Latest news with #Form1099-DA
Forbes
05-05-2025
- Business
- Forbes
Tax Court Ruling Could Impact AI Software Tax Reporting
Artificial Intelligence (AI) continues to impact all industries as companies and individuals try and find the perfect balance between automation and sufficient oversight and monitoring. Tax reporting would appear, on its face, to be a prime candidate for the promises of efficiency achieved through AI's streamlined review of large amounts of data and identification of potential errors or inconsistencies. The Internal Revenue Service (IRS) already uses AI to select individuals and partnerships for audit, identify fraud, and other compliance and enforcement functions. I've previously written about the IRS' historical struggle with auditing partnerships and the future of partnership enforcement, which may include the use of AI. A Government Accountability Office (GAO) study on government use of AI has indicated that its own studies require high-quality data and a skilled workforce to truly recognize the benefits of the technology. It has been reported that the IRS pausing current modernization efforts to evaluate the use of AI going forward. However, a recent U.S. Tax Court ruling signals that the increased use of software for compliance may not spare taxpayers from errors made by the new technology. In fact, the immediate future may be less forgiving for errors by software than traditional human error. The IRS receives millions of third-party informational returns used for analysis and enforcement against non-compliance with reporting and tax payment obligations. Information reporting can come from employers (e.g. Form W2), non-employee compensation (e.g. 1099-NEC), or intermediaries to the sale of goods or services (e.g. 1099-K), and an entirely new set of informational reporting was sought and imposed for digital assets. Congress and President Donald Trump recently removed informational reporting requirements for certain DeFi transactions indicating the burden on small businesses and the digital asset community. However, informational reporting is still required for certain 'brokers' involved in digital assets transactions on the new IRS Form 1099-DA. Businesses, especially small businesses, the added costs of creating, implementing, and overseeing compliance with informational reporting can be quite burdensome. Many such businesses choose to purchase software programs to assist in those compliance efforts. As the availability of software programs implementing AI promise savings of both time and cost adoption is certainly expected to increase. Companies must comply with tax reporting obligations or face potentially large penalties by the IRS for non-compliance. Therefore, an AI solution would be an attractive option. However, based on a recent Tax Court case the use of an AI tax reporting software solution may not save you from large tax penalties if the software makes a mistake. One of the many informational reporting penalties the IRS can assess is for failure to file a Form 8300 when a business receives more than $10,000 in cash in one or more related transactions. In a recent U.S. Tax Court case, Dealers Auto Auction of Southwest LLC v. Commissioner, an Arizona company purchased specialized software intended to assist with compliance in preparing IRS Form 8300 after a noncompliance incident in a previous year. Despite having the software in place, the IRS determined that the company failed to file all of the required Forms 8300 and assessed $118,140 in penalties. Failure to file an informational return like the Form 8300 results in a $250 penalty for each return not filed not to exceed $3 million in any calendar year. This penalty can, in some situations, be enhanced if the IRS deems the failure to be 'intentional disregard' of the statute. In general, intentional disregard exists where a taxpayer knows or should know of the obligation and chooses to ignore it. Actual knowledge is one thing, but 'should know' may be construed differently by the IRS and the impacted taxpayer. This is especially true in the context of a taxpayer's responsibility over software, using artificial intelligence or not, it has purchased to handle compliance. Information return penalties, usually assessed under Section 6721 of the Internal Revenue Code, can be particularly high because of their per failure application and potential enhancement for alleged 'intentional disregard." Thousands of mistakes at a $250 per mistake charge adds up quickly and a $3 million ceiling on penalties is little comfort. There is, thankfully, a defense against imposing the penalties if it can be shown that the failure is due to reasonable cause and not willful neglect. A taxpayer meets the 'reasonable cause' exception to information reporting penalties if they can show significant mitigating factors for the failure or the failure arose from events beyond the filer's control. The statement outlining the facts showing reasonable cause is usually signed under penalties of perjury, which comes with its own risks for misstatements. In Dealers Auto Action of Southwest LLC, the company involved argued that it relied on the software it purchased but the software did not perform as intended. However, the Tax Court noted that the company's own brief indicating 'there may have been a failure with the computer system' and that the record was not clear on what specific failures involved the software and whether the failures might be connected to input errors. The company claimed that the failure was due to software malfunctions beyond its control and the IRS countered with the argument that reliance on software does not establish reasonable cause. Several individual taxpayers have tried, unsuccessfully, to defeat penalties using reasonable cause defenses claiming that tax preparation software like Turbo Tax generated the errors resulting in accuracy penalties. The Tax Court, in Bunney v. Commissioner, held that Turbo Tax is only as good as the information entered. However, IRS regulations still indicate that circumstances indicating reasonable cause against accuracy penalties include 'honest misunderstanding of fact or law' and 'isolated computational or transcriptional' errors. Also, the regulations still provide for reasonable cause against accuracy penalties if the taxpayer relied on qualified professional tax advisor (e.g. CPA) when taking a position later determined to be incorrect. Perhaps a future case will decide whether reliance on a CPA using AI still meets the reasonable cause exception or not. The Tax Court, in Dealers Auto Auction of Southwest LLC, did rejected the IRS' 'blanket assertion' that software malfunctions cannot qualify for reasonable cause. Although this gives hope for future taxpayers, it did not provide penalty relief in Dealers Auto Auction's claim of software errors. Why not? It appears that company was unable to show sufficient facts to convince the Tax Court that the software was really to blame. The Tax Court found that the record did not adequately show as software failure and that the company itself had failed to show adequate controls to identify the noncompliance. The Tax Court also pointed to the lack of proof that the company acted reasonably before or after the failure. For example, the Tax Court noted that there was no evidence regarding the installation, training or use of the software. Also, the number of Forms 8300 decreased from 212 in 2014 to 116 in 2016 and no explanation was given as to why the reduction appeared reasonable. Regardless, the Tax Court appears to be indicating there needed to be more affirmative actions by the taxpayer in implementing and overseeing the software and its operation. As AI attempts to take more and more human interaction out of the process, how will future AI misfunctions be judged when 'reasonableness' is required for penalty relief. The government recognizes the burden on businesses, especially small businesses, to comply with informational reporting requirements but maintains the expense is required to enforce the tax laws and maintains penalties for failures in reporting. Both the IRS and companies under reporting obligations are looking to software innovation, including artificial intelligence, to ease burdens on analysis of large amounts of data. As the IRS attempts to reduce both costs and people through increased use of AI will it expect tolerance of its own software malfunctions. If the IRS' AI system results in errors there are few remedies for taxpayers recover the cost of disputing those errors. The IRS has penalties and other enforcement mechanisms to punish private use of software that doesn't produce expected results. According to this current Tax Court decision, it appears that taxpayers will need to maintain evidence of proper operation and oversight of any software because the benefit of the doubt isn't going to the taxpayer in software situations.
Forbes
14-04-2025
- Business
- Forbes
Trump Signs Crypto Reporting Repeal But Thorny Tax Issues Remain
DeFi -Decentralized Finance on dark blue abstract polygonal background. Concept of blockchain, ... More decentralized financial system Since 2014, the IRS focus on the tax treatment and tax reporting issues for crypto has grown and become more intensity. The IRS has been forced to confront digital assets and has introduced a number of reporting requirements for holders, exchanges and others. Now, President Trump has taken a step off the required and looming reporting by signing H.J. Res. 25. The new law repeals a set of regulations introduced by President Biden in 2024 that required decentralized finance brokers to report their gross proceeds from cryptocurrency sales to the IRS using a new variety of IRS Form 1099, the Form 1099-DA, 'Digital Asset Proceeds From Broker Transactions.' The new form and requirements were controversial from the start, in part because the filing of this form would reveal the identity of the digital asset's recipient to the IRS. Any Form 1099 reporting income—such as Form 1099-MISC and Form 1099-NEC—does just that, with the recipient's Social Security Number so that the IRS computers can crosscheck against their tax returns. Everyone must report their income, and that includes income from crypto transactions. However, many privacy-minded taxpayers are reluctant to disclose more information to the government. Some in the crypto community are particularly concerned about this issue. Brokers are still susceptible to an audit of their crypto sales, including via a John Doe Summons, which was widely used by the government with Coinbase, Kraken and other exchanges. The idea is to get account holder details from the exchanges directly. A big advantage the government sought to reap from Form 1099 reporting is the ease with which reporting can be verified via computer matching. If amounts reported on Form 1099 don't match amounts on tax returns, discrepancies can quickly be identified. The Congressional Joint Committee on Taxation estimated that the rollback of these regulations could add up to $3.9 billion to the federal deficit over ten years. It is possible that this long-discussed reporting requirement could be revisited in later administrations. However, the bill was passed under the Congressional Review Act, which prevents the IRS from issuing a new, substantially similar rules to replace the repealed ones without first going through Congress. Until Congress moves away from its current deregulatory stance, it is unlikely we will see similar reporting requirements introduced. But that doesn't mean crypto tax reporting is gone or is easy. The IRS announced in 2014 (Notice 2014-21) that, for tax purposes, cryptocurrency is not currency, it is property. Since crypto is treated as property (e.g., stocks or real estate), taxpayers pay taxes if they realize a gain, but may also be able to claim losses when they are realized. As property, taxpayers must know when they bought the crypto, how much they paid and what they received for it. For stocks and real estate, this may be simple. For crypto, it can be much more difficult. The IRS's FAQs state that all income, gain or loss involving crypto must be reported regardless of the amount and regardless of whether you received a Form W-2 or 1099. If you can't prove your basis to the IRS, the IRS will assume that your basis is zero. Many crypto investors make purchases at multiple times and over many years. Don't forget the IRS question near the top of tax returns either. IRS tax returns ask this basic question, with appropriate variations tailored for corporate, partnership or estate and trust taxpayers: 'At any time during [tax year], did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?' The question must be answered by all taxpayers. Normally, you must answer "Yes" if you: For frequently asked questions and other details, visit the Digital Assets page on No matter what the transaction, you may have a gain or a loss, something quite apart from the income tax impact on the person you are paying. Take paying for services. Say you pay someone as an independent contractor with crypto. To report the payment, if you are in business and the payments during the year reach $600, you'll need to issue them an IRS Form 1099. Whatever the type or amount of crypto you use, the IRS will say you paid them the current market value of the crypto on that day. When you pay an independent contractor and issue a Form 1099, you can't enter a number of bitcoin on the form. You must put the value in U.S. dollars as of the time of payment. The contractor you pay might keep the crypto, or might sell or transfer it the same day, but that doesn't impact your taxes. How about wages paid to employees? Wages paid to employees using crypto are taxable and you must withhold taxes. That means withholding on other cash, or paying them partly in cash so you can send the cash to the IRS. It can be complex.
Yahoo
02-04-2025
- Business
- Yahoo
Don't forget to report your gains from crypto — the IRS already knows about them
While the exact amount is up for debate, the IRS estimates that it loses billions of dollars each year due to taxpayers underreporting the income they receive from trading cryptocurrencies and other digital assets. For several years, the agency has been working to better enforce the rules around crypto trading and ensure that taxpayers are accurately reporting their gains from digital assets transactions. In the past, it has been up to taxpayers to accurately and truthfully report the entirety of their crypto trading activities, including gains or losses, as well as the fair market value of the asset at the time of transaction. Some brokers and crypto exchanges may have provided reporting, but they had no obligation to do so. This has been a point of frustration for both the IRS and taxpayers alike, as there have been no standardized reporting requirements to follow up to this point. But under a law passed by Congress as part of the 2021 Infrastructure Investment and Jobs Act, crypto exchanges and brokerages will soon be required to report their customers' transaction details, including cost basis and sales proceeds, directly to the IRS using form 1099-DA. This shift to third-party reporting represents a major breakthrough for the IRS, as this will be the first time they have such a clear picture of what each crypto holder owns. These new rules mirror the reporting requirements that have been enforced against traditional brokerage firms regarding the way they report sales from stocks and other securities for years. However, the rules were not finalized by the Treasury Department until 2024 and will take effect starting with any transactions taking place in 2025. That said, investors should not assume that they will receive a pass for 2024, as many crypto brokerages and exchanges have already been providing such information to the IRS voluntarily. Crypto investors should also be aware that Form 1099-DA gets reported to the IRS using a standardized format, which includes cost basis, acquisition and sale dates, and gross proceeds. While crypto brokerages will begin to shoulder the responsibility of accurately reporting transactions under these new IRS rules, the ultimate burden still lies with the taxpayer. Active traders who transfer assets between platforms or engage in more complex activities, such as yield farming or staking, should carefully examine each 1099-DA that they receive, looking for discrepancies between their own records and what was reported. To help manage the complexity, crypto investors should keep a detailed transaction list that includes the dates of purchase and sale, asset type, ticker symbol and the value of the token at the date and time of each transaction. In addition, any exchange of crypto for goods or services is also tax liable and needs to be reported. Although this information can certainly be tracked using a basic spreadsheet, there are several companies that offer software capable of connecting to multiple exchanges and wallets and can consolidate all that data into one concise report. Need an advisor? Need expert guidance when it comes to managing your investments or planning for retirement? Bankrate's AdvisorMatch can connect you to a CFP® professional to help you achieve your financial goals. Many third-party software applications even generate a pre-filled Form 8949 and Schedule D so that taxpayers who recognize a discrepancy between their own records and what was reported to the IRS can easily make the necessary corrections on their tax return. The crypto tax landscape is evolving quickly, and 2025 will be a pivotal year. Up until this point, the IRS has relied primarily on taxpayers to self-report their holdings of digital assets, opening the door to incomplete or inaccurate data, or even an outright failure to report the trading income. But with the IRS set to begin receiving more accurate data directly from the trading platforms themselves, the agency will be better positioned to spot discrepancies between what taxpayers choose to report and what the government already knows. Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation. Sign in to access your portfolio
Yahoo
14-02-2025
- Business
- Yahoo
Navigating the IRS alphabet soup: There are nearly two dozen different 1099 forms, we explain them all
Tax season is well underway, and that means you should have received one or more income statements from employers or any other entities that paid you income in 2024. IRS rules state that all tax documents must be made available to filers by January 31, or postmarked by this date. The most important of these is the W2—a wage and tax statement from your employers—but there's also an alphabet soup of 1099 forms to watch out for. Maybe you received Form 1099-DIV? That's for dividend income. How about 1099-G, for unemployment benefits? Did you receive income via payment apps last year? If so, watch out for Form 1099-K. These are just a few of nearly two dozen 1099 form types. Any one of them could have serious implications for your tax return. 'If you get a 1099, you have to include it on your tax return in some capacity,' says Mark Steber, senior vice president and chief tax information officer at Jackson Hewitt. The easiest way to deal with 1099s is to talk to a tax professional or to plug it into tax preparation software, saving you from grappling with the complexities of each form. But if you want to learn more, here is what you need to know about the many flavors of the 1099. If you used property to back a secured loan and the property was foreclosed, repossessed, or abandoned, you will receive Form 1099-A. The information on this form helps you calculate the taxable gains (or losses) from the cancellation of the debt. While Form 1099-A documents capital losses or gains, losses on property held for personal use are not tax deductible. Did you sell off stocks or any other securities from your taxable investment portfolio last year? If so, you should expect to receive one or more 1099-B forms. Brokers report the proceeds you earn from sales of stocks, bonds, derivatives, or other securities on Form 1099-B. People who had student loan debt canceled or forgiven should watch out for Form 1099-C. This form acknowledges that the government or a financial entity canceled or forgave debt valued at $600 or more. Even if canceled or forgiven debt was less than $600, the IRS still requires you to report it on your tax return (under the 'other income' line on Form 1040 or 1040-SR). Mergers and acquisitions can be a boon for equity investors, but as always, the IRS gets a share. If you held stock in a corporation that changed control or saw substantial changes in capital structure, and received cash, stock, or other property exchanged for the corporation's stock, you will receive Form 1099-CAP. Yes, you owe taxes on income received from cryptocurrency sales. Starting in 2025, if you sold, exchanged, or disposed of a digital asset, brokers will report proceeds to you and the IRS on Form 1099-DA. That means crypto trading platforms, crypto wallet companies, and payment processors issue this form for all digital asset sales or exchanges. If you receive Form 1099-DA, you must then calculate your capital gains or losses on schedule D of form 1040. Taxpayers should also include Form 8949 with their Form 1040 if they have any capital gains or losses from cryptocurrency transactions. This new form represents a big change in crypto income reporting for tax purposes. Before, taxpayers had to self-report gains on their taxes. Now, transactions will automatically be reported to the IRS. Financial institutions report the income you earn from dividends and distributions on Form 1099-DIV. Dividend payments from stocks or investment vehicles like mutual funds count as taxable income. Ordinary dividends are taxed as income, while qualified dividends are usually taxed as long-term capital gains. Local, state, and federal government agencies file Form 1099-G for any funds they have distributed to you that must be reported on your tax return. You will get this form if you receive payment for items such as: Unemployment compensation State or local tax refunds, credits, or offsets Re-employment trade adjustment assistance payments Government grants Agricultural payments Steber says this form was popular during the pandemic and caught many taxpayers off guard since unemployment income is considered taxable. Taxpayers may receive Form 1099-H if they receive early payments of health coverage insurance premiums through the Health Coverage Tax Credit. This tax benefit expires at the end of 2025, but Congress is working to extend it. If you earned any interest from a bank account—like a high-yield savings account—during the previous year, you will receive Form 1099-INT from your bank. You may also receive the form if you withheld and paid any foreign tax on interest or if you opened a new account and received a cash welcome bonus. Form 1099-K covers any payments you received through a third-party payment processing platform, like Venmo, CashApp, PayPal, eBay, or Ticketmaster. For 2024, individuals with at least $5,000 in gross receipts will receive this IRS form. However, some platforms may issue the form for transactions exceeding $600, which will be the official threshold starting in 2026. Acquirers of a life insurance contract or interest in a policy sale will receive Form 1099-LS. Income must be reported appropriately. Payments made to you or third parties from an insurance company or settlement provider related to long-term care insurance contracts or accelerated death benefits are reported on Form 1099-LTC. Form 1099-MISC is the Swiss Army knife of 1099 forms. Anyone who owns a business, rents out apartments, runs a farm, operates a fishing boat, or otherwise receives payments from the normal course of business will likely be reckoning with a stack of 1099-MISC forms. According to Steber, it's one of the most common 1099 types because of its catch-all nature. If you received at least $600 from the following, it should be reported on the form: Rent payments Prizes or awards Medical or health care payments Crop insurance proceeds Cash payments for fish Cash paid from a notional principal contract to an individual, partnership, or estate Payments to an attorney If you earn $600 or more by providing services to a business, it's typically required to report those payments on Form 1099-NEC. The IRS calls this nonemployment compensation, and it covers a broad swath of freelancers, gig workers, and independent contractors. This document informs the IRS not only about income but also that you did not have income tax, social security, or Medicare tax withheld from payments. Form 1099-OID reports interest from bonds that were issued at prices lower than the value, known as an 'original issue discount.' Form 1099-PATR notes taxable distributions received from cooperatives, like a farm or housing co-op. Individuals receiving payments from a 529 education plan or a Coverdell education savings account (CESA) will receive Form 1099-Q. The income received may or may not be taxable. Distributions from Achieving a Better Life Experience (ABLE) accounts are reported on Form 1099-QA. Income is only taxable if it is used for expenses other than to support a disabled person. Income you receive from retirement accounts, annuities, and certain insurance products is reported on Form 1099-R. This can include distributions from an IRA, profit-sharing plans, annuities, and pensions. It also covers income from certain insurance contracts, like survivor income benefit plans, permanent and total disability payments under life insurance contracts, and charitable gift annuities. The sale or exchange of real estate is reported on Form 1099-S. It may or may not need to be included in your tax return. Form 1099-SA reports distributions from a health savings account (HSA), Archer Medical Savings Account, or Medicare Advantage Medical Savings Account. A separate form is issued for each plan type. If your life insurance policy is transferred under a reportable policy sale, including to a foreign person, the policy issuer will supply a Form 1099-SB. The Social Security Administration will send Form SSA-1099 to people who receive Social Security benefits since some of the income is considered taxable. If you receive a 1099 form by mistake, it is best to immediately contact the issuer in the top left corner of the document. Taxpayers should keep records of all correspondence with the issuer and make a copy of the original 1099 form. If a corrected form cannot be obtained, the IRS advises filers to still report the income on Lines 8z and 24z (Other Income and Other Adjustments) and note the 1099 form was received by mistake. If a 1099 is received and there are mistakes, taxpayers should immediately contact the form issuer and request a corrected document. Keep detailed records of the original document and correspondence. Contact the IRS if an amended document cannot be obtained by the issuer. Taxes should still be filed on time, and an amended return can be filed later if needed. Payees are legally obligated to receive their 1099 forms relating to income from the previous year by January 31 of the current year. If you did not receive the form by mail, check with the expected issuer. They may have provided an option to download it online, or there could be a problem such as with your address. If you do not receive the 1099 in time, you are still expected to report the income. 'If you didn't get one, leaving it off is the worst answer, you know, unless you want to go with what I'll call the nuclear option, which is, leave it off and then amend later. But that never really helps out,' Steber says. Regardless of whether you receive a 1099 form, all income must be reported to the IRS. However, Steber warns that making assumptions without proper record-keeping can be a recipe for trouble. 'Guessing is more risky than leaving it off,' he says. When in doubt, Steber encourages taxpayers to talk to a tax professional for help or, at a minimum, rely on trusted resources like If not, you could create more tax issues down the road, including the potential to be penalized or audited by the IRS. 'This is not a place to go guessing, or watch that TikTok video, or ask your uncle Bob with TikTok,' Steber says. 'You need to work with somebody who's knowledgeable, and if you do plan to do it yourself, make sure you use a credible source.' More on taxes: Americans trust AI more than a CPA to do their taxes, according to new research IRS extends tax deadline for those affected by California wildfires 70% of Americans are eligible to file their taxes for free. Here's what you need to know This story was originally featured on Sign in to access your portfolio
