Estimated Revenue Effects Of The Chairman’s Amendment In The Nature Of A Substitute To H.R. 4, The “Comprehensive 1099 Taxpayer Protection And Repayment Of Exchange Subsidy Overpayments Act Of 2011,” February 16, 2011.  http://www.jct.gov/publications.html?func=startdown&id=3736.  Last Accessed March 3, 2011.

Why is this Topic Important to Wealth Managers? This topic presents a discussion on information reporting regarding nonresident aliens and domestic interest income.  Because some wealth managers work with international clients, or a family in which at least one family member like a spouse or child is foreign, it is helpful to discuss the new proposed reporting requirements as issued by the Department of the Treasury.  Having a better understanding of the reported information that will end up in the hands of the IRS will hopefully help wealth managers focus on compliance, as well as wealth preservation and growth.

The Internal Revenue Service recently released new proposed regulations regarding reporting interest payments made to nonresident aliens.  A nonresident alien is an individual who is neither a citizen of the United States nor a resident of the United States.[1] We will discuss in a later blogticle this week about how to determine if someone is either a US taxpayer or instead is a non-resident alien (not a US taxpayer).

The new proposed rules require the payor to make an information return on Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding” on interest payments aggregating $10 or more each year paid to a nonresident alien, that is otherwise reportable on a Form 1099 (interest income). [2]

The payor shall generally prepare and file Form 1042-S at the time and in the manner prescribed by the code and the regulations, for the calendar year in which the interest is paid. [3]

The IRS and Treasury Department first published, in 2001, a notice of proposed rulemaking which provided that U.S. bank deposit interest paid to any nonresident alien individual must be reported annually to the IRS. [4] Then in 2002, the Treasury Department and the IRS withdrew these regulations and proposed narrower regulations that would require reporting only on interest payments to nonresident alien individuals that are residents of certain designated countries or, at the option of the payor, on interest payments to all nonresident alien recipients of bank deposit interest. [5]

Under regulations currently in effect, reporting of U.S. bank deposit interest is required only if the interest is paid to a U.S. person or a nonresident alien individual who is a resident of Canada. [6]

The newest proposed regulations published this month withdraw previous regulations and provide proposed regulations that extend the information reporting requirement to include bank deposit interest paid to nonresident alien individuals who are residents of any foreign country.

The Treasury Department notes this extension is appropriate for several reasons:

First, since the 2002 proposed regulations were released, there is a growing global consensus regarding the importance of cooperative information exchange for tax purposes that has developed.

Second, requiring routine reporting to the IRS of all U.S. bank deposit interest paid to any nonresident alien individual is aimed to further strengthen the United States exchange of information program, consistent with adequate provisions for reciprocity, usability, and confidentiality in respect of this information.

Finally, the proposed regulations are designed to help to improve voluntary compliance by U.S. taxpayers by making it more difficult to avoid the U.S. information reporting system (such as through false claims of foreign status).

Who is concerned with the proposed enactment of these new rules?  The US financial services community including wealth management firms that have interest bearing assets of foreigners. Briefly, US financial firms think that foreigners will move their assets out of the US into other countries such as the City of London, Switzerland, Hong Kong, and Singapore) that do not have such reporting rules.  Historically, when countries have increased tax on interest, in general money does flee to other countries.  We will also cover this capital flight issue in a historical context in later blogs to provide a wealth manager a better understanding of the likely economic impact to their clients and the US economy should the new interest reporting rules inevitably be enacted.

Tomorrow’s blogticle will discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts

[2] Internal Revenue Bulletin: 2011-8; REG-146097-09.

[3] For rules regarding the preparation of a Form 1042 see Treasury Regulations §1.1461-1(b); for rules for furnishing a copy of the Form 1042-S to the payee see Treasury Regulations §1.6049-6(e)(4).

[4] REG-126100-00, 2001-1 C.B. 862.

[5] .REG-133254-02.

[6] See Treasury Regulations § 1.6049-4(b)(5).

Why is this Topic Important to Wealth Managers?  A producer should be able to present a perspective of the potential impact of current budget proposals upon investments that will be realized in the future.  Thus, Advanced Market Intelligence discusses certain features to the proposed federal budget that impact fiscal year 2012.

The President’s new budget proposal included many revenue raising measures.  However, below are two areas affecting the tax code that will actually increase the deficit, and also have a strong likelihood to have an impact on clients’ decisions made today.

Currently, the maximum rate of tax on the qualified dividends and net long-term capital gains of an individual is 15 percent. [1] In addition, any qualified dividends and capital gains that would otherwise be taxed at a 10- or 15-percent ordinary income tax rate are taxed at a zero percent rate.

The zero- and 15-percent rates for qualified dividends and capital gains are scheduled to expire for taxable years beginning after December 31, 2012. [2] In 2013, the maximum income tax rate on capital gains would increase to 20 percent (18 percent for assets purchased after December 31, 2000 and held longer than five years), while all dividends would be taxed at ordinary tax rates of up to 39.6 percent.

Taxing qualified dividends at the same low rate as capital gains for all taxpayers is said to reduce the tax bias against equity investment and promote a more efficient allocation of capital.  Eliminating the special 18-percent rate on gains from assets held for more than five years is thought to further simplify the tax code.

The Administration’s revenue baseline budget assumes that the current zero- and 15-percent tax rates for qualified dividends and net long-term net capital gains are permanently extended for middleclass taxpayers.   In addition, the proposed budget would apply a 20-percent tax rate on qualified dividends that would otherwise be taxed at a 36- or 39.6 percent ordinary income tax rate.  This is the same rate as will apply to net long-term capital gains for upper-income taxpayers under current law after 2012.  The reduced rates on gains from assets held over five years would be repealed.  The special rates applying to recapture of depreciation on certain real estate (Section 1250 recapture) and collectibles would be retained.

This proposal would be effective for taxable years beginning after December 31, 2012, and would increase the deficit by $9.582 billion in 2013.

Secondly, the President’s budget calls for the repeal of information reporting on payments to corporation and payments for property (an issue that has been the topic of much discussion lately).

Generally, a taxpayer making payments to a recipient aggregating to $600 or more for services or determinable gains in the course of a trade or business in a calendar year is required to send an information return to the Internal Revenue Service setting forth the amount, as well as name and address of the recipient of the payment (generally on Form 1099). [3] Under a longstanding regulatory regime, there were certain exceptions for payments to corporations, as well as tax-exempt and government entities.  Also, this information reporting requirement did not apply to payments for property.

Effective for payments made after December 31, 2011, the Affordable Care Act expanded the information reporting requirement to include payments to a corporation (except a tax-exempt corporation) and payments for property.  [4]

Generally, compliance increases significantly for payments that a third party reports to the IRS.  In the case of payments to tax-exempt or government entities that are generally not subject to income tax, information returns may not be necessary.  On the other hand, during the decades in which the regulatory exception for payments to corporations has become established, the number and complexity of corporate taxpayers have increased.  Moreover, the longstanding regulatory exception from information reporting for payments to corporations has created compliance issues.   In addition, the expanded information reporting requirements imposed by the Affordable Care Act is expected to put an undue burden on small businesses.

The proposed budget would repeal the additional information reporting requirements imposed by the Affordable Care Act.  Further, the proposal would require businesses to file an information return for payments for services or for determinable gains aggregating to $600 or more in a calendar year to a corporation (except a tax-exempt corporation).  Information returns would not be required for payments for property.

This proposal would be effective for payments made after December 31, 2011, and have a net increase of the deficit in 2012 of $475 million.

Tomorrow’s blogticle will continue with discussion on the national budget.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts

[2] See Section 102 of The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (HR. 4853).

[3] See Internal Revenue Code Section (IRC) 6041, Treasury Regulations (TR) 1.6041-1(a)(1)(i), TR 1.6041-1(a)(2).

[4] See Patient Protection and Affordable Care Act, 124 Stat. 1029.  §9006 (a).