Beware Horse Owners, Breeders and Trainers! IRS Issues Advice on Reporting Requirements for Payments to Veterinarians Made by Taxpayers in the Course of Their Trade or Business
On December 6, 2013, the Internal Revenue Service (the “IRS”) issued Chief Counsel Advisory 201349013 (the “CCA”) in which the IRS Office of Chief Counsel concluded that payments made to a veterinarian operating as a corporation were subject to the reporting requirements under Internal Revenue Code Section 6041 (“§ 6041”). Although the CCA cannot be used or cited as legal precedent, it does provide insights into how the IRS views this particular issue. As such, the IRS’ analysis in the CCA would be relevant for any taxpayer making payments in the course of their trade or business to a veterinarian.
This article will: (1) provide a general overview of the reporting requirements under § 6041; (2) identify potential penalties that can be imposed on taxpayers failing to comply with § 6041; and (3) discuss and analyze the CCA. As always, it is essential that the taxpayer consult with his/her financial advisor and accountant as each taxpayer’s situation is unique.
Requirements Under § 6041
Under § 6041, a taxpayer is required to file a report with the IRS that sets forth the amount of any payments made as compensation for services rendered when such payments are made in the course of the taxpayer’s trade or business. This report must also list the name and address of the recipient of any such payment. A similar report must also be sent to the recipient of the payment. A taxpayer will typically satisfy these reporting burdens by filing a Form 1099 with the IRS with a copy to the recipient of the payment. The 1099 essentially represents that those payments were made in the course of the taxpayer’s trade or usiness. The 1099 must be filed on or before February 28 (March 31 if filed electronically) of the following year. Importantly, § 6041 only applies to those payments made in the course of the taxpayer’s trade or business. For example, § 6041 would not apply to an amount paid by a business owner to a doctor for medical services rendered by the doctor in connection with treatment provided to the business owner’s child.
There are two big exceptions to the § 6041 reporting requirement. First, the taxpayer does not have to report payments made to a person in the course of their trade or business where the aggregate total of such payments in the taxable year does not reach $600 or more. Additionally, the IRS has listed out certain exempt payments in Treasury Regulation Section 1.6041-3 (the “Treas. Reg.”). One of the exemptions under the Treas. Reg. is payments made to a corporation in the course of a taxpayer’s trade or business. However, a taxpayer must still file a Form 1099 for those payments made to a corporation that is engaged in “providing medical and health care services” or engaged in the billing and collection of payments with respect to providing such “medical and health care services.”
This filing requirement is eliminated if the corporation engaging in “providing medical and health care services” is exempt from tax under Internal Revenue Code Section 501(a). Neither the Internal Revenue Code, nor the Treas. Reg. defines what constitutes “providing medical and health care services” for purposes of the Treas. Reg. exemption.
Potential Penalties Triggered by Non-Compliance With § 6041
In situations where a taxpayer fails to comply with the reporting requirements under § 6041, civil monetary penalties can be imposed. Under Internal Revenue Code Section 6721, a 100 penalty will be imposed on each Form 1099 that the taxpayer fails to timely submit to the IRS, or fails to include all of the required information under § 6041. Pursuant to Internal Revenue Code Section 6722, a $100 penalty will be imposed on each Form 1099 that the taxpayer fails to timely submit to the payment recipient, or fails to include all of the required information under § 6041. Lastly, a $50 penalty can be imposed under Internal Revenue Code Section 6723 for each of the taxpayer’s failures to timely comply with § 6041.
A taxpayer can avoid the imposition of the civil monetary penalties for any acts of non-compliance with § 6041 so long as the taxpayer can establish that such non-compliance was due to reasonable cause and not willful neglect. To establish reasonable cause, the taxpayer must either show that there were significant mitigating factors related to their non-compliance, or that their non-compliance arose because of event’s that were out of their control. Additionally, the taxpayer must establish that they operated in a responsible manner in ultimately satisfying the requirements under § 6041. To be considered to have acted in a responsible manner, the taxpayer must have used the same standard of care that a reasonably prudent person would use under the circumstances in the course of its business in determining its filing obligations and further that the taxpayer undertook significant steps to avoid or mitigate their non-compliance with § 6041.
Analysis of the CCA
In the CCA, the IRS Office of Chief Counsel opined that payments made to a veterinarian operating as a corporation were subject to the § 6041 reporting requirements to the extent the payments made aggregated to $600 or more in the taxable year and were made in the course of the taxpayer’s trade or business. In reaching this conclusion, the IRS focused its analysis on whether or not a veterinarian was engaged in “providing medical and healthcare services.” In reaching its conclusion, the IRS Office of Chief Counsel took note that the terms medical and healthcare were defined in a similar manner to that of the term veterinarian in the American Heritage Dictionary of the English Language. Additionally, the IRS Office of Chief Counsel took note that the IRS and Congress had historically included veterinarians in the field of “medical and healthcare services” and explicitly excluded veterinarians when they so intended. As such, the IRS Office of Chief Counsel concluded that veterinarian services were to be included within the meaning of “providing medical and healthcare services.”
The IRS Office of Chief Counsel’s analysis in the CCA is not without its flaws. First, the IRS Office of Chief Counsel relies on the definition of a taxable medical device under Internal Revenue Code Section 4191(b), which specifically defines a “taxable medical device as any device intended for humans,” for the notion that Congress has specifically excluded veterinarians where it was intended. However, there is not a specific exclusion of veterinarians within this definition, only that a medical device is taxable if it’s intended for humans. Additionally, the Office of Chief Counsel did not provide any examples of a situation in which Congress included veterinarians within the field of medical and healthcare services. Lastly, although the cited Revenue Ruling did state that a veterinarian should be included in the field of healthcare for purposes of establishing whether a corporation is a personal services corporation, a Revenue Ruling is only the IRS’ interpretation of the Internal Revenue Code as applied to the specific facts. The facts and statute in issue in the cited Revenue Ruling did not involve whether a veterinarian operating as a corporation “provides medical and healthcare services” for purposes of § 6041. Despite the flaws in the CCA’s analysis, the IRS will likely take the position that a taxpayer must file Forms 1099 when they otherwise meet all of the qualifying requirements under § 6041. This is important because under the Internal Revenue Code, the burden will be on the taxpayer to establish that the veterinarian’s corporation does not “provide medical and healthcare services.”
While the analysis in the CCA has its flaws, should enforcement action be taken by the IRS, a taxpayer will bear the burden in establishing that they are not subject to the reporting requirements under § 6041. Additionally, the reporting burden imposed under § 6041 is small when compared to the potential penalties that can be imposed for non-compliance. Therefore, to avoid the potential imposition of any civil monetary penalties, taxpayers making payments to a veterinarian operating as a corporation should timely file Forms 1099 with the IRS with a copy to the veterinarian-recipient documenting payments in the aggregate of $600 or more during the taxable year where the payments represent compensation for veterinarian services rendered for the taxpayer’s trade or business.
Thanks to Austin Byars firstname.lastname@example.org (also of Frost Brown Todd LLC) for his contributions to this article. For more information regarding the American Horse Council, please visit www.horsecouncil.org.