IRS Audits - Part 4 Examining Process

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IRS Audits

Chapter 6. Payer Compliance

Section 2. Information Returns and Information Reporting (Cont. 4)

4.6.2  Information Returns and Information Reporting (Cont. 4)

4.6.2.15 
Form 1099-S, Proceeds from Real Estate Transactions

4.6.2.15.5 
Reporting Requirements

4.6.2.15.5.2  (08-01-2002)
Multiple Transferors

  1. Filers must use a separate Form 1099-S to report the proceeds for each transferor when there are multiple transferors.

  2. Filers must request an allocation from each transferor and report each persons allocated proceeds accordingly.

  3. Filers must report the total unallocated gross proceeds on each transferor's form if no allocation or an incomplete allocation is received.

4.6.2.15.5.2.1  (08-01-2002)
Husband/Wife

  1. If the transferors were husband and wife at the time of closing, who held the property as joint tenants, tenants by the entirety, tenants in common, or as community property, treat them as a single transferor. Only one Form 1099-S showing either of them as the transferor is required.

  2. If they provide an uncontested allocation of gross proceeds, Form 1099-S should be filed for each spouse accordingly.

4.6.2.15.5.2.2  (08-01-2002)
Partnerships

  1. Property transferred by partnerships requires only one Form 1099-S. Filers must show the name and Employer Identification Number (EIN) of the partnership, not the individual partners.

4.6.2.15.6  (08-01-2002)
References

  1. IRC section 6045(e).

  2. Regulation 1.6045-4.

  3. Rev. Proc. 98-20.

  4. Notice 93-4.

  5. Instructions for Forms 1098, 1099, 5498 and W-2G.

  6. Publication 515.

4.6.2.16  (08-01-2002)
Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc./Form 5498, IRA Contribution Information

  1. This part of Section 2 covers the types of distributions from pension plans and Individual Retirement Arrangements/Accounts (IRAs) which must be reported on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

  2. This chapter also contains the filing requirements for Form 5498, IRA Contribution Information.

4.6.2.16.1  (08-01-2002)
General Information

  1. Payers/trustees use Form 1099-R to report designated distributions of $10 or more from profit-sharing or retirement plans, any IRAs, annuities, pensions, insurance contracts, survivor income benefit plans, permanent and total disability under life insurance contracts, charitable gift annuities, etc.

  2. Payments made to military retirees are reported on Form 1099-R. If amounts paid under military retirement are awarded to a former spouse, the Form 1099-R is filed listing the former spouse's name and taxpayer identification number (TIN).

  3. Nonqualified plan distributions are reported on Form W-2, Wage and Tax Statement.

  4. Amounts totally exempt from tax are not reported on Form 1099-R. These include amounts paid by worker's compensation plans and the Department of Veterans Affairs.

4.6.2.16.1.1  (08-01-2002)
Types of Distributions Reported

  1. Various information is reported for different types of distribution.

    1. The most common dollar values reported are the gross distribution (Box 1); the taxable amount (Box 2a); Federal income tax withheld (Box 4); and employee after-tax contributions (Box 5).

    2. Other information, which may be reported, includes amounts eligible for capital gain election (Box 3); any net unrealized appreciation in employer's securities (Box 6); the current actuarial value of an annuity contract (Box 8); and the payee's percentage of the total distribution (Box 9).

     

  2. Each distribution reported on Form 1099-R is characterized by one or two distribution codes which are reported in Box 7 of Form 1099-R. These distribution codes are as follows:

    1. Code 1 - Early distribution, no known exception

    2. Code 2 - Early distribution, exception applies (as defined in IRC section 72(q), (t), or (v))

    3. Code 3 - Disability

    4. Code 4 - Death

    5. Code 5 - Prohibited transaction

    6. Code 6 - IRC section 1035 exchange

    7. Code 7 - Normal distribution

    8. Code 8 - Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in the current year

    9. Code 9 - PS 58 costs

    10. Code A - May be eligible for 5 or 10 year tax option

    11. Code D - Excess contributions plus earnings/excess deferrals taxable in the current year less two years

    12. Code E - Excess annual additions under IRC section 415

    13. Code F - Charitable gift annuity

    14. Code G - Direct rollover to an IRA

    15. Code H - Direct rollover to a qualified plan or a tax-sheltered annuity

    16. Code J - Distribution from a Roth IRA

    17. Code L - Loans treated as deemed distributions under IRC section 72(p)

    18. Code M - Distribution from an Ed IRA

    19. Code P - Excess contributions plus earnings/excess deferrals taxable in the current year less one year

    20. Code R - Recharacterized IRA contribution

    21. Code S - Early distribution from a SIMPLE IRA in first two years, no known exception

     

  3. The current acceptable code combinations are contained in Exhibit 21-1.

4.6.2.16.2  (08-01-2002)
Distributions From IRAs

  1. IRA distributions are unique because most trustees are not able to determine their taxability. Therefore, for most IRA distributions, trustees are required to report the same amount as the gross distribution and taxable amount and mark the "Taxable Amount not Determined" indicator to alert IRS that this may not be the true taxable amount.

  2. Payers also check the IRA/SEP/SIMPLE indicator for most IRA/SEP/SIMPLE distributions.

  3. Form 5498, IRA Contribution Information, is used to report contribution and Fair Market Value (FMV) information for these IRA/SEP/SIMPLE plans.

4.6.2.16.3  (08-01-2002)
Withholding

  1. If a distribution is considered rollover eligible (it can be rolled into another qualified plan, tax sheltered annuity or IRA), 20% of the distribution must be withheld if the distribution is made payable to the account holder.

  2. If a distribution is not rollover eligible, the rules for periodic payments or nonperiodic distributions apply.

    1. For periodic payments, the trustee must withhold based upon the recipient's Form W-4P, Withholding Certificate for Pension or Annuity Payments. If the recipient does not provide Form W-4P to the trustee, the trustee should withhold by treating the recipient as married with three exemptions.

    2. For nonperiodic distributions, the trustee must withhold 10% of the taxable portion of the distribution. The recipient can request additional withholding or claim exemption on Form W-4P.

    3. Recipients who fail to provide a TIN to the trustee may not claim exemption from withholding. However, backup withholding does not apply.

     

4.6.2.16.3.1  (08-01-2002)
Form 945

  1. Amounts withheld from pension and annuity payments are deposited using the same deposit rules and procedures as those used for payroll taxes.

  2. Amounts withheld by these trustees are reported annually on Form 945, Annual Return of Withheld Federal Income Tax.

4.6.2.16.4  (08-01-2002)
Law

  1. IRC section 408(i) requires that the trustee of an individual retirement account and the issuer of an endowment contract or an individual retirement annuity to make reports with respect to contributions to those accounts.

  2. IRC section 530(h) requires that the trustee of an education individual retirement account to make reports with respect to contributions to those accounts.

4.6.2.16.5  (08-01-2002)
Definitions

  1. A rollover contribution is a contribution made within 60 days after receipts of an eligible rollover distribution (the taxable part) from another qualified plan or from a tax-sheltered annuity. It must be limited to the assets received in the eligible rollover distribution plus the amount of any cash received in the distribution. It must also be limited to the taxable part of the distribution.

  2. A recharacterization is the transfer of contributed amounts from one type of IRA to another type of IRA.

  3. A conversion is the transfer of contributed amounts from a traditional IRA to a Roth IRA.

  4. A reconversion is the transfer of contributed amounts from a traditional IRA to a Roth IRA after a recharacterization.

  5. An Education IRA (Ed IRA) is a trust created or organized in the US exclusively for the purpose of paying the qualified higher education expenses of a designated individual (beneficiary).

  6. PS 58 Costs are the current costs of one-year term insurance protection. A table of PS 58 costs is published in Rev. Rul. 55-747, 1955-2 CB 228.

  7. A Simplified Employee Pension (SEP) is a written plan that allows employers to make contributions toward their own, if self-employed, and their employees' retirement by making contributions to an individual retirement arrangement which is owned by the employer or the employees. The rules for these plans are found in IRC section 408(k).

  8. A Savings Incentive Match Plan for Employees (SIMPLE) is a written salary reduction arrangement that allows eligible employees of a small business (generally an employer with 100 or fewer employees) to make elective contributions. SIMPLEs are qualified pensions plans that can be set up as part of a 401(k) plan or by using Individual Retirement Accounts under IRC section 408(p).

4.6.2.16.6  (08-01-2002)
General Information

  1. Plan administrators/trustees must report all contributions to IRA accounts they maintained during the calendar year on Form 5498.

  2. The FMV of the account on December 31 must also be reported.

  3. An IRA includes all investments under one plan.

  4. The FMV statement must be furnished to all IRA participants by January 31. Form 5498 must be furnished to Ed IRA participants by January 31, and must be furnished to the participants in all other types of IRAs by May 31. Form 5498 must also be filed with the IRS by May 31.

  5. If the statement of FMV is furnished to the participant by January 31 and no contributions were made for the year, the trustee is not required to furnish the payee with an additional statement showing zero contributions.

  6. If a total distribution was made from an account during the year and no contributions were made for the year, the trustee is not required to furnish the payee with a statement to reflect the FMV on December 31 was zero.

4.6.2.16.7  (08-01-2002)
Types of Contributions Reported

  1. Various types of contributions are reported. These are:

    1. Gross contributions to traditional IRAs made during a calendar year and until April 15 of the next year that are designated for the prior year and employee contributions to an IRA under a SEP plan (Box 1).

    2. Rollover contributions, including direct rollovers from qualified plans or tax sheltered annuities and recharacterizations (Box 2).

    3. Conversion or reconversion amounts from traditional IRAs, SEPs, or SIMPLEs to Roth IRAs (Box 3).

    4. Employer contributions to a SEP or SARSEP (salary reduction SEP) and contributions made by self-employed persons (Box 7).

    5. Contributions made to a SIMPLE IRA (Box 8).

    6. Contributions made to a Roth IRA (Box 9).

    7. Contributions made to an Ed IRA (Box 10).

     

4.6.2.16.8  (08-01-2002)
Reporting Requirements

  1. Trustees are required to report certain additional information. This information is described in greater detail below:

    1. The trustee's name, address, and TIN;

    2. The participant's name, address, and TIN;

    3. The FMV of the account on December 31 of the calendar year (Box 4).

    4. For endowment contracts, the cost of life insurance that was included in Box 1 (Box 5).

    5. The appropriate box must be checked to designate the kind of plan if only reporting amounts in Boxes 2 or 4 (Box 6).

     

4.6.2.16.9  (08-01-2002)
Exceptions

  1. Direct trustee to trustee transfers are not required to be reported. For example, a traditional IRA to another traditional IRA or a Roth IRA to another Roth IRA.

  2. If there are one or more recharacterizations and reconversions in the calendar year with the same trustee, the trustee may report the results of the recharacterizations and reconversions on Form 1099-R and Form 5498 using a reasonable alternative method per Announcement 99-5.

4.6.2.16.10  (08-01-2002)
Inherited IRAs

  1. Special rules apply to inherited IRAs. Generally in the year the owner dies, IRA trustees must furnish Forms 5498 for the decedent and each nonspouse beneficiary.

    1. The decedent's name must be shown on the nonspouse beneficiary's Form 5498.

    2. If the beneficiary is the spouse and makes the IRA his or her own, the trustee must report Form 5498 without the beneficiary designation.

     

4.6.2.16.11  (08-01-2002)
References

  1. Taxpayer Relief Act of 1997 (P.L. 105-34).

  2. IRS Restructuring and Reform Act of 1998 (P.L. 105-206).

  3. IRC sections 408(i), 408A; 530(h); and 6047.

  4. Ann. 99-5.

  5. Rev. Proc. 89-52.

  6. Instructions for Forms 1098, 1099, 5498, and W-2G.

  7. Rev. Rul. 55-747.

  8. IRM 4.6 Exhibit 4.6.2-19.

4.6.2.17  (08-01-2002)
W-2G, Certain Gambling Winnings

  1. This part of Section 2 explains the filing an withholding requirements for Form W-2G, Certain Gambling Winnings.

4.6.2.17.1  (08-01-2002)
Law

  1. IRC Section 6041(a) and the regulations requires payers of gambling winnings to report those amounts and any Federal income tax withheld on Form W-2G.

4.6.2.17.2  (08-01-2002)
Who Must File

  1. Payers of reportable gambling winnings, including tax exempt organizations and Federal, state and local governments, must file Form W-2G.

4.6.2.17.3  (08-01-2002)
Reporting Requirements

  1. Payers are required to complete Form W-2G with the following information:

    1. The payer's name, address, taxpayer identification number (TIN), and telephone number (on recipient copy).

    2. The payee's name, address, and TIN.

     

  2. The requirements for reporting and withholding depend on the type of gambling, the amount of the gambling winnings, and generally the ratio of the winnings to the wager.

4.6.2.17.3.1  (08-01-2002)
Horse Racing, Dog Racing, Jai Alai, and Other Wagering Transactions

  1. Winnings of $600 or more if such winnings are at least 300 times the amount of the wager are required to be reported (Box 1).

  2. Federal income tax withheld (Box 2).

  3. Type of wager (Box 3).

  4. The date of the winning event (Box 4).

  5. The race (or game) applicable to the winning ticket (Box 6).

  6. The amount of additional winnings from identical wagers (Box 7).

  7. The cashier and/or winning number making the winning payment (Box 8 or 10).

  8. The identification numbers of the person receiving the winnings (Boxes 11 and 12).

  9. Optional state information (Boxes 13 and 14).

4.6.2.17.3.1.1  (08-01-2002)
Withholding Requirements

  1. If winnings, less the amount of the wager, exceed $5,000 and the winnings are at least 300 times the amount of the wager, payers must withhold Federal income tax at the rate of 28%.

  2. If the winner of reportable gambling winnings does not provide a TIN, the payer must backup withhold at the rate of 31%.

4.6.2.17.3.2  (08-01-2002)
Sweepstakes Wagering Pools, and Lotteries

  1. Winnings of $600 or more if such winnings are at least 300 times the amount of the wager are required to be reported (Box 1).

    1. The payer may subtract the amount of the wager from the winnings to determine the reportable amount. The wager must be subtracted at the time of the first payment.

     

  2. Federal income tax withheld (Box 2).

  3. The type and amount of the wager (Box 3).

  4. The date of the winning transaction (Box 4).

  5. The ticket or identifying number for a state lottery (Box 5).

  6. The identification numbers of the winner, other than state lotteries (Box 11 and 12).

  7. Optional state information (Boxes 13 and 14).

4.6.2.17.3.2.1  (08-01-2002)
Withholding Requirements

  1. If winnings, less the amount of the wager, exceed $5,000 and the winnings are at least 300 times the amount of the wager, payers must withhold Federal income tax at the rate of 28%.

    1. Installment payments of $5,000 or less are subject to 28% withholding if the aggregate proceeds exceed $5,000.

     

  2. If the winner of reportable gambling winnings does not provide a TIN, the payer must backup withhold at the rate of 31%.

4.6.2.17.3.3  (08-01-2002)
Bingo, Keno and Slot Machines

  1. Winnings of $1,200 or more from bingo or slot machines, or $1,500 or more from Keno after the amount of the wager for the winning Keno game is deducted, are required to be reported (Box 1).

  2. Federal income tax withheld (Box 2).

  3. The type and amount of the wager (Box 3).

  4. The date of the winning transaction (Box 4).

  5. The identifying number of the winning transaction (Box 5).

  6. The initials of the person paying the winnings (Box 8).

  7. The location of the person paying the winnings (Box 10).

  8. The identification numbers of the person receiving the winnings (Boxes 11 and 12).

  9. Optional state information (Boxes 13 and 14).

4.6.2.17.3.3.1  (08-01-2002)
Withholding Requirements

  1. Regular gambling withholding (28%) does not apply to winnings from Bingo, Keno, and slot machines.

  2. If the winner of reportable gambling winnings does not provide a TIN, the payer must backup withhold at a rate of 31%.

4.6.2.17.4  (08-01-2002)
Exceptions

  1. Payments of gambling winnings to a nonresident alien individual or a foreign corporation are not subject to reporting on Form W-2G. These payments may be subject to withholding and reporting on Form 1042-S, Foreign Person's US Source Income Subject to Withholding.

4.6.2.17.5  (08-01-2002)
Withholding on Noncash Payments

  1. A noncash payment must be taken into account at Fair Market Value (FMV) for withholding and reporting purposes.

  2. The computation for withholding and paying of the tax must be done under either of the following methods:

    1. The winner pays the withholding tax (28%) to the payer.

    2. The payer of the winnings pays the withholding tax. The withholding rate is 38.88% of the FMV minus the amount wagered. The sum of the noncash payment plus the withholding tax must be reported in Box 1.

     

4.6.2.17.6  (08-01-2002)
Form 5754

  1. Payers are required to file Form W-2G based on Form 5754, Statement by Person(s) Receiving Gambling Winnings, when the person receiving the winnings is not the actual winner or is a member of a group of two or more winners on the same winning ticket.

  2. Payers must determine the withholding and reporting requirements for Form W-2G prior to allocating each winner's share.

4.6.2.17.7  (08-01-2002)
References

  1. IRC sections 3402(q) and 6041(a).

  2. Regulations 1.6041-1 and 7.6041-1.

  3. Notice 93-7.

  4. Instructions for Forms 1098, 1099, 5498, and W-2G.

Exhibit 4.6.2-1  (08-01-2002)
Rulings, Regulations and Cases Involving Middleman and Third Party Payers

Regulations 35a.9999-3 Q & A 1 states that the person required to withhold is the person who is required to make an information return with respect to a payment under IRC sections 6041, 6041A, 6042, 6045, 6049 or 6050A. Q & A 1 also differentiate between a "paying agent" and a "middleman" with regard to who has reporting responsibility.

Rev. Rul. 77-53 states, in part, that Reg. 1.6041-3(n) does not apply and therefore reporting is required when an institution assumes a management function or retains the collected funds under an arrangement other than the customary depositor relationship.

Rev. Rul. 59-328 states, in part, that Blue Cross/Blue Shield operating as the fiscal administrator for a state medical society must report payments it makes to physicians.

Rev. Rul. 73-232 states, in part, that racetracks making payments to free lance jockeys on behalf of horse owners must report payments.

Rev. Rul. 70-608 states that payments to health care providers may be made by: (1) a person whose name is shown on the check or draft as the payer (Payer of Record); (2) by a person that is the ultimate provider of the fees being paid (Source Organization); or (3) by a person who is processing the claim and preparing the check or draft in the name of another person (Processing Organization). Sometimes these three persons are the same, but frequently two or three different persons are involved. Under these circumstances, the IRS will look to the person identified as the payer on the check or draft as the one responsible for filing information returns.

Exhibit 4.6.2-2  (08-01-2002)
Rulings, Regulations and Cases Involving Deemed Employers

In Otte v. United States 419 U.S. 43, 50-51 (1974), the Supreme Court determined that because a bankruptcy trustee had control over the payment of wage claims, the trustee was considered the "employer" for income tax and FICA tax withholding purposes. The Supreme Court stated that IRC section 3401(d)(1) was intended to place responsibility for withholding at the point of control.

In Rev. Rul. 70-51, the Service ruled that when a union distributed cash payments, other than health and welfare benefits, under a plan or system established by an employer, the union was deemed to be responsible for withholding and paying over income tax on the cash payments to the employees.

In Rev. Rul. 73-253, the Service ruled that racetrack stewards were employees of the State horse racing board for Federal employment tax purposes. However in accordance with IRC section 3401(d)(1), the State racing association was their "employer" for purposes of income tax withholding since the racing association had control of the payment of wages to the stewards.

While many of the revenue rulings only refer to income tax withholding, Otte and certain other courts have also concluded that if the common law employer is not in control of payment of wages, then the person in control of payment of wages is the employer for withholding FICA. Though not discussed in Otte, several lower court decisions have found such person to be liable for the employer's portion of FICA tax payments under IRC 3111 as well. See:

  • Re Laub Baking Co. 642 F.2d 196, 199 (6th Cir. 1981)

  • Matter of Southwest Restaurant Systems, Inc. 607 F.2d 1237 (9th Cir. 1979)

  • STA of Baltimore-ILA Container Royalty Fund v. United States 621 F. Supp. 1567, 1575 (D. Md. 1985) aff'd. 804 F. 2d 296 (4th Cir. 1986)

  • InRe Armadillo Corp. 561 F. 2d 1382 (10th Cir. 1977)

Exhibit 4.6.2-3  (08-01-2002)
Instructions for Completing Form 1042–S

Column (a) Income Code Filers must enter the appropriate two-digit income code from the list in the Instructions for Form 1042-S. Each income type must be listed on a separate line.
Column (b) Gross Income Paid The gross amount paid to or on behalf of a recipient during the calendar year for each income code (Column a).
Column (c) Withholding Allowances For income codes 15 and 16 only, filers must enter the allowable withholding allowance amount. Publication 515 provides information for withholding agents on determining withholding allowances.
Column (d) Net Income If amounts are entered in Column (c), the difference between Column (b) and (c) must be entered, otherwise Column (d) should be blank.
Column (e) Tax Rate (%) The two-digit tax rate used to determine the amount of withholding from income in Column (b) or (d). If withholding on income for the same income code and recipient was at two different tax rates in the same year, the appropriate information for each tax rate must be reported on separate lines.
Column (f)
Exemption Code		 The appropriate exemption code from the Instructions for Form 1042-S must be entered if Column (e), Tax Rate, is zero.
Column (g) US Federal Tax Withheld The amount of US Federal income tax withheld, less any amount repaid to the recipient.
Column (h) Country Code The country code from the Instructions for Form 1042-S for the country of which the recipient is a resident for tax purposes. US is not an allowable code. Filers may use "OC" , Other Countries, only when the country of residence cannot be determined.
Line 3, Total The total amounts for each appropriate column.
Line 4, Recipient Code The appropriate recipient code from the Instructions for Form 1042-S to denote the correct recipient type.
Boxes 12, 13, and 14 Filers may use these boxes to report state information.

Exhibit 4.6.2-4  (08-01-2002)
Sourcing Rules

TYPE OF INCOME SOURCE DETERMINED BY:
Compensation for personal services Where services are performed
Dividends Type of corporation (foreign domestic)
Interest Residence of payer
Rents Where property is located
Royalties Where property is used
Pensions Where services performed
Scholarship and fellowship grants Residence of payer

Exhibit 4.6.2-5  (08-01-2002)
Examples of FDAP Income

Annuities

Dividends

Gains

Interest

Patronage Dividends

Premiums

Profits

Rents

Royalties

Salaries

Wages

A sales commission paid or credited monthly

A commission paid for a single transaction

Distributable net income of an estate or trust from US sources that must be distributed currently

Taxes, mortgage interest, or insurance premiums

Prizes awarded to nonresident alien artists for pictures exhibited in the US

Purses paid to nonresident alien boxers for prize fights in the US

Prizes awarded to nonresident alien professional golfers in golfing tournaments in the US

Exhibit 4.6.2-6  (08-01-2002)
International Withholding Sections

IRC SECTION TITLE FORM FILING ADDRESS FILING REQUIREMENT
1441 Withholding of Tax on Nonresident Aliens 1042/ 1042–S IRS Service Center
Philadelphia, PA 19255		 Treas. Reg. Sec. 1.1461–1(b) and (c)
1442 Withholding of Tax on Foreign Corporation 1042/ 1042–S IRS Service Center
Philadelphia, PA 19255		 Treas. Reg. Sec. 1.1461–1(b) and (c)
1443 Foreign Tax Exempt Organizations 1042/ 1042–S IRS Service Center
Philadelphia, PA 19255		 Treas. Reg. Sec. 1.1461–1(b) and (c)
1444 Withholding on Virgin Island Source Income 1042/ 1042–S IRS Service Center
Philadelphia, PA 19255		 Treas. Reg. Sec. 1.1461–1(b) and (c)
1445 Withholding of Tax Disposition of US Real Property Interest 8288/ 8228–B IRS Service CenterPO Box 21086 Drop Point 535B Philadelphia, PA 19114 Treas. Reg. Sec. 1.1445–1(c)
1446 Withholding on Foreign Partners Share of Effectively Connected Income 8804/ 8805 IRS Service Center PO Box 21086 Drop Point 535B Philadelphia, PA 19114 IRC Sec. 1446(a)(2) Rev. Proc. 89–31, Sec. 4

Exhibit 4.6.2-7  (08-01-2002)
30% Withholding Relief Documentation

FORM DESCRIPTION
Form W-8 Certificate of Foreign Status
Form W-8BEN Certificate of Foreign Status of Beneficial Owners for United States Tax Withholding
Form W-8ECI Certificate of Foreign Person's Claim for Exemption from Withholding on Income Effectively Connected with the Conduct of a Trade or Business in the United States
Form W-8EXP Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding
Form W-8IMY Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain US Branches for United States Tax Withholding

Exhibit 4.6.2-8  (08-01-2002)
Withholding Agent Liabilities and Penalties

IRC SECTION DESCRIPTION PENALTY
1461 Makes withholding agent liable for the tax required to be withheld Varies
6672 Imposes a penalty for failure to collect, truthfully account for and pay any tax due 100% of tax due
6601 Imposes an interest charge on any amount of tax imposed by title that is not paid on or before the last date prescribed for payment from the last date to the date of payment Applicable Amount
6656 Imposes an addition to tax on failure to make deposit of taxes on the date prescribed 10% or 15%
6651(a) Imposes an addition to tax for failure to file any return required under subchapter A 5% per month; not to exceed 25%
6038(a) Dollar penalty for failure to furnish information $10,000 for each annual accounting period

Exhibit 4.6.2-9  (08-01-2002)
Instructions for Completing Form 1099–A

Box 1, Date of Lender's Acquisition or Knowledge of Abandonment The date of the acquisition of the secured property or the date they knew or had reason to know that the property was abandoned is entered in Box 1.
Box 2, Balance of Principal Outstanding The balance of the debt outstanding is entered in Box 2. The amount only includes unpaid principal on the original debt. Accrued interest or foreclosure costs must not be included.
Box 4, Appraised Value Abandonment or Voluntary Conveyance For an abandonment or voluntary conveyance in lieu of foreclosure, the appraised value of the property is entered in Box 4 and Box 5 is checked "yes." The Fair Market Value of the property for a foreclosure, execution, or similar sale is entered in Box 5.
Box 5, Was Borrower Personally Liable for Repayment of the Debt? An "X" is placed in the applicable box to indicate whether the borrower was personally liable for repayment of the debt.
Box 6, Description of Property A general description of the property is entered in Box 6.

Exhibit 4.6.2-10  (08-01-2002)
Instructions for Completing Form 1099–B

Box 1a, Date of Sale The trade date of the sale must be reported in Box 1a for broker transactions. The date cash, property, credit or script is constructively received is reported in Box 1a for barter exchanges.
Box 1b, CUSIP Number The CUSIP (Committee on Uniform Security Identification Procedures) number of the obligation is reported in Box 1b for transactional broker reporting.
Box 2, Gross Proceeds, Broker Transactions The gross proceeds from any disposition of securities, commodities, or forward contracts are entered in Box 2. Gross proceeds may include account commissions and option premiums. The applicable box must be checked to indicate what amount has to be reported to IRS. A loss from a closing transaction on a forward contract must be reported as a negative amount by enclosing it is parentheses.
Box 3, Gross Proceeds, Barter Transactions The gross amount received by a member of a barter exchange for goods and services is entered in Box 3. Negative amounts must not be reported.
Box 4, Federal Income Tax Withheld Federal income tax withheld as backup withholding is reported in Box 4.
Box 5, Descriptions For broker transactions, a brief description of the disposition item is entered in Box. For regulated futures and forward contracts "RFC" or other appropriate description should be used. For barter transactions, the services or property provided is entered in Box 5.
Box 6, Profit or (Loss) Realized, Current Year Brokers must report the profit or (loss) realized by the customer on closed regulated futures or foreign currency contracts for the current year in Box 6.
Box 7, Unrealized Profit or (Loss), Open Previous Year Brokers must report the unrealized profit or (loss) on open regulated futures contracts at the end of the previous year.
Box 8, Unrealized Profit or (Loss); Open Current Year Brokers must report the unrealized profit or (loss) on open regulated futures or foreign currency contracts at the end of the current year in Box 8.
Box 9, Aggregate Profit or (Loss) Brokers must report in Box 9 the aggregate profit or (loss) for the year from regulated futures or foreign current contracts by using the amounts from Boxes 6, 7, and 8.

Exhibit 4.6.2-11  (08-01-2002)
Instructions for Completing Form 1099–DIV

Box 1, Ordinary Dividends The ordinary dividends paid. Include the recipient's share of investment expenses reported in Box 5. For S corporations, distributions out of accumulated earnings and profits.
Box 2a, Total Capital Gain Distribution Total capital gain (long-term) distributions. This amount should include amounts in Boxes 2b, 2c, and 2d.
Box 2b, 28% Rate Gain Capital gain distributions that are 28% rate gain.
Box 2c, Unrecaptured Section 1250 Gain Capital gains distributions that are unrecaptured IRC section 1250 gain from depreciable real property.
Box 2d, Section 1202 Gain Capital gain distributions that are IRC section 1202 gain from certain qualified small business stocks.
Box 3, Nontaxable Distributions Any nontaxable distributions, if determinable. Generally this is a return of cost (basis).
Box 4, Federal Income Tax Withheld Federal income tax withheld. (Backup withholding IRC section 3406.)
Box 5, Investment Expenses The stockholder's pro rata share of certain amounts deductible by a nonpublicly offered regulated investment company.
Box 6, Foreign Tax Paid Foreign tax withheld and paid on dividends and other distributions on stock. For regulated investment companies, this should only be the amount they elect to pass through to the shareholder.
Box 7, Foreign Country or US Possession The name of the foreign country to which the withheld tax (Box 6) applies.
Box 8, Cash Liquidation Distributions Cash distributed as part of a liquidation.
Box 9, Noncash Liquidation Distributions Fair market value of noncash distributions as part of a liquidation.

Exhibit 4.6.2-12  (08-01-2002)
Instructions for Completing Form 1099–PATR

Box 1, Patronage Dividends The total patronage dividends paid in cash, qualified written notices of allocation, and other property.
Box 2, Nontaxable Dividends The total nonpatronage distributions paid in cash, qualified written notices of allocation, and other property that apply to farmers' cooperatives exempt from tax under IRC section 521.
Box 3, Per-Unit Retain Allocations The total per-unit retain allocations paid in cash, qualified per-unit retain certificates, and other property.
Box 4, Federal Income Tax Withheld Federal income tax withheld under Reg.31.3406(b)(2)-5.
Box 5, Redemption of Nonqualified Notices and Retain Allocations Redemptions of nonqualified written notices of allocation issued as patronage dividends or nonqualified written notices of allocation issued as nonpatronage allocations that are applicable to farmers' cooperatives under IRC section 521 and nonqualified per-unit retain certificates issued with respect to marketing.
Box 6, 7, and 8 Investment, Work Opportunity and Other Credits The patron's share of unused credits that the cooperative is passing through. Credits other than Investment Credits (Box 7) and Work Opportunity Credits (Box 8) should be reported in Box 6 with the appropriate label.
Box 9, Patron's AMT Adjustment The patron's Alternative Minimum Tax (AMT) adjustment.

Exhibit 4.6.2-13  (08-01-2002)
Instructions for Completing Form 1099–G

Box 1, Unemployment Compensation Payments of $10 or more in unemployment compensation including Railroad Retirement Board payments are required to be reported in Box 1.
Box 2, State or Local Tax Refunds, Credits, or Offsets Payments of $10 or more in refunds, credits, or offset amounts of state or local income taxes are required to be reported in Box 2. If the payer can determine that the payee did not itemize deductions on their income tax return for the year giving rise to the refund, the payee is not required to furnish a statement to the recipient. Form 1099-G must be filed with the IRS in all cases. Refunds, credits, or offsets of taxes on unincorporated businesses are required to be reported to IRS and the recipient in all cases.
Box 3, Tax Year for which Box 2 is Reported Box 3 is required to be used if the refund, credit, or offset amount reported in Box 2 is for a tax year other than the tax year just prior to the refund year. If the payer is reporting for other years, the 4-digit year must be entered. If the refund, credit, or offset is for more than one year, a separate Form 1099-G is required for each year.
Box 4, Federal income tax withheld Payers must report any voluntary Federal income tax withheld from unemployment compensation, Commodity Credit Corporation loans, and certain crop disaster payments in Box 4. Payers must report in Box 4 any backup withholding from payments reported in Boxes 6 and 7.
Box 5, Qualified state tuition program earnings QSTPs must report all earnings on distributions from their programs in Box 5. Earnings may be determined with the earnings ratio described in Proposed Regs, 1.529-3. Distributions include tuition credits or certificates, payment vouchers, tuition waivers and similar items, and refunds to the account owner, designated beneficiary or the designated beneficiary's estate. A transfer from the designated beneficiary's account to himself is a distribution. Rollovers are not distributions.
Box 6, Taxable grants All amounts of taxable grants administered by Federal, state or local programs to provide subsidized energy financing or programs to conserve or produce energy with respect to IRC section 38 property or dwelling units located in the US are required to reported in Box 6. Taxable grants of $600 or more are also required to be reported in Box 6.
Box 7, Agricultural payments Payments of $600 or more in USDA agricultural subsidies made during the calendar year are required to be reported in Box 7.
Box 8, Trade or business indicator An "X" must be used in Box 8 to indicate that the amount in Box 2 is a refund, credit, or offset attributable to an income tax that applies exclusively to income from a trade or business.

Exhibit 4.6.2-14  (08-01-2002)
Instructions for Completing 1099–INT

Box 1, Interest Income Not Included in Box 3 Interest income not included in Box 3 is reported in Box 1. A payer includes interest of $600 or more paid in the course of a trade or business under IRC section 6041. A payer also includes accrued interest on bonds sold between interest dates (or on a payment date) and original issues discount on obligations of one year or less on certificates of deposit.
Box 2, Early Withdrawal Penalty Interest or principal forfeited because of an early withdrawal of time deposits that is deductible from income is reported in Box 2.
Box 3, Interest on US Savings Bonds and Treasury Obligations Interest on US Savings Bonds, Treasury bills, notes, and bonds is reported in Box 3.
Box 4, Federal Income Tax Withheld Federal income tax withheld as backup withholding under IRC section 3406 is reported in Box 4.
Box 5, Investment Expenses The regular interest holder's pro rata share of investment expenses deductible by a single-class Real Estate Mortgage Investment Conduit (REMIC) is reported in Box 5.
Box 6, Foreign Tax Paid Any foreign tax withheld and paid on interest is reported in Box 6.
Box 7, Foreign Country or US Possession The name of the foreign country or US possession to which the tax withheld in Box 6 applies is reported in Box 7.

Exhibit 4.6.2-15  (08-01-2002)
Instructions for Completing Form 1099–OID

Box 1, OID for the current year The OID on the obligation for the part of the year it was owned by the record holder is reported in Box 1.
Box 2, Other periodic interest Any stated interest (that is not OID) paid or credited on the obligation during the calendar year is reported in Box 2. This may be reported on Form 1099-INT in Box 3 instead of on Form 1099-OID.
Box 3, Early withdrawal penalty Interest or principal forfeited because of an early withdrawal that is deductible from gross income by the recipient is reported in Box 3. Amounts in Boxes 1 and 2 should not be reduced by this amount.
Box 4, Federal income tax withheld Federal income tax withheld as backup withholding under IRC section 3406 is reported in Box 4.
Box 5, Description The Committee on Uniform Security Identification Procedures (CUSIP) number of the obligation or the abbreviation for the stock exchange, for the issuer used by the stock exchange, the coupon rate and the year of maturity are listed in Box 5.
Box 6, OID on US Treasury obligations The OID on a US Treasury obligation for the part of the year it was owned by the record holder is reported in Box 6. This amount must not be included in Box 1.
Box 7, Investment expenses The regular interest holder's pro rata share of investment expenses deductible by a single-class REMIC.

Exhibit 4.6.2-16  (08-01-2002)
Examples of Reportable Payments

The following list is not all inclusive and is meant to only show examples of some of the items that are reportable on Form 1099-MISC. These payments must be made in the course of a taxpayer's trade or business; therefore, payments for personal services are not reportable - e. g., an individual hiring someone to paint his/her personal residence.

Examples of reportable rents include:

  • Payments for real estate rental such as office space, lease of a building, rental of parking space (unless paid to a real estate agent), pastures, grazing land, etc.

  • Rental or lease payments on copiers, computers, application software, programs, construction equipment e.g. bulldozers, trenchers, tools, etc.

  • Payments for rental of space such as rental of meeting space, motel/hotel rooms.

  • Payments by public housing agencies for assistance payments made to owners of housing projects. See Rev. Rul. 88-53.

  • Payments for uniform and linen rentals.

Examples of reportable medical payments include:

  • Payments to hospitals for medical care (other than nonprofit hospitals that qualify under IRC section 501(c)(3)).

  • Payments to emergency care clinics, physicians, and veterinarians.

  • Payments for medical office visits including employee physicals.

  • Payments for physical therapy and other types of therapy.

  • Payments to opticians/optometrists (but not the purchase of glasses themselves).

  • Payments for nursing home care.

  • Payments to dentists for dental care.

  • Payments for X-rays, laboratory services, drug tests, etc.

Examples of reportable nonemployee compensation include:

  • Professional service fees, such as fees to attorneys, accountants, and architects.

  • Fees paid by one professional to another, such as fee-splitting or referral fees.

  • Payments by attorneys to witnesses or experts in legal adjudication.

  • Payments for services, including payment for parts or materials used to perform the services if supplying the parts or materials were incidental to providing the service, e.g. car repairs where the bill includes both parts and labor.

  • Payments for services such as printing, advertising, catering, messenger service custodial services, electrical repairs, plumbing repairs, lawn maintenance, pest control services, and construction.

Exhibit 4.6.2-17  (08-01-2002)
Common Problems Found on Form 1099–MISC

Forms 1099 without a taxpayer identification number (TIN) shown.

  1. In order to avoid backup withholding of 31% under IRC section 3406 on reportable payments, the payer must obtain the payee's TIN prior to payment of $600 (or $10 in the case of royalties, interest or dividends).

  2. Lack of a TIN on Form 1099-MISC may also generate penalties under IRC section 6721and 6722.

Payments to individuals and sole proprietors must show the individual's name on the top line rather than the name of