Tax reporting changes: Making IRS compliance easy with Supplier Information Management (SIM)
Making IRS compliance easy with SIM, tax reporting requirements can change regularly and, as such, the quality of an organization’s supplier data will determine how rapidly – and at what cost – any new requirements can be incorporated into the database in order to remain compliant. This article reviews the latest changes unveiled by the US Internal Revenue Service (IRS), the impact of these changes, and evaluates how Supplier Information Management (SIM) can be used to mitigate risks.
Changes to IRS forms and impact
The IRS has recently unveiled its reinstated tax form, Form 1099-NEC. The form was last seen in the 1980s and is to be used for reporting ‘Nonemployee Compensation,’ where the payee is considered an independent contractor or freelancer, rather than an employee. This was previously covered on form 1099-MISC. The form 1099-MISC has also therefore undergone some amendments of its own, with several boxes having been redefined as follows:
- Form 1099-MISC Box 7 has been changed to ‘Payer Made Direct Sales of $5000 or more’
- Form 1099-MISC Box 9 has been changed to ‘Crop Insurance Proceeds’
- Form 1099-MISC Box 10 has been changed to ‘Gross Proceeds Paid to an Attorney’ (previously Box 14)
Details formerly captured on 1099-MISC will need to be transferred to new locations, most notably to Box 1 on the new 1099-NEC form (Nonemployee Compensation) and Box 4 (Federal Income Tax Withheld).
The changes mean that data stored in ERPs, which define which box to report information to, will no longer be valid. While ERP vendors will be sending out patches to incorporate the new form and changes to the definitions of boxes, these patches will not change existing customer data. As a result, enterprises now have to determine how to reparse their vendor master data to ensure that the data for each supplier are remapped to the correct locations, such as direct sales of $5000 or more going into Box 7 of Form 1099-MISC; or suppliers appropriate for reporting on Form 1099-NEC being correctly identified. This identification is not always straightforward and there are specific guidelines for certain types of payees, such as attorneys.
There is therefore a high degree of risk. There is a lot of complexity around the data and if the information is not stored in the ERP(s), then some general assumptions may have to be made. This can be costly. If it leads to misreporting, then there are numerous ‘downstream’ repercussions, from dissatisfied suppliers that do not want tax-related issues to be caused from inaccuracies, through to penalties imposed by the IRS.
The question for enterprises is: how quickly can they update their vendor master to accommodate changes in tax reporting requirements? The deadlines can be extremely tight, especially in scenarios where there are multiple ERPs.
For example, after the ERP vendors have pushed out patches, enterprises could then do a series of mass ERP updates, or uploads. However, much of this process cannot be initiated until the patches are live in the ERP(s), so no matter how far in advance plans are made, it is only at this stage that data can really be evaluated – and the scale of the data work required becomes known.
At this point, once each ERP has its patch, it is necessary to schedule a series of mass uploads (although in reality not all ERPs enable easy mass uploads), and have a process established for new suppliers that are added between staging and loading. It requires having the right level of resource in place and most likely opening up a project with IT. The timeline begins to shrink further once all of the limitations around data changes in an ERP have been factored in.
Benefits of a supplier information management (SIM) platform
Enterprises that have a dedicated supplier information management platform will have tremendous advantage in dealing with this – and indeed any other future changes initiated by the IRS.
For example, when the patch is received for the ERP(s), which could be around the November timeframe, the vendor master is already available and there is no reliance on IT to pull that list. Furthermore, the data is already standardized and therefore a decision about each vendor only needs to be made according to the one data source, rather than attempting to reconcile information across multiple ERPs.
When a supplier information management system provides the source for master data, the default tax reporting box numbers for suppliers can be set at this level to match IRS requirements; there is one upload and automatic distribution of the information to the ERP(s).
While the benefits of using a supplier information management system in Procurement are well documented, this use case demonstrates how the value of having good supplier data yields significant benefits for other functions as well, such as accounts payable in this instance.
Some of the risks that have been removed and benefits added include:
- Not being reliant on IT schedules in terms of resources to pull the data. The business has first-hand access to the data.
- The master supplier list is accurate and readily available with no delay
- Rapid deployment of the new tax box mappings and alignment with ERP(s) can be undertaken
- There is less likelihood of fines due to misreporting on the basis of inaccurate data
- Further benefit from automated validations such as Tax ID verifications to ensure correct information is reported to the IRS
This is another example of how functions should be encouraged to collaborate to understand wider business use cases when evaluating platforms and tools relating to data that is created and used enterprise-wide.