As we close out one year and begin a new one, we announce our Tax Top Ten List of 2019. This is our list of prominent tax information reporting and withholding events from 2019 that we think will continue to impact us in 2020. Plus, a few year-end news items: new section 871(m) transitional relief, passage (finally) of tax extenders that include deduction of mortgage insurance premiums (which affects reporting on Form 1098), the enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the release of certain final withholding and reporting tax regulations.
First, these headlines from December.
A. IRS Extends Transitional Period for Certain Section 871(m) Rules
In December, the IRS released Notice 2020-02, which extended for two additional years (through 2022) the section 871(m) transitional rules that were first announced in 2016. The transitional rules defer the application of some of the more complicated section 871(m) dividend equivalent withholding rules.
For example, under the transitional relief, only delta-one derivatives (the value of which moves in a 1:1 ratio with the value of the underlying referenced stock) are in-scope for section 871(m) until January 1, 2023. In addition, the simplified “combined transactions” rule continues to apply through 2022, requiring withholding agents to combine transactions for section 871(m) classification purposes only if they are over-the-counter transactions that are priced, marketed or sold in connection with each other. Actual dividends, moreover, paid to a Qualified Derivatives Dealer or QDD remain exempt from withholding during the transition period, and the Qualified Securities Lender or QSL regime is extended through 2022.
More information on Notice 2020-02 may be found on our tax blog.
B. Mortgage Insurance Premiums and Form 1098 Reporting
Spending bills passed by Congress and signed into law in December included the passage of certain tax extenders that have been pending for two years. Among the extenders was the renewal of the deduction for mortgage insurance premium (MIP), which is now extended through December 31, 2020 and is retroactive to January 1, 2018. Since reporting of MIP on Form 1098 is tied to the eligibility for such deduction, the extension impacts Form 1098 reporting.
C. SECURE Act
The spending bills enacted into law in December also included what is known as the SECURE Act, which provides significant changes to retirement savings rules. Reporting teams engaged with tax reporting for retirement arrangements such as IRAs may need to review the SECURE Act provisions to assess impact to current processes that lead into tax reporting. For example, changes to required minimum distribution (RMD) rules may require adjustment to processes that lead to RMD reporting.
D. IRS Issues TD 9890 Finalizing Certain Withholding and Reporting Tax Regulations
A few days before year-end, the IRS also released Treasury Decision 9890. TD 9890 finalizes certain tax withholding and reporting regulations issued as temporary and proposed regulations in 2017 and as proposed regulations in 2018. These final regulations cover foreign TIN solicitation requirements (as modified by Notice 2017-46 and Notice 2018-20), withholding statements, electronic signatures, third-party repositories, treaty statements, and issues relating to hold mail instructions.
The regulations, as finalized, appear substantially the same as previously proposed or announced, with a few areas where the IRS seems to have provided additional flexibility. For example, the final regulations allow a withholding agent to obtain an FTIN on a separate written statement even for Forms W-8 signed on or after January 1, 2018 and provide more flexibility for a withholding agent to conclude that a withholding certificate has been signed electronically.
E. Tax Top Ten List of 2019
There’s little more exciting to round out a year of tax information reporting and withholding news items than putting together our Tax Top Ten List of 2019. Here are our picks for significant tax news items from 2019 that we think will continue to impact us in the coming year.
1. Section 1446(f) Proposed Regulations
Proposed regulations issued in spring 2019 would require brokers to withhold on sales of publicly traded partnership interests. These regulations are expected to be finalized in 2020.
2. Crypto Tax Guidance
IRS issued Notice 2019-24 and new crypto tax FAQs in October 2019, providing the first IRS crypto tax guidance in 5 years. Among other things, the new guidance provides some parameters for calculating cost basis for crypto assets and, to the consternation of some, stated that crypto “hard forks” may be taxable.
3. Crypto Enforcement
In addition to the crypto guidance, letters to taxpayers sent in summer of 2019 and the addition of a crypto question on Schedule 1 to Form 1040, IRS has listed information reporting guidance (gross proceeds reporting) as a new item on its priority guidance plan. This indicates that the IRS is ramping up crypto tax enforcement and recognizes that third-party information reporting is a key component to its enforcement efforts. Guidance relating to Form 1099-B reporting on crypto sales may be coming as soon as 2020.
4. Section 871(m) Transition Relief
Released in December 2019, IRS Notice 2020-02 extends the transitional period for certain of the more complicated section 871(m) rules for two years through 2022. We remain a delta-one regime for section 871(m) compliance for now.
5. New Tax Treaties
Four new tax treaties were ratified in 2019, creating the first changes to tax treaty withholding tax rates for a number of years and a bit of unplanned work for operations teams overseeing tax withholding. Several negotiated tax treaties remain unratified but progress may still be made over the coming months, and there is indication the Treasury is negotiating several new tax treaties. So it may not be as long a hiatus as the last before the next tax treaty change.
6. New IRS Form 1099 Internet Platform by 2023
Buried in the Taxpayer First Act of 2019, passed in the spring, there is a provision requiring the IRS to establish a website/internet platform for Form 1099 reporting by January 1, 2023 – perhaps intended for small business use, but it is unclear as to total scope. This is something for the information reporting community to monitor.
7. SECURE Act
Passed in December 2019, the SECURE Act will make significant changes to rules relating to retirement savings arrangements which may require those engaged in reporting for retirement plans to assess impact to current processes.
8. Fixing Accidental CFCs
The Tax Cuts and Jobs Act in 2017 repealed a provision in the controlled foreign corporations (CFC) rules (section 958(b)(4)). The repeal caused certain foreign corporations to be treated as CFCs, even though that may not have been the intent of the statutory change. In particular, non-U.S. subsidiaries of non-U.S. financial institutions could be treated as CFCs if the parent also owned a U.S. subsidiary. Treatment as a CFC created new Form 1099 reporting responsibilities for these non-U.S. subsidiaries. The IRS in proposed regulations in October provided a fix to keep such foreign subsidiaries from becoming CFCs.
9. Reporting on Life Insurance Policy Sales
In October 2019, the IRS issued final regulations on reportable sales of life insurance contracts. These rules govern tax reporting on new Forms 1099-LS and 1099-SB for reportable sales and also on Form 1099-R with respect to reportable death benefits.
10. New Form 1099-NEC
Nonemployee compensation will be reported on a separate Form 1099-NEC rather than Form 1099-MISC beginning for tax year 2020 (reported in 2021). This will also mean a reformatting of existing Form 1099-MISC.
Thank you for a wonderful year. Happy New Year 2020!