Recently, the Treasury Inspector General for Tax Administration (TIGTA) released a scathing report showing the Internal Revenue Service failed to collect nearly $9 billion in backup withholding tax in Fiscal Tax Year 2013. From the TIGTA press release:
“TIGTA also identified 13,647 payers who submitted 27,576 information returns with the same missing payee TIN for two years in a row (TYs 2012 and 2013). These returns reported payments of about $14.3 billion. Payers were required to immediately withhold nearly $4 billion from these payees, but just more than $1 million was withheld.”
While the press release above is bad, it skims the surface. TIGTA identified an additional 62,714 taxpayers who submitted a total of 203,751 information returns over a four consecutive year period, and in every year used the wrong Taxpayer Identification Number (TIN). Furthermore, these taxpayers were required by law to withhold and remit almost $5 billion but paid only $1 million to the IRS during this period.
Much like elections in America, this even affects the tax returns of about 1.6 million dead people.
I think it goes without saying, this will become an issue of interest with the audit and enforcement agent of the IRS immediately if not sooner.
Let’s take a look at Backup Withholding Tax….
But First, the Required Legalese…
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
What is Backup Withholding Tax?
When banks and businesses pay certain kinds of income, they are required to file information returns (Form 1099s) with the Internal Revenue Service, even though these payments are not frequently subject to withholding tax. The types of payments which require this information return include:
- Interest payments, (Form 1099-INT)
- Dividends, (Form 1099-DIV)
- Patronage dividends, but only if at least half of the payment is in cash, (Form 1099-PATR)
- Rents, profits, or other income, (Form 1099-MISC)
- Commissions, fees, or other payments for work performed as an independent contractor, (Form 1099-MISC)
- Payments by brokers and barter exchange transactions, (Form 1099-B)
- Payments by fishing boat operators, but only the part that is in cash and that represents a share of the proceeds of the catch, (Form 1099-MISC)
- Payment Card and Third-Party Network Transactions, (Form 1099-K)
- Royalty payments, (Form 1099-MISC)
For purposes of this article, we will be looking only at a scenario where a business is making payments to a consultant or subcontractor.
When a business establishes a relationship with a contractor, the business is required to capture some information from the contractor before remitting payments to the contractor – specifically the Taxpayer Identification Number (TIN). If the contractor is an individual, that would be their Social Security Number or Individual Taxpayer Number (ITIN) if they are a non-resident alien. If the contractor is a business, it could be their Employer Identification Number (EIN). The contractor is required to furnish the business with a Form W9, disclosing its Taxpayer Identification number (TIN) along with the legal name of the contractor's business, the address of the contractor and the entity type of the contractor's business. This information is used to complete the 1099 information filing with the IRS.
What if the company either does not require a Form W9 or the contractor refuses to remit the Form W9?
According to the Internal Revenue Code, Section 3406(b), the company must now withhold and remit backup withholding tax to the IRS on behalf of the contractor, even though these payments would not normally be subject to withholding. The amount which must be withheld and remitted is 28% of the total payout to the contractor. Intentional disregard by either party to furnish this information carries a substantial civil and/or criminal penalty.
Why This Matters to Authors and Curators on Steemit
Steemit is a platform which rewards authors for content generated, and curators are paid with curation rewards for upvoted content. Essentially Steemit is a business which is providing payment to subcontractors (authors and curators) much like the example above, which is reportable income. It is entirely possible upon examination; the IRS could determine the rewards distributed by the Steemit corporation to the authors and curators fall into one of two categories:
- Commissions, fees, or other payments for work performed as an independent contractor, (Form 1099-MISC)
- Payment Card and Third-Party Network Transactions, (Form 1099-K)
It may further be determined; the Steemit corporation had an obligation to collect Taxpayer Identification Numbers for a majority (if not every) of the individuals who received rewards (either author or curation rewards). Since the Steemit Corporation did not require this information, nor was it provided by any of the individuals paid, Steemit should have been collecting and remitting backup withholding taxes to the IRS on behalf of the authors and curators.
Setting aside the issues the Steemit Corporation would face, what does that mean for authors and curators?
The immutable blockchain which not only logs all the posts and comments of the community also records all the rewards earned by every individual on Steemit. It is the perfect source document for auditing earnings as well. In a nutshell, be certain to record, report and pay your income tax from your income earned here on Steemit. I cover the topic of how to do this in a previous article.
Wrapping it up
There is a very real possibility upon examination; the Steemit Corporation had an obligation to collect and remit informational tax reporting and/or collect and remit backup withholding tax. Be certain to protect yourself in the event of an examination, and record, report and pay all income and income tax due from both your author and curation rewards. The IRS has determined this is an area of interest this tax season. From Karen Schiller, commissioner of Small Business/Self Employed Division of the IRS:
“We note that, as a result of your previous audit and recommendations, we had convened a team to review the backup withholding process from beginning to end,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the latest report. “The team has been mapping and validating the existing processes in order to identify and evaluate potential gaps. They are looking for solutions to close any identified gaps in our process that can be implemented with our current available resources.”
Have a tax question? Please feel free leave a question in the comment section below and I may feature it in a future blog post.
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