Tax Information Reporting: Big Penalties Coming Soon!

Monday, January 18, 2016

The Trade Preferences Extension Act of 2015 was signed into law on June 29, 2015. One significant change from this law that will affect medical practices and other businesses soon is an increase to penalties assessed on tax information reporting. This includes items such as Forms W-2 and 1099. The previous penalty of $100 per information return was increased to $250 per information return. For many practices, this law change could have serious implications.

Most medical practices have a good handle on payroll tax reporting and often use third-party vendors to assist with this reporting. However, the tax reporting for other payments using Form 1099 varies greatly with some practices being fully compliant and others having only minimal or no compliance at all. One of the greatest exposure areas with regard to Form 1099 reporting relates to Form 1099-MISC. This form has wide applicability but can often be overlooked.

In general, you must file a 1099-MISC for payments to a person or a business during the calendar year that in total is $600 or more. The 1099-MISC is used for reporting payments for rent, payments to service providers and certain other payments (e.g. prizes and awards). There are exceptions to 1099-MISC reporting. For example, you generally do not have to report payments for goods and merchandise. There are also exceptions to reporting for payments to corporations, but you have to be careful as payments for legal services and payments for certain other items are required to be reported even if paid to a corporation. Please note that Form 1099-MISC is used for reporting payments made in the course of business and does not include personal payments.

The new penalties under the Trade Preferences Extension Act are effective for information returns required to be filed after Dec. 31, 2015. This means that the new penalties apply to Forms W-2 and 1099, etc., for the 2015 tax year. The penalties also apply to new information reporting under the Affordable Healthcare Act (Forms 1094-B, 1095-B, 1094-C and 1095-C).

With a $250 per information return penalty, the IRS has more incentive than ever to pursue deficiencies. For example, a medical practice reports the various payments to its service providers. However, it incorrectly captures four of its new vendors and four of its long-standing vendors were never captured properly in the practice’s system. Therefore, eight Forms 1099-MISC do not get issued. Under the new rules, this medical practice could be incurring a $2,000 ($250 x eight) fine for each year this deficiency continues.

Now is the time for medical practices to revisit and review their tax reporting systems to ensure they are correctly capturing all reportable payments. Tax reporting has historically been perceived as a mundane administrative task requiring little skill or thought. While it may remain mundane, medical practices may want to give tax information reporting a second look to understand its critical importance and the associated risks for failing to properly comply.

Tax Audit Concept 750Bennett Allison, CPA, CFP, is a shareholder at Sol Schwartz & Associates PC. He has more than 20 years public accounting experience serving individuals, corporations, S-corporations, partnerships, trusts, estates and nonprofit organizations. In addition, Bennett works with a high concentration of physician practices and high net worth individuals. Contact Bennett at 210-384-8000, ext. 138 or