Volume 10: Chapter 6: Federal, State, Local, and Foreign Taxes

DoD Financial Management Regulation Volume 10, Chapter 6

Ë September 2009

SUMMARY OF MAJOR CHANGES TO

DoD 7000.14.R, VOLUME 10, CHAPTER 6

“FEDERAL, STATE, LOCAL, AND FOREIGN TAXES”

All changes are denoted by blue font

Substantive revisions are denoted by a Ë preceding the section,

paragraph, table, or figure that includes the revision

Hyperlinks are denoted by underlined, bold, italic, blue font

PARAGRAPH EXPLANATION OF CHANGE/REVISION PURPOSE

All Reworded and reformatted chapter for clarity and ease of

reading. Revised references and added hyperlinks.

Revise/Add/

Delete

0601 Added an Overview section to include purpose and general

paragraphs which provides a synopsis of the chapter’s

content.

Add

0602 Added section to identify responsibilities related to the

payment and reporting of various federal, state, local, and

foreign taxes.

Add

060204 Emphasized requirement that all payees provide their TIN

prior to receiving payment.

Add

060405 Added guidance for state and local taxes for “Leases and

Rentals”.

Update

0607 Updated section to reflect the comprehensive policy

guidance for Federal Tax Reporting.

Update

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TABLE OF CONTENTS

FEDERAL, STATE, LOCAL, AND FOREIGN TAXES

Ë 0601 Overview

Ë 0602 Responsibilities

0603 Federal Taxes

Ë 0604 State and Local Taxes

0605 Customs Duties

0606 Miscellaneous

Ë 0607 Federal Tax Reporting

DoD Financial Management Regulation Volume 10, Chapter 6

Ë September 2009

CHAPTER 6

FEDERAL, STATE, LOCAL, AND FOREIGN TAXES

0601 OVERVIEW

Ë 060101 Purpose. This chapter prescribes the policy surrounding payment of

Federal, state, local, and foreign taxes. It also provides the information required for Department of

Defense (DoD) Components to fulfill information reporting requirements under Title 26, United

States Code (U.S.C.), Chapter 80. These reporting requirements apply to certain contract and

vendor payments and miscellaneous payments to military and civilian employees made by

commercial payment operations.

060102. General

A. Tax Information Sources. The Federal Government’s right to tax

exemptions depends on the applicability of Federal, state, local and foreign tax law; tax

agreements with foreign countries; items being acquired; the nature of the tax; and the type of

transaction. See Federal Acquisition Regulation (FAR), Part 29 for general tax applications on

the United States (U.S.) purchases, right to exemptions, and the methods of claiming

exemptions. Specific information not obtainable locally may be obtained from taxing authorities

or through discussions with the Component’s general counsel regarding the applicability of

various taxes.

B. Exemptions from Certain Federal Taxes

1. Title 26, U.S.C., section 4293 exempts the Federal Government

from Federal taxes on services and facilities furnished to and paid for by the Government. This

does not include facilities furnished to a government contractor. Exemption can be made with or

without the use of an exemption certificate. The installation contracting office is responsible for

preparing tax exemption certificates.

2. Title 26, U.S.C., section 4483(b)

exempts the Federal Government

from the Federal highway vehicle users tax imposed in 26 U.S.C. 4481. The exemption applies

whether the vehicle is owned or leased by the Federal Government.

C. Sales of Commodities or Facilities. Tax collections are required on

commodities or facilities sold that are not for the exclusive use of the U.S. When tax free items or

services purchased by the U.S. are sold to others, collect costs plus required taxes. The selling

activity identifies customers and items or services subject to tax and includes any applicable taxes

in billing documentation or statements. Taxes remitted are sent to the taxing authority.

D. Guidance. Internal Revenue Service (IRS) published guidance takes

precedence over DoD guidance for the resolution of tax issues. If there are legal questions

regarding reporting requirements not otherwise addressed or resolved by the guidance provided in

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this chapter, or for any apparent conflicts between DoD and IRS guidance, then responsible

officials should consult their agency designated counsel.

E. Nonappropriated Funds Instrumentalities (NAFI). Tax issues for NAFI

are covered in Volume 13, Chapter 7 of this Regulation.

0602 RESPONSIBILITIES

Ë 060201. Defense Energy Support Center (DESC)

. DESC, 8725 John J. Kingman

Road, Fort Belvoir, VA 22060, is responsible for:

A. Any needed application for tax refunds in its programs. If DESC supports a

Federal civilian agency, then that civilian agency is responsible for collecting data needed to apply

for tax refunds.

B. Contracting for fuels to include use of the proper clauses concerning local

tax provisions as provided in FAR 29.4.

060202. Military Departments and Defense Agencies (hereafter referred to as the

Components). Components should take maximum advantage of exemptions for excise taxes. The

National Guard is considered a state agency for tax purposes.

060203. Contracting Officer. The contracting officer (either the procuring

contracting officer or administrative contracting officer) is responsible for:

A. Inserting the appropriate contract clause with regard to taxes to be paid.

B. Soliciting prices on a tax-exclusive basis when it is known that the

Government is exempt from these taxes, and on a tax-inclusive basis when no exemption exists, as

directed in FAR 29.201.

C. Contacting local and/or state taxing authorities to verify acceptance of tax

exemption certificates.

D. Working with fleet card issuers to maximize excise tax reclamations

(recoupment).

E. Ensuring that contractors are aware of and understand duty-free entry clause

requirements.

F. Resolving tax liability or tax exemption disputes associated with

government contracts.

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G. When required, ensuring the enrollment of contractors and vendors in the

Central Contractor Registration (CCR) system as part of the contract award process. Policy on

CCR is found in FAR 4.11 and Chapter 17 of this volume.

060204. All Contractors, Vendors, and Individual Payees

A. Contractors, vendors, and individual payees requesting payment from a

DoD Component may be required to take certain action with regard to payment, nonpayment,

refund, protest, or other treatment of a specialized tax. Such special treatment may be

appropriate when there is doubt as to the applicability or allocability of the tax, or when the

applicability of the tax is being litigated, see FAR 29.304.

B. The contractor and vendor, when required, will enroll in the CCR

database, FAR 4.11, or provide a valid Tax Identification Number (TIN). 31 U.S.C. 7701(c)

requires all payees, subject to the U.S. Internal Revenue Code, requesting payment from a DoD

Component, to furnish their TIN, to include an Employer Identification Number (EIN), or a

Social Security Number (SSN) for individuals, prior to receiving payment (FAR 4.902).

C. If the contractor believes the 1099-MISC (Miscellaneous Income),

1099-INT (Interest Income), or 1099-C (Cancellation of Debt) was improperly completed or

had incorrect information, then they must provide written evidence needed for a correction to the

entitlement office. For contractors or vendors paid by the purchase card or other government

card program, the Defense Finance and Accounting Service (DFAS) will not issue a corrected

1099 based on a disputed or incorrect merchant category code (MCC). The 1099 is issued based

on MCC data at the time of the transaction. The issue of the correct MCC is resolved between

the merchant and the card-issuing bank.

060205. Fleet Card Issuer. The Fleet Card issuer (third-party payer) is responsible

for working with DESC and DFAS to maximize excise tax reclamations, as rules and procedures

vary by state. Generally, states require that tax reclamations be completed after payment is made.

Few states permit the Fleet Card issuer to file a request for tax refund on motor fuels.

060206. Defense Finance and Accounting Service (DFAS)

. DFAS is responsible

for:

A. Computing all appropriate tax withholding, making deposits to the United

States Treasury, and filing the appropriate tax documents.

B. Paying excise taxes as appropriate.

C. Reclamation of Federal and state excise tax related to fuel purchases, based

on data provided by either DESC or Fleet Card issuers. Filing for reclamation will include the

National Guard.

D. Recording any taxes recovered in the accounting system.

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E. Reviewing payment information to determine if a payment is reportable

under current IRS guidelines.

F. DFAS will file 1099 information returns or other type returns with the IRS

for all DoD activities and pay systems, including payments made by purchase card and other card

program transactions. DFAS will determine filing status under the optional procedures of IRS

Revenue Procedure 2004-43 (Merchant Category Codes to Determine Reportable Payment Card

Transactions).

060207. Office of the Staff Judge Advocate and General Counsel. These offices are

responsible for providing available payment data related to all settlements of personnel cases. The

document forwarded to the paying office should identify the type of payment(s) represented by the

settlement (for example, compensatory damages, back pay, overtime, attorney fees, or interest), as

well as the dollar amount attributed to each type of payment. This information will be used to

determine the proper tax reporting of the payments. These offices also provide the information

required to properly report payments to attorneys under 26 U.S.C. 6045(f), separate from the

claims settlement payment.

060208 . Third-Party Payers (VISA and Master Card). When information has not

been provided, or is otherwise unavailable, third-party payers should provide DFAS the missing

transaction information and merchant identification information. This information should include:

merchant address; transaction details (date and amount); corporate status; TIN; MCC; or North

American Industry Classification System (NAICS). The MCC or the NAICS is used to determine

the nature of the item, i.e., whether goods or services were purchased. If services were provided,

then the tax reporting requirements discussed in this chapter apply. The data to be provided must

be in a manner agreed to by both parties covering such items as, but not limited to, database

retrieval, file formats, and timing.

060209. Cardholder. The agency rather than the employee is considered the DoD

cardholder for tax reporting compliance of purchase card and travel card centrally billed accounts.

DoD will authorize the payment card organization or its members to act as the Department’s agent

under the conditions outlined in Revenue Procedure 2004-42 (Qualified Payment Card Agent

Determination).

060210. Payment Card Organization

. Payment card organizations should be

Qualified Purchase Card Agent(s) (QPCA) under Revenue Procedure 2004-42. A QPCA may act

on behalf of cardholders in soliciting, collecting, and validating merchants’ names, TINs, and

corporate status (collectively referred to as merchant/payee data) and on behalf of merchant/payees

in furnishing merchant/payee data to cardholders/payers.

060211. Convenience (Accommodation) Check Account Holders. The account

holder must provide to DFAS the transaction data to include payee identification to permit filing of

needed 1099-MISC information returns. If the account-holding activity does not provide this

information to DFAS, then that activity is responsible for determining the filing status, as well as

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for filing any needed information returns.

060212. Debt Management. Activities that manage debt and approve canceling debt

must provide information related to cancellation of valid debts to the DFAS Debt Management

Office. They must identify the person or business that has a reportable canceled debt. See Chapter

18 of this volume for additional guidance on canceling debt.

060213. NAFI

. NAFIs are responsible for collecting, accounting for, and remitting

excise and state taxes on products and services requiring such taxes. Under 4 U.S.C. 104, NAFIs

located on a Federal installation are not exempt from state and local taxes for sales of motor fuel on

said installation.

0603 FEDERAL TAXES

060301. Federal Excise Tax (FET)

A. General. Except for exemptions provided by the Internal Revenue Code as

set out in FAR 29, the Government must pay taxes on fuel purchases. If a contract does not specify

that the contract price excludes FET, then assume the contract price includes the tax and pay only

the contract price. If the contract specifically excludes the tax, then FET is added to the contract

price by the contractor and billed on the invoice as a separately identified item.

B. Exemptions. Tax exemptions or refunds are available for DoD purchases of

aviation fuel and off-highway use of gasoline and road diesel fuels. Whether or not an exemption

is available or a refund application is required depends on where in the distribution chain the

purchase was made and the IRS status of the seller of the fuel.

C. Refunds. File for refunds on Internal Revenue Service (IRS) Form 8849

(Claim for Refund of Excise Taxes, Schedule 1, Nontaxable Use of Fuels).

D. Federal Excise Tax on Motor Fuels. The Tax Reform Act of 1986

eliminated tax-free sales to exempt entities and organizations. The tax-exempt entities are defined

as state (including National Guard) and local governments, the American Red Cross, and nonprofit

educational organizations. Tax-exempt entities must pay the tax and file for a refund. DoD entities

are not tax exempt.

E. Quarterly Federal Excise Tax Return

1. Reports are prepared and submitted quarterly unless notified

differently by the IRS District Director. A return is made on IRS Form 720 (Quarterly Federal

Excise Tax Return) for the first calendar quarter when a tax liability is incurred and each later

calendar quarter until a final return is filed. Final returns are filed when the requirement ceases

and shall be marked “FINAL.” See IRS Publication 510 for additional guidance.

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2. IRS Form 720 contains a list of the commodities and services

subject to the tax and the tax rate. This form also serves as the return for all excise taxes for

which quarterly reporting is required.

3. Credit collections for FET are made to deposit fund accounts.

Deposit excise taxes collected using the most current instructions received from the IRS.

Generally, semimonthly deposits of excise taxes are required and must be made electronically to

the Department of the Treasury.

4. Show the schedule of collection numbers, dates, and amounts for the

collections.

5. Report the amounts of FET collected and deposited for the sale of

commodities or services other than for the exclusive use of the U. S. Government.

6. Preparation of IRS Form 720

a. The accounting office prepares IRS Form 720. Instructions

for preparing this form are in IRS Instructions for Form 720. Obtain forms and pamphlets from

your local IRS office.

b. The IRS Form 720 is due on or before April 30, July 31,

October 31, and January 31. Penalties and interest may be assessed for failure to deposit excise

taxes per IRS instructions. Such penalties may be waived by the IRS if the activity can establish

reasonable cause for failure to comply.

c. Submit the original IRS Form 720 covering the amount of

taxes collected to the appropriate IRS Center.

0604 STATE AND LOCAL TAXES

060401. State and Local Taxes. DoD Components shall assert the government’s

immunity or exemption from taxes whenever it is available. State statutes indicate whether the tax

is levied on the seller or the purchaser. The process for seeking refunds differs from state to state.

Some states accept SF 1094, U.S. Tax Exemption Form

; some states have their own required

forms; and other states require payment of the tax at the time of purchase and provide a means for

seeking refunds of the tax. The contracting officer will contact the local state taxing authority to

verify if they accept tax exemption certificates. A blanket-type tax exemption certificate is used to

obtain the U.S. Government’s exemption from state or local taxes in the case of continuing or

numerous purchases from contractors. Payments of state and local taxes are supported under the

following conditions:

A. When the tax is levied on the seller, the Federal Government must pay the

tax as part of the purchase price, unless the taxing authority provides otherwise.

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B. When the Government has, by contract, agreed to reimburse the contractor

for taxes paid to a state or municipality.

C. When there is a valid and binding contract covering the furnishing of

supplies or services at fixed unit prices, and the contract contains no provision for the adjustment of

such prices in the event of the imposition on the contractor of state taxes applicable thereto, there is

no authority for the payment of any taxes over and above the unit price stipulated in the contract.

D. Unless specifically stated otherwise in the contract, it is presumed that state

and local taxes are included in the contract price.

060402. Credit Cards for Service Station Purchases. If a service station does not

accept the Government’s tax exemption at time of purchase, then the tax will appear on the

invoice. The disbursing office may pay the state or local tax on the credit card invoice. DESC is

responsible for supplying applications for tax refunds on fuel purchases at service stations.

Refer to paragraph 060201 for more information on DESC responsibilities.

060403. Bulk Purchases of Fuel. The rules for credit card purchases also apply to

state and local taxes on bulk purchases of diesel fuels and gasoline (see paragraph 060402).

060404. Disposition of State or Local Taxes. Disbursing offices deposit amounts

collected on individual sales during a month to the applicable deposit fund account. Make

payments to the state or political subdivision using SF 1049. Remit on or before the 15th day after

the month collection was made.

Ë 060405. Leases and Rentals. Leases and rentals may be subject to various state and

local taxes. See FAR 29.302, application of state and local taxes to the Government, and FAR

29.304 for additional guidance. See FAR 29.4 for contract clauses concerning state and local taxes

on leases and rentals.

0605 CUSTOMS DUTIES

060501. U.S. Customs Duties on Foreign Purchases

A. Duty-Free Purchases. Emergency purchases of war materials abroad can be

made by the Military Services. This material will be admitted free of duty. The current version of

the U.S. International Trade Commission’s Harmonized Tariff Schedule contains details

pertaining to the classification and rate of duty. However, only Customs and Border Protection can

provide legally binding advice or rulings on the classification of imports. See FAR 25.9 and

Defense Federal Acquisition Regulation Supplement

(DFARS) 225.9 for additional guidance.

B. Payment of Custom Duties

. If the importation is not duty free, then charge

the custom duty to the same appropriation as the purchase. This is done even though the

importation and purchase may be in different fiscal years. Prepare vouchers to show the check will

be paid to and addressed to the Collector or Deputy Collector at the port of entry.

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060502. Customs Exemptions for American Imports and Purchases in Canada for

Joint Defense Program

A. General. The Government’s imports and purchases from other countries are

exempt from Canadian import duties and taxes when used for joint Defense projects in Canada.

B. Refund or Remission of Taxes. Goods purchased in Canada by or for the

U.S., or by the Canadian Commercial Corporation, are governed by concessions when U.S. funds

expended are intended for joint Canadian–U.S. projects in Canada or when the goods will become

and remain U.S. property. The concessions permit refund or remission in certain circumstances,

including:

1. Sales taxes paid on goods other than those for resale to members of

the U.S. Armed Forces or civilian personnel for private use.

2. Excise taxes, including the stamp tax on checks. Items for resale to

members of the U.S. Armed Forces or civilian personnel for private use are not exempt from stamp

taxes or purchase taxes.

3. Excise taxes are ordinarily payable on:

a. Cable, telegraph, and long-distance telephone messages

when charges are not made to individuals, but are made directly to the U.S. Government.

b. Transportation requests, warrants or tickets, seats, berths, or

other sleeping accommodations when charges are not made to individuals, but are made directly to

the Government.

4. Customs duty paid on import goods when used, directly consumed,

processed, or attached to items or goods manufactured in Canada and sold to the U. S. Government

for use with joint Canadian–U.S. projects.

C. Notation on Payment Vouchers. Vouchers for Canadian purchases or

services will show: “United States Government Funds exempt from Canadian excise tax, refer to

Order in Council PC 3108.” Paying and Collecting will type the notation on checks. This

statement will assist the Canadian Department of National Revenue in giving the exemption.

0606 MISCELLANEOUS

060601. Payments in Lieu of Taxes. Issues involving payment of taxes are complex

and should be referred to the activity’s servicing legal office.

A. Charges by state or local governments for services levied on Federal

Government entities or their contractors, which are not imposed on residents or nonfederal

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tax-exempt entities, where the cost of service is borne by the general tax revenues, are in the nature

of a tax to which the U.S. is immune.

B. A reasonable charge by a political subdivision based on the “quantum” of

direct service furnished, and which is applied equally to all property tax exempt entities, is not

considered a tax against the U.S., even though the services are furnished to taxpayers without a

direct charge, provided the political subdivision is not required by law to furnish the service

involved without a direct charge to all located within its boundaries.

C. Payments are permitted in lieu of taxes to municipalities that have lost tax

revenue due to the transfer of plants to Government Components, only when authorized by the

Congress. Payments in lieu of taxes are not authorized if the property transferred was never on

municipality tax rolls and municipal services had never been furnished.

060602. Foreign Taxes. U. S. Government purchases in a foreign country are not

exempt in general from taxes and custom duties when imposed by the foreign country. The Status

of Forces or government tax agreements may provide exceptions. See FAR 29.402 for additional

guidance.

060603. Taxes on Arms and Ammunition. Appropriated funds are not to be used for

tax payments on the sale or transfer of firearms, pistols, revolvers, shells, or cartridges. For

additional information on these taxes, see 10 U.S.C. 2385 and FAR 29.2.

060604. Environmental Assessments. If an environmental assessment is levied by a

local government and it represents a fee, then payment is authorized. If the assessment appears to

be a tax and its legality is questionable, then payment is not authorized. Payment under protest

should not be made and legal advice should be obtained from your office of general counsel

regarding payment of assessments by state and local governments.

0607 FEDERAL TAX REPORTING

Ë 060701. General

A. At the end of each calendar year, payment or entitlement offices are required

to report certain payments to the IRS. The reporting requirements are established by

26 U.S.C. 6041, 6041A, 6045(f), and FAR 4.904. Payment or entitlement offices must provide the

recipients (payees) with a 1099 by January 31 following the year of payment. Additional guidance

is published in the Treasury Financial Manual, Part 3, Chapter 4000 (Federal Income, Social

Security, and Medicare Taxes).

B. There are various miscellaneous payments made to military members and

civilian employees that are subject to IRS Form W-2 (Wage and Tax Statement) reporting (e.g.,

military award payments and medical health service providers paid under individual set-aside

contracts). At the end of each calendar year, payment or entitlement offices are required to report

these payments via IRS Form W-2 according to current Social Security Administration/IRS

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guidelines.

060702. Policy

A. Each DoD Component is responsible for the preparation of a 1099 on its

contract or vendor payments that total $600 or more, or royalties of $10 or more in a calendar year

to a single person or business entity (partnership, sole proprietor, or corporation), unless an

exception applies. For DFAS serviced activities, DFAS will prepare, print, and distribute the hard

copy of the 1099 to the vendor/contractor/payee and forward the same information to the IRS. If a

1099 is required to be corrected, then the paying office that maintains the underlying payment

record provides the information necessary to effect the correction. If the

vendor/contractor/merchant or individual believes the 1099 was improperly completed or had

incorrect information, then they must provide written evidence needed for a correction.

B. Payment data in various payment systems for the same contractor must be

merged to determine if an entity was paid more than $600 for reportable payments.

C. For purchase cards and centrally billed travel paid using a government credit

card, the issuance of any required 1099 is handled on a central basis by DFAS, regardless of the

using activity.

D. If payment is made with a convenience check associated with a government

credit card program, then the check-issuing activity must forward the following information for

reportable payments to DFAS on a monthly basis and prior to December 31st of each year, to

ensure that a 1099 is issued: the payee’s name and address, the payee’s TIN, the amount paid, the

date paid, and the check number, as well as, the paying activity information or other activity

identification. Activities must contact the DFAS Tax Office to obtain access to the 1099

tax-reporting program before transmitting convenience/accommodation check data.

E. DFAS will not make a determination of independent contractor or

employee status for tax purposes when payments are made to individuals. That determination is at

the discretion of the contract-issuing activity. If there is a question, then the contract-issuing

activity, through its chain of command, will submit an IRS Form SS-8 (Determination of Worker

Status for Purposes of Federal Taxes and Income Tax Withholding) to the IRS Associate Chief

Counsel (tax exempt and government entities) for a determination. See IRS Pub 1779

(Independent Contractor or Employee) for additional information.

060703. 1099 Information Reporting

A. Payments Subject to Reporting

. Certain contract and vendor payments are

subject to 1099 reporting in accordance with IRS regulations/guidelines.

1. General Rule

. Payments are aggregated for the taxable year for:

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a. Business entities: sole proprietors, partnerships, and

corporations, with some exceptions.

b. Corporations providing medical and health-care services

which are not otherwise exempt from taxation under 26 U.S.C. 501(a).

c. Interest (including Prompt Payment Act (PPA)) to

individuals, sole proprietors, and partnerships. Corporations are exempt from reporting interest.

d. Canceled debts.

2. Payment for Services. Payments or compensation for services

rendered, including medical or health-care services and contractual legal services, are subject to

1099 reporting unless the payment should be reported on a W-2. This reporting requirement

applies regardless of whether payment is issued to an individual, a sole proprietorship, a

partnership, or a corporation. The requirement does not apply when payment is made to a hospital

or extended health-care facility that is exempt from taxation under 26 U.S.C. 501(a) or to a hospital

or extended health-care facility owned and operated by the U.S. or an agency or instrumentality of

the U.S. This reporting rule also applies to payments issued to U.S. corporations, paid in U.S.

dollars, for service contracts that are executed in foreign countries.

3. Payments for Taxable Settlements

a. Generally, payments for personnel claims, Equal

Employment Opportunity actions, and grievances represent taxable income and should be reported

on a 1099, but may be reported on a W-2 depending on the classification of the settlement

categories. This includes amounts paid in settlement, damages for nonphysical injuries or sickness

(such as employment discrimination or defamation), liquidated damages, and punitive damages.

Amounts paid on account of personal physical injury or physical sicknesses, however, are not

taxable and are not reported on a 1099. In addition, compensatory damages received based on

emotional distress or injury that are attributable to a physical injury or physical sickness, are not

taxable and not reported on a 1099 to the extent that the amount paid does not exceed the amount

paid for medical care for the emotional distress. Damages paid on account of emotional distress,

including physical symptoms such as insomnia, headaches, and stomach disorders, which are not

attributable to a specific physical injury or physical sickness, are reportable.

b. In cases where the amount to be paid to the complainant

represents back pay and the claim originates with a DoD activity whose civilians are paid by

DFAS, the claim must be forwarded to a civilian pay office for payment and issuance of a W-2.

DoD activities should forward claims representing back pay to their supporting payroll office.

c. The office forwarding personnel claims as described in

Chapter 12 of this volume for payment, such as taxable settlement awards, is responsible for

providing information with the settlement documents that are needed for tax reporting. All

settlement payments are presumed to be taxable, unless otherwise indicated in the settlement

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agreement or meet one of the specific categories that are nontaxable.

4. Gross Proceeds Paid to an Attorney. The total amount paid to an

attorney for legal services, other than contractual legal services, must be reported on a 1099 as

required by 26 U.S.C. 6045(f). The term “attorney” includes a law firm or other providers of legal

services, such as a corporation. This reporting requirement applies regardless of whether or not

legal services are provided to the Government, and if the attorney is the sole payee. In the case of

payment by check, payment is considered to be made to the attorney or law firm, if the attorney or

law firm is named as a sole, joint, or alternate payee. A need to issue two 1099 forms on a single

payment may occur. In this case, issue a 1099 to the complainant and another 1099 to the attorney.

Information that must be provided by the office forwarding the claim for payment includes but is

not limited to: payee name(s); payee TIN; amount paid; payee address(s); and settling activity

identification. See IRS Bulletin 2006-33, section 1.6045-5

for information reporting on payments

to attorneys.

5. Vendors in U.S. Territories

. Service payments to vendors located in

Puerto Rico, Guam, and the U.S. Virgin Islands are subject to information reporting.

B. Payments Not Subject to Reporting. The following classes of contract and

vendor payments are not subject to 1099 reporting:

1. Payment of bills for merchandise, transportation, freight charges,

telegrams, telephone, storage, and similar charges.

2. Payments subject to reporting on a W-2, which generally relates to

compensation paid to DoD employees or service members.

3. Payments of rent, if made to a real estate agent.

4. Payments to government employees as an allowance or

reimbursement for traveling or associated expenses, including claims for damaged household

goods.

5. Payments made to government employees for service performed in

Puerto Rico. These payments should be reported on a W-2. See Volume 8, Chapter 4 (Deductions) of

this Regulation.

6. Payments made as an award to an informer or similar payments.

7. Payments made to a Government agency, political subdivision, or

instrumentality thereof.

8. Payments to organizations that are exempt from taxation under

26 U.S.C. 501(a).

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060704. Debt Actions Subject to Form 1099-C (Statement for Canceled Debt)

A. Federal agencies are required to report the cancellation of each individual

debt to an individual, sole proprietor, partnership, or corporation. The term “debt” includes the

principal owed, interest, penalties, administrative costs, and fines. If, however, interest is included

in the amount reported on the 1099-C, then it must be listed separately on the form. A debt is

considered to be canceled on the date that the authorized individual approves the cancellation of the

debt-collection process.

B. The cancellation of the debt is reported on Form 1099-C, regardless of

whether the debtor is required to report the debt as income. A copy of the 1099-C must be

provided to the debtor by January 31 of the year following the year in which the debt is canceled.

If payment is received on a previously canceled prior year debt, then there is no requirement to file

an additional or corrected 1099-C.

060705. Payments to Individuals Subject to W-2 Reporting

A. General. As discussed in Chapter 12 of this volume, various miscellaneous

payments are issued by DFAS to, or on behalf of, DoD employees and military members.

Payments may be subject to tax withholding and tax reporting (Federal and state) on a W-2.

B. Cash Awards to Military Members

1. Cash awards to military members for disclosures, suggestions,

inventions, and scientific achievements are subject to the withholding of Federal and state income

taxes. Certain Combat Zone Tax Exclusions (CZTE) may apply. Information on the CZTE is

available in IRS Pub 3 (Armed Forces Tax Guide) and Volume 7A, Chapter 44 (Withholding

Income Tax) of this Regulation.

2. For purposes of issuing a W-2, DFAS will withhold taxes and will issue

a W-2 by January 31 of the year following the award payment.

060706. Procedures for the Payee Copy

A. Instructions

. When preparing a 1099-MISC, reporting activities must be

sure to follow the IRS Instructions for Form 1099-MISC, as the IRS uses this information to

determine whether the recipient has properly reported the payment.

B. Requirements for Tax Identification Number (TIN)

Title 26 U.S.C. 6109

requires a recipient of income to give the payer

their TIN for use in filing tax information returns. The TIN is the individual’s SSN or a business’

EIN. A Privacy Act statement must be provided to an individual when requesting the reporting of

an SSN. If the TIN is not readily available from the CCR system, or from contractual or other

documents, then the contracting officer is responsible for contacting the payee to obtain their TIN

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(

FAR, parts 4.203

and

4.9

). Individuals or entities that refuse or fail to provide a TIN are to be

advised that such refusal or failure may result in a reduction of the payment otherwise due because

of backup tax withholding for reportable payments.

2. Both the Debt Collection Improvement Act of 1996 (DCIA) and the

FAR 4.9 require the collection of a TIN. A valid TIN is also part of a complete CCR listing.

Entitlement systems will validate remittance and TIN data against the CCR. For payees exempt

from CCR, but required to have a TIN, the TIN may be collected from any source. If a TIN has not

been provided when payment is to be made, then the payment is subject to backup tax withholding

at the current rate. In these circumstances, the contractor or vendor is not eligible for PPA interest,

as they have not fulfilled the requirements for a proper invoice as stated in Chapter 7 of this

volume. Miscellaneous noncontractual payments, where the TIN has not been provided, are

subject to backup withholding and the resulting payment reduction.

C. Backup Withholding

1. Backup withholding requirements are enforced on a

payment-by-payment basis, regardless of payment size. When an individual or entity has not

provided a TIN as described above, the backup withholding requirement is applicable. See

26 U.S.C. 3406 for additional guidance.

2. Backup withholding requirements are separate from the reporting

thresholds that apply to most 1099 reporting. Backup withholding is applied to the principal

payment only, to exclude such charges as transportation charges or interest. Payments that are not

subject to reporting on the 1099, as set forth in paragraph 060703.B, are not subject to backup

withholding.

3. The backup withholding is reported to the IRS. The paying office

will generate both a 1099-MISC, reporting tax withheld in box 4 to the payee, and IRS Form 945

(Annual Return of Withheld Federal Income Tax) for the IRS. Additional guidance is available

in separate IRS instructions for Form 945, IRS Pub. 15, (Circular E), “Employer’s Tax Guide”,

and IRS Pub 1281 (Backup Withholding for Missing or Incorrect TINs – Including Instructions

for Reading Tape Cartridges and CD/DVD Format(s)).

4. DoD activities must perform backup withholding on reportable

payments when the following conditions exist:

a. The payee fails or refuses to provide a TIN to the DoD

activity before a payment is made, or

b. The IRS informs the paying office that the payee provided an

incorrect TIN, or

c. The payee provides a TIN consisting of other than nine

numerals, and

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d. Reportable payments to the payee total $600 or more during

the calendar year, or

e. An information return was required concerning the payee for

the preceding calendar year, or

f. Backup withholding was required from the payee for the

preceding year.

060707. Purchase Card and Centrally Billed Account Reporting. Under the terms of

the contract, purchase card contractors and centrally billed travel contractors must provide

merchant activity reports, which provide the information needed for compliance with tax-reporting

requirements. See section 060208 for third-party payer responsibilities.

060708. Filing Information Returns With the IRS

A. Form 1096 (Annual Summary and Transmittal of United States

Information Returns) and Form 4804 (Transmittal of Information Returns Reported

Magnetically)

1. Forms Required

a. When filing manual (paper) 1099s, the Form 1096 must be

used to transmit and summarize payment information. It serves as a cover sheet for one or more

individual reports. See IRS instructions for Form 1096 for detailed guidance. Form 1096 is

obtained through the IRS publication and forms Web site at www.irs.gov.

b. A separate Form 1099 must be completed for each entity

concerned and collectively are covered by one Form 1096. Form 1099s are obtained through the

IRS publication and forms Web site at www.irs.gov

2. Distribution of Report

. Forms 1096 and 1099 are to be filed according

to IRS Publication 1220 Specifications for Filing Forms 1098, 1099, 5498 and W-2G

Electronically, by February 28 following the year of payment, with the appropriate IRS center

listed in the instructions for Form 1096.

3. Electronic Filing. When filing 250 or more 1099 returns in a single

report, filings are done electronically. These electronic filing procedures are published annually in

Internal Revenue Service Publication 1220.

060709. Records Retention. Activities preparing information returns must have the

ability to reconstruct the data or records used to prepare the 1099. The data or records shall be

retained for at least 3 calendar years after filing the information return. These records permit an

audit trail that will substantiate the amount(s) reported by showing all relevant payments, to include

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payments from multiple contracts. The retention period for Form 1099-C or backup withholding

data is 4 calendar years after filing the information return. The issuing location must maintain a

copy of information returns or be able to recreate the tax document.