Tax information reporting and withholding guidance in August is often slow, so much so that this August we are resorting to commenting on IRS statistics. But, not to worry, the statistics are sort of interesting, well, from a tax reporting maven’s perspective at least.
And, there are several IRS pronouncements that are worth a note as we head into a busier fall season, from proposed regulations on digital content and cloud transaction payments to an update to the reportable countries list relevant for Form 1042-S reporting on US deposit interest.
I know. I probably had you already at IRS statistics.
1. IRS Projections on Information Reporting Returns
August generally sees the IRS statistics team update Publication 6961. IRS Pub 6961 (now updated as of August 2019) provides a snapshot as to the number of tax information returns filed with the IRS in the U.S. for the prior year (2018) and a projection of the expected volume of each type of tax information return for the current filing year and the next 8 years. The publication covers tax information returns from W-2’s to Form 1042-S to the 1099 series, among others. It is used by the IRS for resource budgeting and planning and may provide industry tax reporting teams a sense of information reporting trends.
One headline number is that the IRS has increased its projection for 2020 tax information return filings by 12.4% or 463.9 million forms from last year’s projections. The increase is largely driven by an increase in the projection for Form 1099-B filings for the 2020 filing year – an increase of 438.6 million more forms from last year’s projected number. The report also reveals that the number of Form 1099-B filings expected for the 2019 filing year is also coming in much higher than last year’s projections.
Here is a small subset of the IRS data on return filings and projections (limited here to 5 years) for several of the principal financial tax information reporting forms:
Form 1099-B filings, of course, can be volatile as it is based on transactional securities sales that can increase or decrease in a given year depending on a variety of factors. 2018 actual filings, for example, were well below what was projected in the prior year, and 2019 filings is now projected to be well above what was previously projected. The significant item to note is the trend line for Form 1099-B filing projections, which is assuming somewhere around a robust 6% per year growth over the next five years. You will also note that Form 1042-S filings are projected to grow significantly at a rate of around 3% per year.
In contrast, Form 1099-INT filings are projected to decrease over time. It raises questions as to the underlying assumptions. Low interest rates resulting in interest payments below the filing threshold? Demographic changes that affect types of income earned?
Curiously, Form 1099-K projections neither increase nor decrease over the next five years in the report. This is interesting since one would have expected growth in this form type given the growth of the gig economy and the Forms 1099-K that are usually generated by gig economy transactions. Also, last year’s Pub 6961 had indicated overall growth in Form 1099-K filing projections. Perhaps the current $20,000 and 200-transactions threshold for Form 1099-K filings by third party payment network processors dampens some of the projected growth of Form 1099-K filings? Or perhaps there was insufficient data for a proper projection forward?
There is, of course, interest by the US Treasury in lowering the Form 1099-K threshold. Any such change could significantly affect the projections for this form type.
Moreover, there are unanswered questions as to the forms crypto exchanges and brokers should utilize for reporting crypto transactions. Both Form 1099-K and Form 1099-B have been used. Depending on IRS guidance as to the appropriate reporting format for crypto, the projections next year for these forms may change significantly.
In any case, statistics are showing that financial institutions need to be prepared for volume growth in tax information reporting on Form 1099-B as well as Form 1042-S.
Speaking of crypto, as of this writing, the much-anticipated additional guidance from the IRS on crypto taxation has not yet arrived. According to several reports in the press though, it appears that the UK tax authority had recently sent letters to several exchanges in the UK demanding account holder information (reminiscent of prior IRS action). So the interest in crypto tax enforcement seems to be alive and well on both sides of the pond.
On that side of the pond, the UK HMRC had published guidance on crypto taxation for individuals at the end of last year. There they allow crypto investors to treat investments in cryptocurrencies much like other investments in stock. Gain on sale is subject to capital gains tax and are subject to UK cost pooling (averaging) rules that are applicable to transactions in shares. The HMRC guidance also points the investor to applicable rules on such thorny tax issues as crypto forks.
In the US, we have a notice from 2014 that tells us that virtual currencies are property and therefore sale or exchange of such assets is taxable. But other than that, as investors or exchanges or brokers, we have little else. So we wait.
3. Proposed Regulations on Digital Content and Cloud Transactions
In August, the IRS released proposed regulations under IRC section 861 providing rules on the tax classification of certain cloud transactions and the transfer of digital content. From a withholding agent’s perspective, these classification rules are important since such classification – whether as a service payment or lease or sale – affect the sourcing of such payments. Sourcing is a key factor for determining whether a payment is subject to US withholding tax when paid to a non-US payee.
The proposed regulations cover cloud computing transactions where customers obtain (more than de minimis) on-demand network access to computing resources, such as networks, servers, storage and software. The regulations are intended to cover transactions that may be labelled as software as service (SaaS), platform as service (PaaS), or infrastructure as service (IaaS) as well as those involving the streaming of digital content (e.g., music streaming). Under the proposed regulations, these transactions can be classified as either a service or lease based on surrounding facts.
The new proposed rules also update existing tax classification regulations relating to transfers of computer software programs which were originally issued in 1998. These rules are extended to apply to transfers of other digital content outside of the cloud computing (e.g., purchase and download of e-books and other content in a digital format).
The new rules are proposed to be effective only after they are finalized.
4. IRS Updates NRA Interest Reporting Countries List
Also of interest to withholding agents and tax reporting teams, the IRS has released Rev. Proc. 2019-23. The revenue procedure updates the list of countries with respect to which Form 1042-S reporting on US deposit interest for nonresident aliens is required. Added to the list is the country of Georgia.
For withholding agents collecting Foreign TINs from non-resident account holders, FTINs are not required to be solicited from an account holder who is NOT resident in a jurisdiction on this reporting countries list. Thus, this list also has a knock-on impact for those withholding agents that wish to utilize this exception to FTIN solicitation requirements.
5. Update to IRS FATCA Reporting Schemas
Finally, for those engaged in FATCA reporting, the IRS has updated several publications that relate to the schema/reporting specifications for FATCA reporting. Here’s a snippet of the IRS informational note and relevant links to updated publications:
Updated! FATCA Metadata XML Schema v1.2 User Guide – Publication 5188
The FATCA Metadata XML Schema v1.2 User Guide has been updated and includes the addition of one new Exchange File Type.
Updated! IDES User Guide – Publication 5190
The IDES User Guide has been updated and is available on irs.gov.
IRS Updates the FATCA-IDES Sender File Metadata XML
The IRS has updated the Sender File Metadata XML to version 1.2. For more information, visit the FATCA XML Schemas and Business Rules for Form 8966 page.
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