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IRS Audits

Chapter 6. Payer Compliance

Section 2. Information Returns and Information Reporting

4.6.2  Information Returns and Information Reporting

This section provides information about reporting requirements for middlemen, agents and other third parties making payments on behalf of another person. It also provides detailed information about the reporting and filing requirements for information returns Forms 1042S, 1098, 1098–E, 1098–T, 1099–A, 1099–B, 1099–C, 1099–DIV, 1099–G, 1099–INT, 1099–LTC, 1099–MISC, 1099–MSA, 1099–OID, 1099–PATR, 1099–S, 5498, 5498–MSA, and W-2G. This information includes what Internal Revenue Code (IRC) sections apply to each form, who must file, the reporting requirements including exceptions, magnetic media filing requirements, recordkeeping requirements, associated penalties, appropriate references, and exhibits to provide detailed instructions for completing each form.

This section also provides information about the processing of international withholding forms and paper information returns with the Philadelphia Service Center (PSC), and international information returns filed magnetically or electronically with the Martinsburg Computing Center (MCC).

4.6.2.1  (08-01-2002)
Information Reporting by Middleman or Third Party Payer

  1. This part of Section 2 covers reporting obligations of middlemen, agents and other third parties making payments on behalf of another person, including:

    • A middleman making reportable payments for others,

    • A middleman receiving mortgage interest on behalf of the lender,

    • A middleman or other third party payer's responsibility for backup withholding under IRC section 3406, and

    • A third party payer of wages.

     

4.6.2.1.1  (08-01-2002)
Introduction

  1. All persons engaged in a trade or business who make (and Introduction in some cases receive) certain payments in the course of their trade or business to another person must report the amount of these payments on information returns.

  2. The party, including any middleman payer, who is responsible for reporting payments under IRC sections 6041, 6041A, 6042, 6044, 6045, 6049, 6050A or 6050N as described in Reg. 31.3406(a)-(2) is also responsible for any backup withholding required under IRC section 3406.

4.6.2.1.2  (08-01-2002)
Definitions

  1. A middleman is defined as any person who makes payments for, collects, or receives a reportable payment on behalf of, or for the account of, another person or otherwise acts in a capacity as intermediary between a payer and a payee. A middleman may also be a person who makes a payment on behalf of another person and who performs management or oversight functions in connection with the payment. See Regs. 31.3406(a)-2(b), 35a.9999-3 Q & A 1, 1.6049-4(f), and Rev. Rul. 93-70.

  2. The term broker means a person that, in the ordinary course of a trade or business during the calendar year, stands ready to effect sales to be made by others. See Reg. 1.6045-1(a)(1).

  3. The term paying agent means a person who makes a payment on behalf of another person and performs merely administrative or ministerial functions in connection with the payment .

  4. Management or oversight functions are activities that involve the exercise of discretion or supervision, or the authority to decide whether a payment should be made.

  5. Under Reg. 1.6049-1(a)(2)(ii) a person who receives interest shall be considered to have received it as a nominee if:

    1. He is not the actual owner of such interest; and

    2. He is required to furnish his taxpayer identifying number (TIN) to the payer of interest; and

    3. Such number is required to be included on an information return filed by the payer with respect to the interest.

     

  6. The term companion sitting placement service means a person (whether or not an individual) engaged in the trade or business of placing sitters with individuals. See Reg. 31.3506-1(a)(1).

  7. The term sitter means an individual who provides personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. See IRC section 3506(b) and Reg. 31.3506-1(a)(2).

  8. The term employer for income tax withholding purposes means any person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except in certain cases of a person paying wages on behalf of a foreign individual or entity not engaged in a trade or business within the United States, and in cases where the person for whom the service is performed does not have control of the payment of the wages. The term employer for FICA tax withholding purposes is defined in the regulations as every person who employs one or more employees.

4.6.2.1.3  (08-01-2002)
Who Must File

  1. Factors to consider when determining who must file the information return include:

    1. Is the third party merely a paying agent?

    2. Does the third party meet the definition of a middleman?

    3. Does the third party have any oversight or management functions

     

  2. The factors listed in Section 2.1.3 of this IRM should be considered when making a determination to implement backup withholding.

4.6.2.1.4  (08-01-2002)
Mortgage Interest Form 1098

  1. Generally when reportable mortgage interest (other than points) is received by any person on behalf of another person, the person first receiving such interest is required to file Form 1098, Mortgage Interest Statement. This is true even though that person does not have to include the interest in their income but merely transfers it to another person (e.g., the lender).Example: If a servicing bank collects mortgage interest payments of $600 or more for a lender in a calendar year, the servicing bank must file Form 1098.

  2. Reportable payments under IRC 6050H are not subject to backup withholding under IRC 3406.

  3. The person for whom the interest was collected does not need to file a Form 1098.

  4. Exception: If the following two