Fidelity National Financial - Fraud Insights - 1099-S poll questions finally answered!

Beginning in January 2016, we discussed different facets of incorrect 1099-S reporting each month. We published 12 poll questions to test your knowledge of 1099–S reporting requirements. Here are the results:

JANUARY: Which of the following transaction types are automatically exempt from 1099–S filing? (Select all that apply):

Deed in Lieu: 20% of you selected this option
Refinance: 82% of you selected this option
Stock in a cooperative housing corporation: 18% of you selected this option
Gift transaction: 26% of you selected this option

A majority of the readers selected one correct answer. Only a small percentage, however, selected all the correct answers: A, B and D. The IRS requires every transaction be reported unless an exemption applies. Exemptions include a deed in lieu of foreclosure, refinances or a gift transaction. It is important to remember reporting a transaction does not create a tax liability for the seller. For a complete list of exempt transactions view the 1099–S instructions at www.irs.gov. In all cases, the settlement agent has the right to report the sale even if an exception applies.

FEBRUARY: An exempt volume transferor is someone who expects to sell or exchange during the year at least __________ separate items of reportable real estate.

If you entered 25, you were correct. Per the IRS, an exempt volume seller is someone who sold or exchanged during the year, who expects to sell or exchange during the year, or who sold or exchanged in either of the two previous years at least 25 separate items of reportable real estate to at least 25 separate buyers. To qualify for this exemption the seller must certify for this under penalty of perjury.

MARCH: If the seller refuses to provide you with their U.S. Taxpayer Identification Number (TIN), you should:

Close without filing a 1099–S: 1% of you selected this option
Close, file a 1099–S indicating the seller refused to provide their TIN: 56% of you selected this option
Refuse to close: 40% of you selected this option
Immediately call the IRS: 3% of you selected this option

A majority of you selected the correct answer: B. If a customer, who has a U.S. TIN, refuses to complete or sign the 1099–S Substitute form you can still proceed and close. Provide the seller with a refusal letter notifying them a 1099–S will be filed without a U.S. TIN and the IRS will be notified the seller refused. It is important to differentiate between sellers who do not have a U.S. TIN with sellers who refuse to provide their TIN. A sale involving a seller without a U.S. TIN still needs to be reported. The refusal letter, however, is not needed.

APRIL: If the seller is a limited liability company (LLC), but the LLC is disregarded for tax purposes and the member of the LLC is a corporation, who completes the Substitute 1099–S?

The managing member of the LLC: 34% of you selected this option
Both the LLC and corporation: 13% of you selected this option
No one. Corporations are exempt from 1099–S filing: 42% of you selected this option
What is a disregarded entity?: 11% of you selected this option

42% of you selected the correct answer: C. A disregarded entity is an entity such as an LLC, trust or estate that is not treated as a separate entity from the sole owner for tax purposes. This means the disregarded entity's tax return is reported in the name of the sole owner of the LLC using its TIN. In this instance, the LLC is wholly owned by a corporation and since the LLC is disregarded, no reporting is required as corporations are exempt from 1099–S reporting.

MAY: How many different 1099 forms are there?

Just one, the 1099–S: 45% of you selected this option
8: 28% of you selected this option
13: 7% of you selected this option
17: 20% of you selected this option

Only 20% got the correct answer of 17, answer D. A complete list of 1099 forms can be found at https://www.irs.gov/pub/irs-pdf/i1099gi.pdf. Each form is used to report different types of incomes and payments each with varying requirements which is why it is important settlement agents do not accept more responsibility by agreeing to vague requirements lenders or principals may include in their instructions to the settlement agent.

JUNE: The IRS defines an ownership interest which is reportable on Form 1099–S as (Select all that apply):

Fee simple interests: 94% of you selected this option
Life estates: 37% of you selected this option
An option to purchase real estate: 24% of you selected this option
Perpetual easements: 25% of you selected this option

The correct answers are A, B and D. Only an interest which has vested in the property is considered a sale and thus reportable on form 1099–S. Options to purchase do not have vested interests in the property. An ownership interest includes fee simple interests, life estates, reversions, remainders and perpetual easements. It also includes leaseholds, easements or timeshares if such rights have a remaining term of at least 30 years.

JULY: Which of the following sellers are automatically exempt from 1099–S reporting? (Select all that apply):

A corporation: 70% of you selected this option
A bank which is a National Association: 51% of you selected this option
A limited liability company: 18% of you selected this option
Department of Veteran Affairs: 73% of you selected this option
Department of Housing and Urban Development: 74% of you selected this option

Corporations (A), governmental agencies (D and E) and international organizations are automatically exempt. However, the answer which seemed to confuse most was B, a bank designated as a National Association. This is not a type of entity, it merely distinguishes their affiliation as a bank. Also, a limited liability company is not a corporation. For a complete list of all exempt organizations please see: https://www.irs.gov/pub/irs-pdf/i1099s.pdf.

AUGUST: A disregarded entity is a legally formed entity in good standing but does not have a U.S. TIN, such as a single member limited liability company.

True: 61% of you selected this option
False: 39% of you selected this option

The correct answer is True. An entity may be legally formed, but not file tax returns. Instead, the managing member or trustee can report the tax liability of the entity on their personal tax returns.

SEPTEMBER: If sellers are married, then only one of them should complete the Certification for No Information Reporting.

True: 11% of you selected this option
False: 89% of you selected this option

The majority selected the correct answer, False. Regardless of their marital status each and every seller claiming this exemption has to complete and sign their own form. Exemptions are handled on an individual basis and each owner of record must qualify to be exempt.

OCTOBER: If your seller is foreign, what form do you use to solicit their U.S. TIN for 1099–S reporting purposes?

1099–S Solicitation: 23% of you selected this option
Certification for No Information Reporting: 7% of you selected this option
None, they are exempt: 8% of you selected this option
W–8BEN: 62% of you selected this option

The W–8BEN (answer D) is the correct form used to solicit a foreign person's Individual Taxpayer Identification Number. A foreign seller cannot sign the 1099–S Solicitation since the IRS requires the signer to state under penalty of perjury, "I am a U.S. Person or resident alien."

NOVEMBER: How much is the penalty for failing to file a 1099–S?

$50: 14% of you selected this option
$250: 30% of you selected this option
$150: 6% of you selected this option
$500: 50% of you selected this option

The IRS assesses a $250 (answer B) penalty for late remittance and typos. Willful disregard imposes a penalty of $10,000 per instance. It is important to always report unless there is a clear exemption.

DECEMBER: A transfer of a leasehold interest is reportable as long as:

There are at least 30 years remaining on the lease: 14% of you selected this option
A memorandum of lease is recorded: 50% of you selected this option
There are at least 10 years remaining on the lease: 29% of you selected this option
The lessor wants you to report the transfer: 7% of you selected this option

A leasehold, easement or timeshare may still be considered a transfer of ownership and thus reportable if there is at least 30 years remaining on the term (answer A). Any lease with less than 30 years left does not qualify as a sale and thus is not reportable.