Form 1099 Reporting Best Practices So You Are Ready For 2023 Reporting
INTRODUCTION
Filing Forms 1099-S with Internal Revenue Service is a routine and accepted part of a settlement agent's responsibilities. However, it seems that many settlement agents wait until January, February and even March of the following year to start working on their 1099-S filing details. This, of course, leads to a mad dash to get the filing completed which often happens with missing or partial tax identification numbers, bad forwarding addresses, and other errors. Only after about two years does IRS notify the settlement agent of the errors which notice may be accompanied by a penalty letter.
The process is fairly simple: gather the seller's name and social security number or employer identification number, enter the sales price of the property and a brief property description and send it in, right? Wrong. Internal Revenue Service may and does levy fines and penalties on settlement agents who do not report transactions on Form 1099 or who report incorrect Forms 1099. For tax year 2023, the maximum penalty for filing incorrect returns is $290.00 each with a maximum penalty of $3,783,000! What’s more, IRS may not even notify you of problems for one to two years thus guaranteeing the maximum penalties if you wait for IRS to notify you.
To further complicate the matter, settlement agents now need to consider the necessity of also issuing Forms 1099-MISC or 1099-NEC in addition to Form 1099-S.
A BETTER WAY
The purpose of this white paper is to prescribe a process to be followed throughout the year so that, come March of the following year, the filing of Forms 1099 will have been completed with minimal stress and errors. It is assumed for these purposes that the settlement agent will file Forms 1099-S electronically through IRS’ FIRE system. It is possible to file paper returns but this option is only available for 10 (yes, TEN!) or fewer returns. Besides, the work involved with filing paper returns makes this option impractical. And, for tax year 2023, the deadline for filing paper returns is February 29, 2024 as opposed to April 1, 2024 for electronic filing. There is no minimum number of returns required to file electronically; yes, the settlement agent can electronically file just one!
DEADLINES FOR PROVIDING FORMS 1099 TO THE PAYEE’S
Form 1099-MISC: January 31, 2024 CLICK HERE for details on Form 1099-MISC.
Form 1099-NEC: January 31, 2024 CLICK HERE for details on Form 1099-NEC.
IMPORTANT DEADLINES: For Form 1099-S (Seller proceeds), the settlement agent MUST provide the Form 1099-S to the taxpayer (seller) by February 15, 2024. For Forms 1099-NEC and 1099-MISC, the deadline is January 31, 2024. Want to beat the February 15, 2024 deadline? (Hint: You do not have to mail the Form 1099-S to the seller.) CLICK HERE for a sure way to get the 1099-S to the seller at closing.
What makes a Form 1099 incorrect?
The taxpayer identification number (TIN) which is the social security number (SSN) for a natural person and employer identification number (EIN) for non-natural persons or entities which number DOES NOT MATCH the NAME of the SELLER (in the case of a 1099-S) or the name of the PAYEE (in the case of other 1099 forms) in the records of Internal Revenue Service or Social Security Administration.
Showing the incorrect mailing address for the seller or payee. Note: In the case of a sale of a personal residence, the seller's mailing address will normally not be the property address.
Showing the incorrect payment amount. In the case of a sale of real property, the amount to be shown on the Form 1099-S is the gross proceeds of the sale before deduction of any expense associated or incurred with the transaction.
In the case of a sale of real property, failing to show or showing the incorrect amount of any credits received by the seller from tax or other prorated expenses.
FORM 1099-S FOR SELLERS IN REAL ESTATE SETTLEMENTS
Except in very specific circumstances, the settlement agent is required to issue a Form 1099-S (Proceeds from Real Estate Transactions) to the seller(s) in a real estate transaction. The Gross Proceeds to be reported equal the total amount of consideration; cash, notes, value of services or non-like kind property received, etc., without regard to any lien payoffs, real estate commissions, other expenses of sale, etc. For a discussion of the exemptions from 1099-S reporting see 1099-S Reporting Exemptions.
The Form 1099-S, whether printed or electronic, requires the NAME & TAXPAYER IDENTIFICATION NUMBER (TIN) of the TRANSFEROR (Seller). The TRANSFEROR could be a natural person or a non-natural or juridical person. The type of TIN will be determined by the nature of the TRANSFEROR.
Non-natural or juridical persons include: Corporations and partnerships and limited liability companies operating as corporations and have filed the appropriate elections with Internal Revenue Service to be taxed as a corporation, estates, irrevocable trusts, charities and governmental entities. Click here for more information on classification of persons for tax purposes.
If the transferor is a citizen or resident of the United States, the TIN will be a 9-digit Social Security Number (SSN). If the transferor is a non-natural or juridical person, the TIN will be a 9-digit Employer Identification Number (EIN).
If the transferor is not a citizen or resident of the United States, including non-resident aliens, whether a natural or juridical person, are referred to as a Foreign Person. A foreign person may or may not have an Individual Taxpayer Identification Number (ITIN). See ITIN for more information.
Entities required to have an Employer Identification Number (EIN)
Corporations
Multi-member Limited Liability Companies
Single member Limited Liability Companies that have at least one W-2 employee
Partnerships
Estates
Irrevocable Trusts
Single member LLCs may, but are not required to, have an EIN. In those cases where the single member LLC does not have an EIN, the seller LLC will be reported to IRS using the LLC owner’s name and social security number. The simple way to test how a single member LLC should be reported is to inquire of the owner if the LLC files a separate Form 1120 (income tax return) or if the business income and expenses are reported on the owner’s personal Form 1040, Schedule C.
Revocable Living Trusts, while the grantor is still living, will not have an EIN and should be reported using the grantor’s name and personal social security number.
Generes & Associates has prepared a 1099-S information request form which may be completed by the seller(s) at closing to facilitate the 1099-S reporting of the transaction. Click HERE to download a fill-in MSWord form.
FORM 1099-MISC FOR PAYEES IN REAL ESTATE SETTLEMENTS Click HERE for sample form
IRS Form 1099-MISC may, under limited circumstances, be required for entities and individuals receiving payments through real estate settlement transactions.
In a typical real estate settlement, payments are made to:
Sellers (if a sale) for proceeds;
Lenders for fees;
Real estate brokers and/or agents;
Outside abstractors;
Outside notaries;
Outside attorneys;
Title insurance underwriters;
Surveyors;
Various Inspectors;
Government entities for recording and other fees;
Miscellaneous service providers and, of course;
Settlement and other fees paid to the title and/or settlement agents.
PAYMENTS AGGREGATING $600.00 OR MORE IN A YEAR: As a general rule, payments to any entity or individual totaling $600.00 or more in a single year must be reported to IRS on some type of Form 1099. The type of form 1099 depends on the nature of the payments. There are exceptions to this general rule that will be addressed in more detail with respect to those types of payments typically made via a real estate settlement transaction.
CORPORATE PAYEES: As a general rule, payees operating as a corporation are not required to be issued a Form 1099 for payments received by them. This category includes entities that are, in fact, corporations but also limited liability companies and partnerships that have made an election with IRS to be taxed as a corporation. In addition, state and federally chartered banks are generally considered corporations. EXCEPTION: payments for legal services are reportable, even if made to a corporation. How do you tell if an LLC or partnership has elected to be taxed as a corporation? You should request from the party, especially sellers, that they complete a current Form W-9. Here’s a link to a convenient fillable pdf of the Form W-9.
REQUIREMENTS FOR ISSUING FORMS 1099 TO RECIPIENTS OF PAYMENTS FROM A REAL ESTATE SETTLEMENT: Real estate settlement activities should fall under 26CFR §1.6041-1, specifically section (e) Payment made on behalf of another person.
1) In general. A person that makes a payment in the course of its trade or business on behalf of another person is the payor that must make a return of information under this section with respect to that payment if the payment is described in paragraph (a) of this section and, under all the facts and circumstances, that person—
(i) Performs management or oversight functions in connection with the payment (this would exclude, for example, a person who performs mere administrative or ministerial functions such as writing checks at another’s direction); or
(ii) Has a significant economic interest in the payment (i.e., an economic interest that would be compromised if the payment were not made, such as by creation of a mechanic’s lien on property to which the payment relates, or a loss of collateral). (Emphasis added.)
The writers of this code section gave an example to illustrate:
Example 3. Settlement agent F provides real estate closing services to real estate brokers and agents. F deposits money received from the buyer or lender in an escrow account and makes payments from the account to real estate agents or brokers, appraisers, land surveyors, building inspectors, or similar service providers according to the provisions of the real estate contract and written instructions from the lender. F may also make disbursements pursuant to oral instructions of the seller or purchaser at closing. F is not performing management or oversight functions and does not have a significant economic interest in the payments and is not subject to the information reporting requirements of section 6041. For the rules relating to F’s obligation to report the gross proceeds of the sale, see section 6045(e) and § 1.6045–4. (Emphasis added.)
SUMMARY
Given language in Section 1.6041-1 and the example provided, that it would appear that settlement agents generally provide check issuing services for the benefit of and at the instructions of others and, therefore, are not subject to the reporting requirements which would otherwise apply. However, a situation not considered here include the not uncommon practice to include funds due to others in their own fee check with the intent to later disburse those funds to the relevant parties from the agent’s operating funds. Does the reporting exemption include this situation?
FORM 1099-NEC FOR PAYEES IN REAL ESTATE SETTLEMENTS Click HERE for sample form
Form 1099-NEC (for non-employee compensation) is a new form adopted for tax years beginning in 2020. The form replaces the information formally placed in Box 7 of the Form 1099-MISC. Form 1099-NEC is used to report payments, accumulating $600.00 or more, to non-employees for business services provided to the payor. Although this is a new form and very little has yet been published on its use and exceptions, it is reasonable to assume that the same exceptions that apply to Form 1099-MISC would apply to Form 1099-NEC (See FORM 1099-MISC FOR PAYEES IN REAL ESTATE SETTLEMENTS above. An obvious circumstance where a Form 1099-NEC might be required is in the case of an independent abstractor. If the payment is made directly from the escrow account along with other required payments, the paid at another’s direction exception should apply. However, it’s not uncommon for a title/settlement agent to mark up an abstractor’s fee and pay the abstractor’s invoice out of the agent’s operating funds. In this case, it would be prudent to issue a Form 1099-NEC to the abstractor.
CLICK HERE FOR INSTRUCTIONS FOR FORMS 1099-MISC, MISCELLANEOUS INCOME AND 1099-NEC NONEMPLOYEE COMPENSATION
CONSIDERATIONS FOR EXEMPTIONS FROM 1099-S REPORTING
While it is true that a significant percentage of residential sales by owner/occupiers are exempt from 1099-S reporting requirements, the settlement agent should take extra care. At the table, the seller(s) should be asked to complete a form called CERTIFICATION FOR NO INFORMATION REPORTING ON THE SALE OR EXCHANGE OF A PRINCIPAL RESIDENCE. CLICK HERE to get a sample form.
As a general rule, the settlement agent is required to report to IRS 100% of the sales proceeds received by seller(s) pursuant to a real estate sale via Form 1099-S. However, IRS has stipulated the circumstances under which a settlement agent may rely on the assurances of the seller that the sale is exempt from 1099-S reporting. IRS Revenue Procedure 2007-12 (CLICK HERE for copy) describes in detail the seller assurances upon which a settlement agent could safely rely. The key point here is that the settlement agent is required to report unless the settlement agent chooses to rely upon the assurances by the seller(s). The certification form, described above, is an ideal vehicle by which to gather the seller assurances.
There are six key assurances:
(1) The seller owned and used the residence as the seller’s principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the residence.
(2) The seller has not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the residence.
(3) No portion of the residence has been used for business or rental purposes after May 6, 1997, by the seller (or by the seller’s spouse or former spouse, if the seller was married at any time after May 6, 1997).
(4) At least one of the following three statements applies:
The sale or exchange is of the entire residence for $250,000 or less.
OR
The seller is married, the sale or exchange is of the entire residence for $500,000 or less, and the gain on the sale or exchange of the entire residence is $250,000 or less.
OR
The seller is married, the sale or exchange is of the entire residence for $500,000 or less, and (a) the seller intends to file a joint return for the year of the sale or exchange, (b) the seller’s spouse also used the residence as his or her principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the residence, and (c) the seller’s spouse also has not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the residence.
(5) During the 5-year period ending on the date of the sale or exchange of the residence, the seller did not acquire the residence in an exchange to which section 1031 applied.
(6) In cases where the seller’s basis in the residence is determined by reference to the basis in the hands of a person who acquired the residence in an exchange to which section 1031 applied, the exchange to which section 1031 applied occurred more than 5 years prior to the date of the seller’s sale or exchange of the residence.
It is readily apparent that the sales price is key to determining whether a sale is exempt from 1099-S reporting but it is only part of the equation. There are other, some obscure, assurances to consider.
If the settlement agent chooses to accept the assurances by the seller, it is important that he or she have the seller complete the certification form with the appropriate answers to qualify for exemption and, the settlement agent must have confidence in the answers. Remember, it is the obligation of the settlement agent to report unless he/she accepts the assurances of the seller(s) that the transaction is exempt.
So, what do you do if you have reason to believe that the seller(s) assurances may not be accurate? What I would do is file the 1099-S with the IRS. I am not aware of anyone being penalized for filing a 1099-S on an exempt transaction. On the other hand, you may be penalized for failing to report a transaction that was not exempt. Even if you don’t have to pay a penalty, you may still have to provide documentation to the IRS that you believed that the transaction was exempt from reporting. Who wants to go through that?
HOW TO BEAT THE DEADLINE TO DELIVER FORM 1099-S TO SELLER
The easiest way to deliver the Seller’s Form 1099-S is to do so at closing. That would require that you download a current Form 1099-S and filling it in. A far easier way is to include substitute 1099 language on your settlement statement or seller’s signature page. This is not only easier, it’s far better for the seller. The “1099” is actually their settlement statement. The settlement statement not only contains the sales proceeds and tax credits like the Form 1099-S would but also contains many of the expenses (i.e. real estate commissions) incurred in the sale of the property.
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