February 2011 Volume 3, Issue 6 Inside This Issue In the News Canadian Auto Deduction Rates..............2 AP Answers When a Vendor Does Not Provide a TIN....................3 TAPN Tools 1099 Reporting Flowchart..........................3 Did You Know? P-cards No Longer Reportable........................4 Continuing Education Opportunities.........................4 See page 4 for more details. Diamond Sponsors: Platinum Sponsors: Cocktail Reception Sponsor: Take TIN Solicitations Seriously Beginning this year, filing incorrect information returns is a significantly more costly mistake to make. Failure-tofile penalties have soared, with some as much as six times as high as they were last year. The Small Business Jobs and Credit Act of 2010, which was signed into law on Sept. 27, 2010, increased 1099 penalties across the board. Previously, the maximum allowable penalty for failing to file accurate information returns was $250,000 per organization. Starting with 1099s filed in 2011 (for payments made in 2010), the maximum penalty has skyrocketed to $1.5 million. Increased penalties mean it has never been more important to ensure that you file 1099s on time and correctly. One of the most crucial pieces of information your organization needs in order to do this is each payee’s taxpayer identification number (TIN). Obtaining a payee’s TIN is in most cases a straightforward process. Typically, accounts payable departments get the number from each payee at the start of the business relationship. However, this does not always happen. When you fail to collect an accurate TIN from your payee, there are specific steps you must take in order to avoid hefty IRS penalties. your payee’s TIN before issuing any payments. Getting it Right the First Time “If you don’t get a W-9, then you have to document how you got the Tax ID and name, when you got it, where you got it, and what you have it written on,” Foertschbeck says. “If you are doing it by telephone, then you have to establish the fact that you got the TIN and name on the telephone. Perhaps you send an email to yourself or your supervisor to establish that.” The Internal Revenue Service requires you to collect TINs from your payees before issuing payment. AP departments usually send their payees a W-9, which, when returned, should include their name and TIN. However, while issuing a W-9 as part of your welcome kit to all new vendors is a best practice, there is no IRS requirement to do so. All that is required for most payees is that you obtain a TIN when opening the account. John Foertschbeck, a CPA with consulting firm IRSCompliance, says that there are multiple ways to collect TINs from your vendors. “It can be done by telephone, it can be done by contract, it can be done through an application or some kind of agreement,” he says. “A lot of times our clients say the vendor invoice includes their [employer identification number]. But we recommend that you use a W-9 or some form of substitute W-9, which can be embedded in these contracts, applications or agreements.” Whether you have a W-9, the important thing is to document that you obtained The IRS refers to this first attempt to gather a vendor’s TIN as the initial solicitation. Having proof that you performed the initial TIN solicitation is crucial to avoiding penalties later if the payee’s TIN turns out to be incorrect or if they fail to provide one at all. Obtaining TINs from Foreign Vendors The TIN solicitation process is different when dealing with foreign payees. Foreign persons are only subject to U.S. tax reporting and withholding if they earn the income performing services inside the U.S. If they perform the services outside the country, then there is no requirement to obtain a TIN. However, you must collect a U.S.-issued TIN, Individual Taxpayer Identification Number (ITIN) or Employer ...continued on pg. 2 © Copyright 2011 Financial Operations Networks Page 2 • www.tapn.com February 2011 Card Programs Aligned continued... Missing TINs do not only refer to a vendor who failed to send you their information, but also to a TIN filled out incorrectly. All valid TINs are comprised of nine numbers. If you receive a TIN with more or fewer than nine numbers, or if one of the characters is a letter, then you must treat it as a missing TIN. AP Monthly is a publication of The Accounts Payable Network, the complete resource for executives and managers responsible for accounts payable. TAPN provides deep and comprehensive resources to help you meet your accounts payable objectives and challenges. Annual Subscription: U.S. - $129.00 Canada - $159.00 All others - $229.00 VP & Managing Editor: Rob Rogers Editor: Patrick Harbin Production Editor: Mary Arnold The Accounts Payable Network 2100 RiverEdge Parkway Suite 380 Atlanta, GA 30328 Phone: 770-984-1184 Fax: 770-984-1174 [email protected] Identification Number (EIN) when a foreign person performs services for your organization inside the U.S. Doing this means requiring foreign vendors to complete a form W-8. Unlike W-9s, W-8s are a requirement for foreign persons. Payees use the W-8 to establish their non-U.S. status and to claim a reduced withholding rate if a tax treaty exists between their country and the U.S. If you do not receive a signed W-8 with a valid U.S.-issued TIN, then you cannot apply a reduced rate. You must instead withhold the standard 30 percent on all payments. For more, see “Correct Withholding of Foreign Payments” on TAPN. Even though payments to foreign persons are not reportable when they perform work outside the U.S., Foertschbeck still recommends that you ask these vendors to complete and return a W-8. This ensures that the payee is a foreign person, and not a U.S. citizen living abroad. “U.S. citizens are taxed on their worldwide income regardless of where they are when they do the work,” Foertschbeck says. “The most important thing for you to establish is whether this person is a nonresident alien or a U.S. person living abroad. Social Security Number: 000-00-0000 “If you get the W-8 and they are a foreign person, then you don’t have to report them. If they are a U.S. person, then they fall in with all the regulations regarding TIN certifications, backup withholding, and reporting.” Individual Taxpayer Identification Number: 900-000-0000 Identifying Missing or Incorrect TINs Provided your initial TIN solicitation goes smoothly and you receive a W-9 (or other documentation containing your payee’s TIN), then you can begin paying that vendor without withholding any taxes. However, if the vendor fails to send the documentation or sends it with a missing TIN, the IRS requires you to begin backup withholding immediately. Knowing whether you have a missing TIN is actually more difficult than it sounds. Missing TINs do not only refer to a vendor who failed to send you their information, but also to a TIN filled out incorrectly. For example, a correct TIN should look like this: Employer ID Number: 00-0000000 All valid TINs are comprised of nine numbers. If you receive a TIN with more or fewer than nine numbers, or if one of the characters is a letter, then you must treat it as a missing TIN. If the payee refuses to furnish you with a copy of their TIN or gives you a “missing” TIN (incorrect format), then you must immediately begin withholding 28 percent from all payments until you receive the correct number. While missing TINs are apparent, identifying an incorrect TIN can be challenging because you will not immediately know there is a problem. Incorrect TINs are in the proper format, but do not match what the IRS or the Social Security Administration have on their records. AP departments often do not find out that they have an incorrect TIN on file until after they report payments to that vendor on a 1099. When a 1099 contains a ...continued on pg. 3 In the News Canadian 2011 Auto Deduction Rates — The Canadian Revenue Agency (CRA) has announced the 2011 automobile expense deduction limits and the prescribed rates for the automobile operating expense benefit. The rates all remain unchanged from 2009. First, the maximum taxexempt allowance employers can pay to employees for business use of a personal vehicle remains at 52 cents per kilometer for the first 5,000 kilometers driven; and 46 cents for each additional kilometer. The rate for the Northwest Territories, Yukon and Nunavut also remains 56 cents per kilometer for the first 5,000 kilometers driven; and 50 cents for each additional kilometer. Secondly, the taxable benefit for the personal portion of car operating expenses paid by employers remains at 24 cents per kilometer and 21 cents per kilometer for taxpayers primarily employed in selling or leasing automobiles. © Copyright 2011 Financial Operations Networks February 2011 www.tapn.com • Page 3 Card Programs Aligned continued... name/TIN mismatch, the IRS will send you a CP2100 or a CP2100A Notice. If you participate in the IRS online TIN matching program, you can identify name/TIN mismatches before filing 1099s. This gives you time to go back to the vendor and ask for an accurate TIN before the IRS requires you to perform backup withholding. IRS Code Section 31.3406(j)1(b) states that a TIN/Name mismatch from the TIN matching program does not constitute a notice to begin backup withholding. For more, see “IRS TIN Matching Program” on TAPN. all payments to that payee immediately. You will also have to perform an annual TIN solicitation before Dec. 31 of the same year you opened the account. Although you only need documentation of the payee’s TIN during an initial solicitation, annual solicitations require a W-9. Your backup withholding requirements continue until you receive a signed W-9 back from the vendor. If the payee fails to return the W-9 during the annual solicitation, then you must perform a second annual solicitation before Dec. 31 of the following year. Incorrect TIN Missing TIN After receiving a CP2100 or a CP2100A alerting you to a vendor name/TIN mismatch, you have 15 days to send that payee a backup withholding notice, also called a “B” Notice, along with a form W-9. This qualifies as your first annual solicitation with that vendor. If you do not receive a completed W-9 within 30 business days, then you must begin withholding 28 percent on payments. If the TIN is missing (or provided in an incorrect format), then you must begin withholding 28 percent on Even if the initial payments made to a vendor do not require a W-9 (only interest, dividends, and payments Performing Annual Solicitations In the case of a missing or incorrect TIN, the IRS requires you to perform annual TIN solicitations in order to avoid penalties. The solicitation requirements differ based on whether you received a missing TIN or if the IRS identified a name/TIN mismatch. subject to broker reporting require W-9s), obtaining a W-9 is the only way to address a “B” Notice. “If you are making payments to somebody with a W-9 on file and all of a sudden you receive a “B” Notice on them, then the W-9 you have on file is no longer good,” Foertschbeck says. “It’s trash.” If you receive notification again within three calendar years that the vendor’s TIN is incorrect, you must perform the second annual solicitation during the same period that you performed the first annual solicitation. However, you do not send a W-9. Instead, the second “B” Notice instructs the vendor to contact the IRS or Social Security Administration to obtain a certified copy of their TIN. You must continue backup withholding until you receive their certified TIN on a W-9. Following the steps presented here—including performing the appropriate TIN solicitations and backup withholding—will insulate you against filing penalties. Not following them, however, can lead to mounting costs as you face increased penalties and the increased burden of filing corrected returns. TAPN Tools 1099 Reporting Flowchart Filing 1099s is one of the single biggest headaches for accounts payable departments. One of the most daunting challenges is making sure you are following every step of the process correctly. TAPN’s 1099 Reporting Flowchart takes the guesswork out of the process. The flowchart clearly outlines each step, including what to do if your vendors fail to provide a TIN and when to perform backup withholding. In addition, the flowchart includes links to key pieces of 1099 information, such as an IRS table of reportable transactions, TAPN’s 1099 Planning Calendar, and a TAPN article on 1099 Filing Basics. Following the correct 1099 process can help protect you from costly penalties. TAPN’s 1099 Reporting Flowchart is in the “1099 Information Return Reporting Templates” section of AP Tools or at www. tapn.com/1099Tools. AP Answers Q: When a vendor does not provide a TIN, is there an easy way to verify whether it is an exempt corporation? A: If a payee fails to provide their Taxpayer ID Number, then you are supposed to begin backup withholding immediately. You should only stop backup withholding when you receive a TIN. That said, the IRS does allow you to use “the eyeball test” to presume a company is a corporation if its name includes “Corporation” or “Incorporated.” Organizations can also earn the corporate exemption if their name contains “insurance company,” “indemnity company,” “reinsurance company” or “assurance company,” if the payer has a document on file clearly indicating the payee’s corporate status, or if the payee provides a withholding certificate indicating they are a foreign corporation. © Copyright 2011 Financial Operations Networks Page 4 • www.tapn.com February 2011 Did You Know? P-cards No Longer Reportable New purchase card reporting rules take effect this year! The 2011 Instructions for Form 1099-MISC have just been released. Included in the “What’s New” section is a description of Form 1099K. This new form is where payment settlement entities will report to the IRS next year the gross amounts of payments cleared over their networks. The instructions go on to say that, because settlement will report these payments on 1099-K, there is no need for payers to report credit card, pcard, or other third-party network payments made during 2011 on form 1099-MISC. While Form 1099-K has not yet been finalized, the IRS has a draft copy on their website that payment processors can look over. In addition to highlighting the new p-card reporting rules, the 2011 Instructions for Form 1099-MISC also describe new rental property reporting requirements. Under these rules, owners of rental property that pay more than $600 in rental property expenses must now report those on a 1099. Previously, individuals receiving income from a rental property were not considered participating in a trade or business. A new law taking affect this year changes that. Finally, the 2011 instructions also announce the end of a pilot program that previously allowed payors to truncate individual taxpayer identification numbers. Starting with payments made in 2011, 1099 filers must again show the payee’s entire TIN on the document. While the rental property and TIN truncation provisions serve to make 1099 filing a bit more difficult than in previous years, the announcement of Form 1099-K reduces the burden for many organizations. However, with the elimination of the corporate and property exemptions coming up next year, the relief may only be short lived. Continuing Education Opportunities Earn CEUs for Certification TAPN AP Leadership Conference When: Monday, April 11, 2011 to Wednesday April 13, 2011 Where: The Ritz-Carlton, Buckhead Hotel — Atlanta, Ga. Sharing Solutions to Meet the New Demands of AP Live conference learning and networking opportunities Judy Bicking and Debbie Vander Bogart, highly regarded professionals in the industry and members of TAPN’s advisory board, will co-chair TAPN’s first live conference. At this premier AP event of the year you will be able to: • Get certified – there will be pre-conference training and testing programs for the AP and Information Reporting Certification Programs • Network with colleagues at the continental breakfasts, breaks, lunches and cocktail reception and hear informally what works and what doesn’t • Share ideas in roundtable discussions with your colleagues on key topics that are important to AP leaders Earn AP Certification CEUs • Learn what solutions are available to solve your AP challenges from the tabletop exhibitors • Take home best practices that you’ll pick up from the 5 general sessions, 18 breakout sessions that you can choose from and informal conversations with your peers To register for this conference call us at 866-827-6389 or visit us at www.tapn.com/LeadershipConference. © Copyright 2011 Financial Operations Networks The Essentials of Accounts Payable Training & Certification Program TAPN/IOMA Accounts Payable Certification Program This intensive, one-day training program will reveal today’s best practices for invoice handling, checks, 1099s, e-Invoicing, audits— all the tasks of today’s multi-tasking AP specialists and managers. Upcoming sessions: San Diego • March 16, 2011 Atlanta • April 11, 2011 Chicago • May 2011 Exact 2011 dates and locations are being finalized. More information will be available shortly. To register for this conference call us at 866-827-6389 or visit us at www.tapn.com/ APSeminars.
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