By Lynda Foertschbeck, Executive Vice President, IRSCompliance, Inc.
Too many organizations incorrectly believe that they are in compliance with individual state reporting requirements or they may believe that filing their returns under the IRS Combined Federal Program (CFS) has satisfied their requirements. Others simply do not follow state requirements and do not deploy any resources on understanding the requirements and the risks for non-compliance.
The truth is that most states do have reporting and withholding requirements and audit programs with non-compliance penalties.
State reporting and state withholding regulations are enormously complex and are becoming a serious financial risk for non compliance. States are beginning to conduct cross-state audits and can enforce their regulations and apply penalties. It does not matter where your organization is located, it matters where the payee performed work. It may also matter where (what state) the payee lives and receives payment, and those guidelines may be further complicated if the payee lives in one state and performs work in another.
Over the last two years, information sharing from the IRS to the states (even states that do not have a reporting requirement) has increased significantly. States may request information from the IRS regarding payments made by residents and reported to the IRS. This allows states to reconcile and match income claimed on state income tax returns. If the state did happen to have certain reporting and withholding requirements and the paying organization did not report or withhold, you will hear from that state.
With the current economic conditions having such a negative impact on state revenue, we have seen several initiatives over the past year and we are expecting further regulatory initiatives that tie in with the new federal regulations. Why? The states need the money - pure and simple.
Here are a few of the state's current requirements:
- Annual Reporting Requirements for US and Foreign Payees
- Mandatory State Withholding on Certain Payments
- Requiring State Backup Withholding if Federal Withholding is Required
- Requiring State Reporting and Withholding if Payee Performs Work in Their State but Resides in a Different State
- Current Year Quarterly Reporting of any Payment with State Withholding
- Current Year Reporting of Independent Contractors Performing Work within the State (within 14 to 20 days of issuing certain payments)
- And more...
It is very probable that with the new legislation recently passed by Congress eliminating the corporate exemption and now requiring the reporting and withholding on payments issued for goods and materials, the states will modify their requirements to conform. Additionally we may see penalty programs increased or new penalty programs added.
For additional information on state requirements contact consider the TAPN audio conference, State Withholding and Reporting for Resident and Non-Resident Service Providers, featuring John Foertschbeck, CPA, and Lynda Foertschbeck with IRSCompliance, Inc. You might also want to consider IRSCompliance's Guide to State Reporting.