A copy of this Client Alert can be found HERE .

The IRS has made several announcements of procedural changes planned for 2020. Clients should be fully aware of these changes to prepare for the 2020 tax filing season.

IRS Implements Form 1099-NEC

Since 1982, Non-employee compensation has been reported in Box 7 of Form 1099-Misc. The IRS has now returned to using Form 1099-NEC (i.e, Non-Employee Compensation) Box 1 for business to report non-employee compensation. This is causing problems for businesses that use a software program to produce Forms 1099, particularly if that program is integrated into that company’s accounting software. As such, each Company should review its software to assure that this change in reporting is addressed well in advance of the January 31, 2021 deadline.

Form 1099-MISC is still the proper form for reporting all other payments that previously appeared on Form 1099-MISC (such as rent, royalties, and healthcare payments), but non-employee compensation should be reported on Form 1099-NEC. This means that business may need to file both Form 1099-NEC and Form 1099-MISC for the same contractor if the business paid both non-employee compensation and another category of payments on Form 1099-MISC. NOTE also that the IRS will not forward Form 1099-NEC to the states, meaning that business will also need to ensure that the necessary state forms are filed as well. As such, any update to software should include state form equivalents to Form 1099.

Small Business Audits to Increase in 2021

The IRS has announced that it will increase audits of small business by 50%. This comes after years of low examination rates for small businesses. Additionally, COVID-19 relief for business from the CARES Act will mean that small businesses will have more complex accounting issues both in 2020 and 2021. As such, small businesses should do the following in anticipation of potential audits:

  • Assure Complete Records: The more easily an auditor can determine the source of amounts reported on the audited tax return, the less likely the auditor will be to make extensive requests for records.
  • Have Returns Reviewed in Anticipation of Audit: Small businesses that have taken an aggressive position on a return, have wide variations in line items between tax years, or have shown losses (especially large losses) for a few years in a row, should have their returns reviewed by a tax professional to determine if any additional reporting actions should be taken prior to the receipt of an audit notice. Actions taken after receipt of an audit notice will generally not reduce penalties.
  • Make Estimated Tax Payments: Failing to pay estimated taxes also increases the risk of audit.
  • Determine How the Bipartisan Budget Act of 2015 (BBA) Applies: A review of a small business’s formation documents, tax elections, and governing documents will determine if the BBA applies and how it affects the tax treatment of such entity.

Anti-Identity Theft Measures

The IRS has expanded the Identity Protection Personal Identification Number (IPPIN) Opt-In program. This program was previously only available to taxpayers who were confirmed victims of identity theft, but it was not available to all taxpayers. Starting in 2021, all taxpayers may voluntarily opt into the IP PIN program as a proactive way to protect themselves from tax-related identity theft. An IPPIN is a six-digit number known only to the taxpayer (and any tax preparers the taxpayer shares it with) and the IRS. The IRS automatically rejects electronic returns without the correct IPPIN and more closely scrutinizes paper returns without the IPPIN for fraud.

Taxpayers may obtain an IPPIN online at https://www.irs.gov/IPPIN, by filing Form 15227 – Application for an Identity Protection Personal Identification Number (IP PIN) via mail or facsimile (available for taxpayers with AGI of less than $72,000), or contacting their local IRS office. The IRS encourages taxpayers to use the online option first. Taxpayers who file Form 15227 will receive a phone call from the IRS to confirm their identity before issuing an IPPIN.