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About Form 1098-E

February 1st, 2011 No comments

Form 1098-E

Form 1098-E must be filed by any financial or government institution, individual, or other entity who receives over $600 in student loan interest from one person during a year. If one entity is receiving interest payments on behalf of another, as in the case of a collection agency, it is the first entity to handle the payment that must report it on form 1098-E.

To qualify as a student loan for tax purposes, a loan must be financed or regulated under Federal, State or local government programs dealing with higher education. The student must officially certify that the loan is used only to pay postsecondary school expenses at an accredited college, university, vocational school or vocational school. The student cannot have used loan money to pay for medical or insurance expenses, room and board, or sports or other hobbies. Mixed-use loans are not reported on form 1098-E.

A copy of form 1098-E is sent to the borrower, who can then use it to claim a Student Loan Interest Deduction. This reduces the amount of income subject to tax by up to $2,500 Per Return, as long as the borrowers are not claimed as dependents on anyone else’s tax return and have a modified adjusted gross income (MAGI) not more than $50,000 for single taxpayers, or $100,000 for married taxpayers.

Box 1 of Form 1098-E lists the total student interest received by the lender, while Box 2 is checked if loan origination fees or capitalized interest are part of the figure listed in part one. (Origination fees or capitalized interest do not have to be included as part of the Box 1 total if the loan was taken out before 2005.)  Other information on the form includes the account numbers, mailing addresses and telephone numbers of the recipients and lenders.

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About 1099-CAP Forms

January 31st, 2011 No comments

Acquisition of Control, and Substantial Change in Capital Structure, are two major developments in a company’s fiscal condition that require reporting for tax purposes.  An Acquisition of Control occurs when, subsequent to a transaction or series of transactions, one corporation ends up with more than 50% ownership of stock (in all stock classes) in another corporation. A change in capital structure involves the transfer of assets from one corporation to another due to bankruptcy, or otherwise, a consolidation or merging of the assets of two companies. A change in corporate identity, form or place of organization can also be considered a change in capital structure.

When a company undergoes changes in control or capital structure it is necessary for it to file a 1099-CAP form with the IRS. Copies of the form are then distributed to shareholders who receive cash or property benefits from the new structure. Many shareholders are exempt from this requirement, including most corporations, tax-exempt organizations, IRA’s, regulated investment companies, and banking organizations. Companies whose shareholders are entirely made up of exempt entities are not required to file 1099-CAP forms.

Any broker who knows or has decisive grounds to infer that a company whose shares they administer on behalf of a client has undergone significant capital restructuring, is required to file a 1099-CAP form. This is not the case only if their client is an exempt recipient.  United States corporations must file 1099-CAP in the case of restructuring unless the rearrangement involves stock of less than 100 million dollars, or if the corporation enables information pursuant to their restructuring to be reported through other legally prescribed means.

Failure to file or lateness in filing can lead to a penalty of up to $500 a day, and up to a maximum of $100,000 total.

A 1099-CAP form lists the account numbers of the shareholders involved, the corporation’s EIN number and contact information, the number of shares exchanged, the Aggregate Amount of cash and shares received and the Classes of Stock Exchanged.

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About Form W-3

December 17th, 2010 No comments

IRS W-3 form is a relative of the more commonly known W-2 form, which reports wages and withholding for each individual employee in January. The W-3 form by contrast, is a single filing by the employer (in March) that lists all wages and compensation paid out to its employees. The W-3 totals up wages paid and taxes withheld. Household employers with even one employee must file a W-3 form.

Essentially, the W-3 contains the sum of all information reported on all W-2’s forms. This includes such items total wages tips and other compensation, total security wages, total social security tax withheld, total Medicare wages and tips, total Social Security tips, total allocated tips, total advance earned income tax credit payments, total dependent care benefits, total non-qualified plans, total deferred compensation, and totals of third party sick pay, and more. It’s important to gather this information from employees throughout the year to avoid a crunch around filing time.

Form W-3’s also list the Employer’s name, address and ZIP code, the employer identification number (EIN), any other EIN’s used in the same year, the kind of payer (whether Military, Medicare Government Exempt etc.) control number (allocated by Payroll software. It must report the total number of W-2’s aggregated, and should completed only when copy A of W-2 forms are being submitted.

Usually employers sign the W-3 form. However, it can also be signed by a transmitter or sender, such as a service bureau, reporting agent, paying agent, or disbursing agent, if the sender is authorized to sign by an agency agreement.

To order scannable paper W-3 forms, one should call 1-800 IRS TAX-FORM. W-3 forms can be filled out electronically with our W-3 software that can be found at http://www.1099fire.com

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About Form 5498

December 16th, 2010 No comments

An IRS Form 5498 must be filed for any individual retirement arrangement (IRA) engaged or maintained during the previous calendar year. An exception is made if no contributions, of any kind, whether rollovers, re-characterizations or conversions were made that year.

Direct rollovers from qualified plans must be included on the form. On the other hand, direct trustee-to-trustee transfers from a traditional IRA to another traditional IRA, or a simplified employee pension, do not. Individuals with IRAs will receive a 5498 form every year from their financial institution sometime in late April or May. They have an option to make contributions throughout the year, ending on April 15th Spousal IRAs have to be filed on their separate form.

Recharacterizations of IRA contributions must be reported. A participant in an IRA has the option after one year, to recharacterize or, in essence, transfer a contribution to a second IRA. In this case the trustee of the first IRA must report the amount contributed before re-characterizing.

Catch-up contributions, made by participants who are 50 years or older (for whom the contribution limit is raised from $5000 to $6000) may be made under salary reduction or a SIMPLE IRA plan. It is necessary to report any conversion of an IRA into a Roth IRA. In the case of any revocation of a traditional, Roth, or SIMPLE IRA after seven days, or its closure for at any time, a Form 5498 must be filed to report the various forms of contribution to the IRA, whether regular, rollover or conversion. Individual IRA conversions, either 60-day rollovers or direct trustee-to-trustee transfers are not considered contributions. One is still allowed to make the maximum allowable IRA contribution after rolling over an IRA.

Special rules for filing apply to certain citizens, such as U.S. military personnel stationed in combat zones or qualified hazardous duty areas. Such personnel have an additional period after the normal contribution due date (April 15th) to make contributions, equal to the time they were in the combat or hazardous area, plus 180 days. Special rules for filing may also apply for individuals living in areas deemed disaster zones by the U.S. president.

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About Form 1099-R

December 14th, 2010 No comments

IRS Tax Form 1099-R is filed for distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans and IRAs in the amount of $10 or more. Death benefit payments from employers not part of a pension or profit-sharing plan must also be reported, as do disability payments made from a retirement plan. Wage payments subject to withholding are not reported on the 1099-R. Military Retirement annuities, income tax withholding, distributions of section 404 (k) dividends from an employee stock ownership plan (ESOP), Life Insurance, annuity and endowment contracts, and charitable gift annuities are all examples of transactions to be filed on Form 1099-R. Copies of Form 1099-R must be provided to the income recipients per the general requirements for information returns.

Individual Retirement Arrangement distributions, including Deemed IRAs, Roth IRAs, Traditional, SEP, and Simple IRAs, are all included on Form 1099-R. IRA distributions are subject to 20% withholding and must be reported in box 4. Corrective distribution from an IRA, IRA revocations and account closures, and transfers from simple to non-simple IRAs must be entered in various sections of the form. If a traditional or Roth IRA is closed within the first seven days or revoked in connection with non-satisfaction of the Customer Identification Program requirements, distributions must be reported.

A separate 1099-R form must be filed for a designated Roth IRA. Deductible Voluntary Employee Contributions (DVECs), also require a separate 1099-R to be filed, except in the case of a direct rollover. Direct rollovers, or the direct payment of the distribution from a qualified plan to a traditional IRA, or Roth IRA, can be made for an employee, an employee’s surviving spouse, or a non-spouse designated beneficiary.

Box 1 of Form 1099-R is where the taxpayer enters Gross Distribution, or the total amount of distribution before withholding. Direct Rollovers, IRA rollovers, and premiums paid for insurance protection are all entered here, along with employer securities and other property. Box 2 is where the taxable amount of income reported on Box 1 is entered.

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About Information Returns

December 13th, 2010 No comments

An information return is a document that must be filed to update the IRS about wage and non-wage related business transactions and income for individuals, businesses, families, estates, partnerships and trusts. It does not specifically determine a tax liability, but allows for the assessment of earnings that might be relevant to such a liability.

Information listed on the return could include such earnings as interest payments and dividends, payments to subcontractors and changes in tax status, such as alterations in the makeup of a household (a marriage, the addition of new dependents, etc.). Copies of the return must be sent to the recipient of the income. Failure to file an information return can result in penalties and a higher tax liability down the road.

Information returns are necessary for a wide variety of additional transactions and earnings, including accelerated death benefits, broker transactions, advance earned income credit, fish purchases, agriculture payments, golden parachutes, allocated tips, annuities, attorney fees, employee awards, bonuses, awards, barter exchange income, employee car expenses, charitable gift annuities, crop insurance proceeds, education loan interest, insurance services, and many more.

Forms must be filed to report contributions of motor vehicles, boats, and airplanes, tuition related expenses reimbursements and government payments such as unemployment compensation, and tax refunds. Changes in corporate control and capital tax structure for a company also bears filing an information return.

IRS rules for information returns stipulate minimum proceeds necessary to mandate filing for a variety of transactions. For example, mortgage interest, student loan interest, and cancellation must be filed at a rate of $600 or more. Dividends and distributions, interest income, unemployment insurance and payments must be filed at $10 or more. Death benefits, health coverage tax credit payments, exercise of stock options, acquisition of abandoned property, and cancellation of debt, must be filed at all amounts.

Each type of transaction has its own form associated with it, and they are due at different times. This makes organizing and tracking information return filings a complex task. Most companies use an automated system to arrange returns and, where possible, file electronically. This can be done using our software at http://www.1099fire.com

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More Info about Form 1042-S

November 30th, 2010 2 comments

Internal Revenue Service Form 1042-S, titled “Foreign Person’s U.S. Source Income Subject to Withholding,” must be filed for non-residents and foreign entities that have derived income or gains from investments in the US in the past year. These gains can include ordinary income dividends, long-term capital gains, or return of capital distributions. Gains from interests in US real estate also require reporting. Foreign corporations, foreign partnerships, foreign estates and foreign governments and foreign individuals should all list gains from US-based investments on the 1042-S form.

Other types of income that should be reported on Form 1042-S are: wages of employees who have claimed tax treaty benefits, fellowship/scholarship income, payments made to foreign independent contractors, royalty payments, and prizes or awards.

Form 1042-S includes a space to report withholding on investment distribution. Short-term capital gain and qualified interest income can be exempt from withholding (this exemption requires verification of the investor’s foreign status), as are long-term capital gains. Foreign persons or entities are not required to file a return if the withholding amount is equivalent to their tax obligation, or if they have not participated in income-generating trade or business inside the United States in the past year.

A 1042-S form should be filed by every withholding agent. This means an individual, a corporation, partnership or trust responsible for payment towards the foreign person’s income or investment gains. The withholding agent is defined this way regardless of whether actual withholding is required. Records of the form should be kept for three years after the original reporting date.

Every entity that engages in business with a foreign person, corporation or partnership is required to file a return for the income or capital gains they pay out. The benefit of this is that it allows non-resident alien individuals and foreign businesses to easily keep track of their investments, trading interests, and income sources within the United States.

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About IRS Form W-2G

November 30th, 2010 No comments

The Internal Revenue Service Tax Form W-2G must be filed to report payment of certain types of gambling winnings and withholdings on those winnings. Forms of gambling covered by W-2G include bingo, keno and slot machines, horse racing, sweepstakes, wagering pools and lotteries. Copies of the form must be provided to the winner as well as the IRS.

Each type of gambling has specific rules for filing and withholding, and these rules lay out minimum requirements for reporting winnings. For instance, bingo game or slot machine winnings must be reported if over $1,200 (not reduced by the wager). Keno winnings of more than $1500 (reduced by the wager) must be reported and more than $5,000 of poker winnings (reduced by the buy-in) must be disclosed on the W-2G. Horse racing, dog racing, jai alai, and all other gambling winnings must be reported only if higher than $600 and at least 300 times the amount of the wager, or are subject to federal income tax withholding.

Withholdings are entered in box 2 of the W-2G form. Withholding is required at the rate of 25% for gambling winnings of more than $500 (wager reduced), in sweepstakes, wagering pools, lotteries, keno, or any other category of gambling as long as the winnings are more than 300 times the wager. Backup withholdings at a rate of 28% can be required if the winner does not provide a correct taxpayer identification number and the other conditions for withholding have been met.

Electronics, automobiles, or any other non-cash payment must be calculated at FMV (Fair Market Value), and tallied into the total winnings. After subtracting the wager, if the non-cash transfer is valued at over $5,000 it is subject to gambling tax withholding. This can either be paid by the winner to the payer in the amount of 25% or by the payer, in the amount of 33.33%.

For bingo, keno, and slot machines, the W-2G form has boxes to indicate the type of wager, date of the winning transaction, ticket number and card number. For poker tournaments, the name of the tournament and its sponsor and the date of the poker tournament must be listed. For horse and dog racing, the date of the winning event, the race involved, and the type of wager (whether big triple or trifecta for instance) should be given. In all cases the amount of federal and state income tax withheld, and the name, address and TIN of the winner must be entered.

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About Forms 3921 and 3922

November 29th, 2010 No comments

A corporation must file an IRS Tax Form 3921 each time it transfers stock to an employee who has exercised an incentive stock option, with an exception made for employees who are non-resident aliens. An incentive stock option is defined in section 422 b of the tax code as an option to purchase stock granted by a corporation to any individual in connection with her employment, with certain conditions having been met: The option must be granted under a plan that has been approved by the corporation’s shareholders and that specifies the total number of shares each employee is able to receive, and which classes of employees are eligible to receive options. The exercise price per share must not be less than the fair market value of stock at the time the option is granted and the employee cannot exercise the option more than ten years after that time.

Form 3921 includes such information as the date the option was granted, the date the employee exercised the option, the number of shares of stock transferred to the employee, the fair market value (FMV) of the stock when the option was exercised, and the exercise price of the stock. There is a space for the mailing address and federal identification number (FIN) of both the transferor and the employee, and for the name, address and FIN of the corporation issuing the stock, if other than the transferor.

Tax Form 3922 must be filed by a corporation that has during the previous calendar year transferred incentive stock to an employee under the particular conditions described by section 423c of the tax code. 423c involves a special rule that takes effect if the option is priced lower between 85% and 100% of the fair market value of the stock. It specifies that the employee (in the event of his timely disposition of the share, or death) is to have the amount by which the fair market value exceeded the price of the share remunerated to him as gross income. A return is required under these conditions laid out in 432c only for the first legal title for a share transferred.

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FAQs About Information Returns

September 30th, 2010 No comments

What is an information return?

Information returns are documents with tax or other information that are required to be filed with the IRS. They are intended to report specific business transactions. Information returns are not considered to be tax returns and they are used for informational purposes alone.

Who must file information returns?

Any business, corporation, individual, estate, or other organization that takes part in a reportable transaction during the calender year must file an appropriate information return. In most cases, statements must also be sent to the other parties involved in the transaction. Those who are filing more than 250 information returns are required to file them electronically, although lower numbers of information returns are also more convenient to file electronically.

Which transactions are reportable?

The IRS lists 120 transactions that are reportable, and the list is by no means complete. If a transaction is not listed on the IRS’s website it does not mean that the transaction does not need to be reported.

The minimum amount of the transaction which necessitates reporting depends on the type of transaction and is determined by the IRS.

How do you file information returns?

Information returns can be filed in paper form by mailing the form to the appropriate address as directed by the form. There are also some information returns that can be filed with magnetic media. Forms 1099, 1098, 1042-S, 3921, 3922, 5498, W-2 and W-2G and others can be filed electronically via FIRE software (File Information Returns Electronically) with an internet connection.

Our website provides software for these and other information returns and you can file them electronically through our site as well. Electronic filing is better for the speed and accuracy of the information return and it is recommended to file electronically over paper filing when possible.

What is the deadline to file information returns?

Although the deadline varies, many information returns have to be provided to those involved in the reportable transaction by January 31st.  The information returns are usually required to be filed to the IRS by February 28, but this deadline varies and the exact date for the particular information return can be found on the form itself.

What if I need more time?

If you need more time, the IRS offers the option of applying for an extension with Form 8809. You are automatically approved and granted 30 more days to send your information returns to the IRS.

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