U.S. businesses that issue payments in the course of their trade or business are required
by federal and state law to properly identify payees, track the payments, withhold federal
and state taxes when required, file information returns and submit periodic reports
as required by the various agencies.
Payment activity that occurs throughout your business – to both U.S. and foreign payees, must
follow proper procedures to ensure that all regulatory requirements are satisfied. To comply
with the federal and state regulatory requirements, the tax department,
legal department, accounts payable, management and staff within your organization must
have a thorough understanding of those requirements, the tools, and procedures that address
all of the regulatory requirements. Federal and state regulations vary
greatly depending on the type of payment, where the payee resides or receives the income, and
the number of agencies within the federal and state regimes that require information reporting
in accordance to specific requirements.
Compliance with federal and state regulations must begin with the processes and procedures
that each business area has implemented. Various payment systems support the tracking of
payments, and the ability to generate the annual IRS file, but not capture all of the necessary
data or have functionality to meet state reporting and B-Notice requirements. Failure to be in compliance
with all federal and state regulations puts your organization at risk!
The effort to implement the necessary procedures, find a processing and reporting
solution that can centralize reportable payments across your organization, and provide
up-to-date tracking and reporting is a difficult task. So difficult in fact, that some organizations
take the risk of not complying with certain regulations, assuming that the odds are
that they will not get audited or caught. The IRS has renewed their scrutiny on issues
related to regulatory compliance and is enforcing compliance on procedures for
payments issued to US citizens, Non Resident Aliens, PCard transactions, withholding and
state requirements. Intentional failure to comply can be a costly decision!
In addition to the regulations and scrutiny our government has placed on Sarbanes-Oxley compliance, the IRS has increased their
focus and audits on 1099 and 1042-S reporting and withholding compliance. The IRS has determined that the “Tax Gap” that exists
in our country today is due in part to the failure of U.S. companies to report all U.S source income payments, properly identify
reportable transactions and the failure of taxpayers to claim all payments considered to be income.
The IRS has taken several initiatives in the effort to reduce this Tax Gap and improve compliance with the regulations:
- Close scrutiny of abatement requests – in many cases now the IRS requires proof to support reasonable cause
- More than 400+ additional agents in place for focused audits on proper documentation, withholding
and reporting of 1099 and 1042-S payments
- Organized specialized audit task forces
- Enacted legislation to require a mandatory 3% federal withholding on payments
for goods or services issued by any government entity, including state and local divisions with
spending of more than $100 million annually
- Proposed that all Businesses be required to report all service payments issued to any
corporation and apply regulatory procedures
- Incorporated 1042-S compliance in standard audits
- Incorporated a review for regulatory compliance for the use of PCards and Corporate
Credit cards with regard to payee documentation, backup withholding and information returns
- Improved communication with state agencies
- Improved income matching of information returns to payee tax returns
- Enforcement of mandatory and backup withholding compliance
