CUNA Regulatory Comment Call
November 6, 2000
IRS Third-Party Payment Rules
EXECUTIVE SUMMARY
- The Internal Revenue Service (IRS) proposed rules are intended to clarify the Form 1099 information reporting requirements for financial institutions, brokers, and others involved in three-party payments. Third-party payments include, for example, payments that a financial institution may make to a contractor on behalf of the borrower.
- The proposed rules will require that a party making the payment on behalf of another must report the payment under one of the following circumstances:
• when this party performs a management or oversight function in connection with the payment, as opposed to a ministerial or administrative function; or
• when this party has a "significant economic interest in the payment," and the rules specifically mention that this will include a financial institution making payments to a contractor working on property that secures a mortgage held by the institution.
Comments on the proposed rules are due by January 17, 2001. Please submit your comments to CUNA by January 11, 2000. A hearing on this issue is also scheduled for February 7, 2001. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Jeffrey Bloch at jbloch@cuna.com; or mail them to Mary or Jeff in c/o CUNA's Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. You may also contact us if you would like a copy of the proposed rules.
BACKGROUND
The Internal Revenue Code requires that those engaged in a trade or business must report the amount of a payment if it is $600 or more and must report the name and address of the recipient. The party responsible for reporting this information must also withhold tax under certain circumstances, such as when the recipient has failed to provide a valid taxpayer identification number.
The proposed rules are intended to clarify these Form 1099 information reporting requirements for financial institutions, brokers, and others involved in three-party payments. Third-party payments include, for example, payments that a financial institution may make to a contractor on behalf of the borrower.
DESCRIPTION OF THE PROPOSED RULES
The proposed rules will require that a party making the payment on behalf of another must report the payment under one of the following circumstances:
- when this party performs a management or oversight function in connection with the payment, as opposed to a ministerial or administrative function; or
- when this party has a "significant economic interest in the payment," and the rules specifically mention that this will include a financial institution making payments to a contractor working on property that secures a mortgage held by the institution.
The significant difference between the proposed rules and the current rules is that under current rules, a financial institution is not subject to the reporting requirements if it collects and makes payments on an "infrequent and isolated basis." Under the proposed rules, a financial institution would be subject to the reporting requirements under such circumstances if it performs a management or oversight function in connection with the payment.
The proposed rules will preserve the current exception of allowing the option for those making payments to designate a paying agent to file information returns and backup withholdings. The proposed rules will also include examples, derived primarily from revenue rulings and private letter rulings. These rulings will then become obsolete to the extent that they are factually encompassed by these proposed rules. These obsolete rulings include IRS Revenue Rulings 93-70, 85-50, 77-53, 73- 232, 70-608, 69-595, 67-197, 65-129, 64-36, 59-328, 55-606, and 54-571.
Here are the other changes outlined in the proposed rules:
Payments to Joint Payees - The proposed rules provide that a payment made jointly to two or more payees may be considered fixed and determinable income for one payee even if it is not fixed and determinable for another payee.
Reported Amount When Fees, Expenses, or Commissions are Deducted From a Payment - The proposed rules clarify that the amount to be reported as paid to another person is the gross amount of the payment before fees, expenses, or commissions have been deducted. The person that is paid is generally responsible for these expenses and would be subject to the reporting requirements.
QUESTIONS TO CONSIDER REGARDING THE IRS PROPOSED RULES
- Besides the ones described above, are there other IRS Revenue Rulings that would be rendered obsolete by the proposed rules? Do you have suggestions as to what other examples would be appropriate to use in the proposed rules? (The IRS has specifically requested comment on these issues.)
- With regard to third-party payments, do the proposed rules simplify the requirements or are they more burdensome than current rules?
- Other comments?
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Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com |
