June 18, 2021
New and familiar provisions on information reporting and withholding included in Biden Administration's FY2022 budget
In its FY2022 budget and explanation of revenue proposals (Treasury Green Book), the Biden Administration includes three information reporting and withholding proposals, one of which was previously proposed as a revenue offset for its American Families Plan (see Tax Alert 2021-1044). These proposals would require:
Gross inflows and outflows
Financial institutions would be required to report on annual information returns the gross inflows and outflows from all business and personal accounts (including "certain corporations") with a low de minimis gross flow threshold of $600 or a fair market value threshold of $600. These information returns would list physical cash, transactions with foreign accounts, and transfers to and from another account with the same owner.
The new reporting requirement would also apply to entities holding accounts similar to financial institution accounts. Accordingly, the requirements would apply to payment settlement entities (i.e., filers of Form 1099-K, Payment Card and Third Party Network Transactions) and crypto asset exchanges and custodians, in addition to banks, brokers and insurance companies.
Reporting requirements would also apply when (1) taxpayers buy crypto assets from one broker and transfer them to another broker; and (2) businesses receive crypto assets in transactions with a fair market value of more than $10,000.
The proposal would be effective for tax years beginning in 2023 for information returns to be filed in 2024.
Comment: The Green Book cites the importance of information reporting in closing the tax gap for business income by noting that the net misreporting percentage is only 5% for income subject to "substantial" information reporting, compared to more than 50% for other categories of business income.
Under current law, banks and brokers must collect certified TINs (under penalty of perjury) from payees on Forms W-9, Request for Taxpayer Identification Number and Certification, or backup withhold on payments to those payees at a rate of 24%. However, filers of Form 1099-MISC, Miscellaneous Income, 1099-NEC, Nonemployee Compensation, and 1099-K may collect TINs from payees in any manner (not necessarily under penalty of perjury) to avoid backup withholding.
Under the Administration's proposal, all payees would have to submit a TIN under penalty of perjury on Forms W-9 to avoid backup withholding.
The proposal would be effective for payments made after December 31, 2021.
Comment: If this provision were enacted, the IRS would hopefully provide clear guidance on how a payee may sign a Form W-9 electronically. They would also, presumably, grandfather pre-existing relationships and possibly those cases in which the filer has used the IRS's name-TIN matching program to confirm the payee's name/TIN combination.
Broker reporting of crypto assets
The Administration's proposal would require brokers that report crypto asset sales and exchanges to also report certain beneficial owners of entities holding accounts with crypto assets. Specifically, the proposal would require brokers, including crypto asset exchanges and hosted wallet providers, to report information on certain US passive entities and their "substantial" foreign owners.
The proposal would be effective for information returns required to sales be filed after December 31, 2022 (i.e., for 2022 information returns to be filed in 2023).
Comment: While there is currently no reporting required on sales or exchanges of crypto assets, guidance requiring such reporting is high on the IRS's priority guidance plan. To do the proposed reporting, brokers would presumably have to look through US passive entities, whether they are US corporations, partnerships or trusts, to identify potential foreign owners, much like they must currently look through foreign passive entities for FATCA purposes to identify US owners. Collecting this information would require significant changes to the Form W-9. It would also presumably require brokers to compare the information on a revised Form W-9 to the information they collect for anti-money-laundering and know-your-customer purposes.
Currently, the proposal would require only brokers dealing in crypto assets to look through US entities for substantial foreign owners. Expansion of that requirement beyond brokers would significantly affect other US financial institutions.