Reporting Tax Abatement Interest to the IRS

By Judy A. Silva, Esq.

Q. When a taxpayer receives a property tax abatement, must the municipality report the interest paid on that abatement to the Internal Revenue Service (IRS)?
A. Municipalities must report to the IRS interest of $600 (six hundred dollars) or more paid on a property tax abatement. When a municipality abates taxes, New Hampshire law requires that interest at the rate of 6 percent per year must be paid on the amount abated from the date the taxes were paid to the date of the refund. RSA 76:17-a. This is true whether the municipality makes the abatement on its own decision or is ordered to do so by the Board of Tax and Land Appeals (BTLA) or the superior court.

The question of reporting that interest to the IRS is highlighted by a recent amendment to the statute prescribing the BTLA abatement form, RSA 76:16, III. Chapter 203 of the Laws of 2004 (HB 426), required that the following statement be added to the abatement form:

If an abatement is granted and taxes have been paid, interest on the abatement shall be paid in accordance with RSA 76:17-a. Any interest paid to the applicant must be reported by the municipality to the United States Internal Revenue Service, in accordance with federal law. Prior to the payment of an abatement with interest, the taxpayer shall provide the municipality with the applicant’s social security number or federal tax identification number. Municipalities shall treat the social security or federal tax identification information as confidential and exempt from a public information request under RSA 91-A. (Emphasis added.)

Q. Doesn’t that mean a municipality must report all interest paid on an abatement, regardless of the amount?
A. No. Note that the statutes says “in accordance with federal law.” This raises the question of what federal law requires. Some municipalities now report interest of $10 or more, but I believe that threshold applies only to interest paid by financial institutions and interest on publicly traded bonds and other securities. See IRC § 6049. You can report the payment of interest of less than $600, but you are not required to do so.

Section 6041 of the Internal Reveue Code states, in pertinent part, that “all persons in a trade or business making payment in the course of such trade or business to another person of…income…of $600 or more in any taxable year” shall report it to the IRS. (Note that the IRS interprets the term “trade or business” very broadly to include charitable organizations, the federal government, states, and “any political subdivision thereof,” so this requirement applies to municipalities. See 26 CFR §1.6041-1(b) & (i).)

Q. Who is responsible for reporting the payment?
A. The federal regulations provide that the report of interest paid (called an “information return”) made by a political subdivision of a state shall be made by the officer or employee of the subdivision having control of such payments or who is designated to make such returns.

Q. How is the payment reported?
A. The information return is to be made on a Form 1099-INT; a separate Form 1099-INT is created for each interest payment that must be reported for the calendar year. The Internal Revenue Code requires that the municipality provide the 1099-INT information (either a copy of the actual form or, with IRS approval, in a different format) to the individual taxpayer on or before January 31 of the year following the calendar year in which the interest was paid.

All Form 1099-INTs issued by the municipality are filed together with the IRS using a single Form 1096, which reports the total number of 1099s that are filed. The federal regulations appear to provide that information returns must be filed with the IRS before February 28 in the year following the calendar year in which the interest was paid (March 31 if filed electronically). The address for filing the information return is on Form 1096.

Q. What other information does the municipality need to file the report?
A. You need the taxpayer’s social security number or taxpayer identification number in order to report the interest paid. If you don’t have that number, there is an IRS form you can use to obtain it—Form W-9. If the interest on the abatement will be $600 or more, you can provide a W-9 to the taxpayer when the abatement is granted, but before the check is sent. If you cannot get the taxpayer’s social security or tax ID number, then you will be required to do “backup withholding” of the federal tax on the interest payment at the rate of 28 percent. The new provision in RSA 76:16, III, however, provides that “prior to the payment of an abatement with interest,” the taxpayer must provide a social security or tax ID number. Given that language, the preferable route would be to simply refund the taxes abated as required and delay the payment of interest until you receive the necessary reporting numbers.

Having said all that, keep in mind that you would have to abate taxes in the amount of $10,000 and have held those taxes for one year in order to meet the $600 interest requirement. It will likely be a rare event when you pay interest in excess of $600 so that you will have to file an information return with the IRS. At least for the next few years…!