Client Accounting Services, Tax & Assurance Guidance

Record Keeping for Information Reporting

Posted on September 8, 2017 by

Sue Tuson

Sue Tuson

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The IRS and state governments continue to increase requirements and penalties for information reporting. With these increases, using best practices when keeping records is crucial. If proper documentation is not maintained, taxpayers risk heavy assessments and penalties.

Filing Form 1099

Form 1099 is an information return that tells the IRS the amount of income paid to subcontractors and other parties during the calendar year. Generally, a payer must report service income, interest income, rents, royalties, dividends, and other income when payment amounts exceed certain thresholds. In order to report the payment, a Form W-9 is needed from the payee. The W-9 form provides the information needed to report the payment.  If the correct information is not obtained, payments can be subject to backup withholding.

Best practices

For existing vendors:

Vendors need to review payment details to determine if 1099 reporting is required. Most accounting systems will allow vendor payments to be coded so a report can be generated at the end of the year. This report will provide the total payment needed to be reported by the vendor. Vendors should make sure to:

  • Check files to ensure a W-9 is on file
  • Confirm the addresses of 1099 recipients, as addresses often change

For new vendors:

  • Request a W-9 when entering new vendors into an accounting system
  • Code the vendor for 1099 reporting

Filing Forms 1042 and 1042-S

Form 1042 and 1042-S are filed when making a US-sourced payment for Fixed Determinable Annual or Periodical (FDAP) income to foreign parties. FDAP payments include, but are not limited to: interest, dividends, rents, royalties, non-employee compensation and other payments to foreign individuals or entities. It is generally required to obtain Form W-8BEN (individual) or Form W-8BEN-E (entities) before making these payments. Companies should be aware of several different W-8 Forms are available depending on either the payee or the type of claim being made in relation to the payment.

FDAP payments are subject to an automatic 30% withholding. Exemptions and reductions in withholding may exist, and are claimed with the appropriate W-8 series form. This is important since there are not only penalties for failure to report, but withholding agents can become liable for any tax in the event of a failure to withhold.

Best practices

  • Before making a payment to a foreign party, determine whether withholding is required
  • Request a W-8 before making a payment. If a W-8 is on file, make sure that it has not expired before making the payment.
  • Review the W-8 for completeness prior to accepting it

The due date for 1042 payments will be based on the dollar value of the withholding. Make sure to review the deposit deadlines when an amount has been withheld.

Filing Sales and Use Tax

Every state has its own sales and use tax requirements. Michigan requires sellers to remit a 6% sales tax when selling tangible personal property to Michigan consumers. What can be often overlooked is the self-assessed use tax. Michigan requires consumers to pay a 6% use tax when bringing items into Michigan that weren’t charged sales tax by the seller.  These are typically purchases from out of state.  The date in which the tax is due to the state will depend on the filing status of the purchaser (monthly, quarterly, or annual filers).  Taxpayers who accumulate greater than $720,000 in sales or use tax are required remit on an accelerated schedule.

Unless a purchaser claims an exemption, Michigan sellers will be required to collect sales tax when selling any tangible personal property. Exemptions are typically claimed on Form 3372, Michigan Sales and Use Tax Certificate of Exemption. Common sales and use tax exemptions exist for retailers, industrial processors, churches, hospitals and schools.

While the sales and use exemption claim Form 3372 is made by the purchaser, it is the seller’s responsibility to maintain records and keep certificates on file in the event of a sale and use tax audit.

Best practices

  • When making purchases, review invoices to determine if sales tax should have been charged. If sales tax was charged in error, contact the seller and provide them with the appropriate exemption certificate. If sales tax was not charged and the purchase is not exempt, record the payable use tax.
  • When making sales to Michigan customers, obtain Form 3372 for each exempt customer. Never assume the sale is exempt without receiving an exemption claim from the customer.
  • Make sure that Forms 3372 on file have not expired. The Form is valid for four years. A schedule or tickler file should be maintained so that new exemption forms can be requested as the old forms expire.

Having documents in order can prevent costly tax assessments. In addition, if a business is being sold, documentation issues can arise during tax due diligence procedures. If records are not in order, it gives the buyer the opportunity to negotiate down selling prices.

Sue Tuson

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With her advanced technical skills and experience with complex global businesses, Sue is known to be a creative & responsive international tax advisor.

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