IRS Increases 1099 Expectations

The Internal Revenue Service has increased its forecasts for the number of information-reporting forms it expects to receive this year and in subsequent years as a result of increased reporting requirements.

In a 2010 report, the IRS predicted that it would receive 2.175 billion information and withholding documents from U.S. businesses and individuals in 2012. But in a recently released update to that report, the IRS is now forecasting that it will receive 2.855 billion information reports in 2012, a readjustment of nearly 700 million forms, effectively a 31 percent increase. In its updated projections, the IRS is taking into account new 1099-K reporting requirements for merchants handling credit card transactions, and 1099-B requirements for buyers and sellers of shares who are now required to report information on the cost basis of the stock.

“Companies have had this 1099 reporting responsibility for 25-plus years now,” said Troy Thibodeau, executive vice president at Convey, a developer of software for automating 1099 reporting. “But the last two to three years has seen a significant increase in the amount of third-party reporting that’s taking place.”

For example, companies that process credit card payments on behalf of merchants and businesses are now required to file a 1099-K for all of their credit card proceeds as a result of the Housing Assistance Tax Act of 2008 (see IRS Postpones Credit Card Withholding Requirements).

“The IRS says that reporting alone is going to yield another 50-plus million forms that are going to need to be filed each year,” said Thibodeau.

In addition, the cost basis reporting rules in the Emergency Economic Stabilization Act of 2008 are going to lead to increased 1099-B information reporting (see Cost-Basis Reporting Changes Portend ‘Messy” Tax Season Ahead).

“This year, when you receive your 1099s as a taxpayer, if you sold or traded on stocks, you’re going to get a new 1099-B, which is going to indicate the cost of that stock on the form,” said Thibodeau. “In the past, if you sold stock, you would get a 1099 that said how much in proceeds you received from the sale of that stock, but now whoever sold the stock on your behalf is also going to have to tell you what your cost basis in that stock was. It’s the IRS’s way of determining the gains or losses you received by the sale of that stock. That legislation is going to yield up a lot more 1099 reporting because there’s a bunch of nuanced rules around that saying that if you had made, say, three purchases to accumulate all the stock that you sold, there’s a different cost basis you probably have in each of those purchases, and they have to issue you a 1099-B for every one of those purchases that you then sold. So there’s significantly more 1099-B volume reflected in those projections.”

The increased information reporting requirements are intended to help the IRS reduce its recently expanded estimates for the tax gap between money owed to the IRS and money collected (see Tax Gap Widens to $450 Billion). “The Service has declared that one of the best ways for them to continue to chip away at this tax gap of money owed is through third-party reporting,” said Thibodeau. “If they receive third-party reports of income, then the likelihood that taxpayers are going to report properly goes up significantly and compliance goes up. There’s a lot of additional third-party reporting that the Service and Congress has been looking for, and that will continue to be the case as we move forward.”

Another burdensome requirement for many accountants involves 1099-MISC forms. Paul Mancinone, a CPA and attorney in Springfield, Mass., noted that for 2011, every single corporation, partnership, or individual with a Schedule C or Schedule E needed to answer the question of whether 1099’s were required to be issued, and if so, were they. "In any event, it forced my office to issue letters to clients about a month ago, and we are doing 1099-MISC’s for clients that need them," he said. "That is a material part of what is driving the IRS figures, I would think."

Thibodeau thinks that will be the case even though Congress repealed the expanded 1099 information reporting of business-to-business transactions in the Patient Protection and Affordable Care Act of 2010 and the Small Business Jobs Act of 2010 (see Congress Votes to Repeal 1099 Requirements). Despite the outcry over the expanded 1099 reporting requirements in the health care reform law especially, he has seen lawmakers proposing bills with tough new 1099 requirements.

“There’s been other third-party reporting legislation introduced this year,” he said. “For example, today if you receive interest on some savings account, you may only need to receive a 1099 if you have at least $10 or more of interest. Congress is actually looking to waive that, to say that for any interest you may get, even if it’s only a penny, you need to receive a 1099 for that. And part of the reason for that is because they believe there’s underreported interest income that they want to make sure is being collected. The stuff that was in the health care bill that was repealed was likely repealed because it was pretty aggressive in the amount of additional reporting that was going to be required, but what we’re hearing is that there is a likelihood that that additional reporting in some way, shape or form is probably going to be revisited and re-proposed by Congress.”

The 1099 reporting requirements in the health care reform law provoked a backlash because the increased volume was seen as too burdensome, especially for small businesses.

“The health care legislation required that the additional reporting be for any payment that you make, even to a corporation, which in the past had been exempt from any reporting, as well as on all goods, and I think that both of those pieces added up to a lot of additional 1099 reporting,” said Thibodeau. “I think we’ll see something come back that maybe isn’t both goods and corporations reporting, but maybe some subset of that. Or there will be some thresholds created that don’t make that quite as burdensome on American business.”