IRS Notice 2011-1: Repealed 1099 Reporting Rules

Expanded Reporting Requirements for Payors

In 2010, two separate laws introduced temporary changes to information reporting for payors—defined as any person engaged in a trade or business making a payment to another person in the course of that business. The new rules were set to apply to payments made after December 31, 2010.

The first set of changes, part of the Patient Protection and Affordable Care Act, expanded reporting. It extended the $600 reporting requirement to include payments for property, goods, and other gross proceeds, not just services. This meant that businesses making payments of $600 or more for merchandise, inventory, or raw materials to a single vendor in a year would now need to file a Form 1099-MISC for that vendor. The act also eliminated the historical exemption for payments made to most C and S corporations, requiring businesses to track and report these payments just as they would for individuals.

A further provision, introduced by the Small Business Jobs Act of 2010, specifically targeted individuals receiving rental income from real estate. These individuals were now explicitly considered to be engaged in a trade or business for reporting purposes. Consequently, landlords who paid $600 or more to service providers, such as plumbers, electricians, or painters, were required to issue a Form 1099-MISC to those providers.

Exceptions and Clarifications Provided

In response to the legislative changes, the IRS issued guidance that outlined several exceptions to the expanded reporting rules. The fundamental de minimis threshold remained in place; reporting was only required if total payments to a single payee equaled or exceeded $600 in a calendar year.

Certain types of payees remained exempt from receiving a Form 1099-MISC. Payments made to tax-exempt corporations, such as those organized under Internal Revenue Code section 501, were not subject to the new reporting requirements. Similarly, payments made to any government entity, whether federal, state, or local, did not need to be reported under these provisions.

The guidance also clarified that the new rules were not intended to create duplicative reporting. Payments that were already subject to reporting under other, more specific provisions of the tax code were excluded. A primary example of this was payments made via merchant cards, such as credit cards, debit cards, or stored-value cards. These transactions were reportable by the payment settlement entity on Form 1099-K and were therefore not required to be reported again by the payor on a Form 1099-MISC.

Additionally, the rules specified that payments for certain types of goods and services were not reportable. This included:

• Merchandise
• Telegrams
• Telephone services
• Freight
• Storage

Transitional Relief Provisions for 2011

Recognizing the systems and procedural changes businesses would need to implement to comply with the expanded reporting requirements, the IRS provided transitional relief for the 2011 calendar year. This relief was designed to give payors a one-year grace period to adapt to the new rules without the immediate threat of financial penalties for noncompliance.

Specifically, for payments made in 2011, the IRS announced it would not impose penalties under Internal Revenue Code sections 6721 and 6722 for failure to file or furnish the newly required information returns. This relief applied directly to the new requirements to report payments for property and payments to corporations.

This penalty waiver was a temporary, administrative measure applicable only to the 2011 tax year. It did not change the underlying legal requirement to report the payments; the law was still in effect. The relief gave businesses time to prepare for full enforcement, which was expected to begin for payments made in 2012.

Subsequent Repeal and Current Status

The expanded information reporting requirements proved to be short-lived. In early 2011, Congress passed the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011. This legislation fully and retroactively repealed the expanded reporting provisions.

The effect of the repeal was a complete reversion to the information reporting rules that existed prior to the 2010 changes. The requirement for businesses to issue Form 1099s for payments to most corporations was eliminated. Likewise, the mandate to report payments of $600 or more for property and other gross proceeds was also struck from the law. The provision that had reclassified all landlords as being engaged in a trade or business for reporting purposes was also removed.

Businesses are generally not required to issue a Form 1099-MISC for payments made to C or S corporations. However, there are specific exceptions where reporting for corporate payments is still necessary. These exceptions include payments for medical and health care services, fish purchases for cash, and payments to attorneys for legal services, which must be reported regardless of the recipient’s corporate status.