Although it¨s just one of many new taxes in the health care reform law, and its effective date is more than a year away, the new Form 1099 reporting requirements are suddenly on everyone's radar screen.
The requirements, included as Section 9006 in the Patient Protection and Affordable Care Act, will require the tracking of payments for goods as well as services, and for payments to corporations as well as individuals. All businesses, tax-exempt organizations, and federal, state and local government entities will be required to issue Forms 1099 to vendors from whom they make purchases totaling $600 or more during a calendar year.
National Taxpayer Advocate Nina Olson cited the new requirements as one of her main concerns during the fiscal year ahead, saying that the burdens "may turn out to be disproportionate as compared with any resulting improvement in tax compliance."
During 2011, her office will study the impact of the new reporting requirement more closely and, depending on what the study finds, may propose administrative or legislative recommendations to modify the provision or suggest that Congress consider less burdensome tax gap proposals.
"This will add an untold number of 1099s to the mix, and it's going to be a record-keeping burden for the purchaser," said Benson Goldstein, senior technical manager at the American Institute of CPAs. "What if they have multiple locations, and the purchaser is buying from many different vendors? There's a lot to be worked out, but it will be a very burdensome task not only for the business community, but also for the IRS."
"It starts with the fact that Form 1099 was focused on reporting compensation for personal services, rather than goods," said Robert Kerr, senior director of government relations for the National Association of Enrolled Agents. "But when push came to shove, it scored higher as a 'pay for' to include goods as well."
"It's extremely intrusive on businesses, particularly small businesses," Kerr explained. "For example, if you run a small shop and pick up doughnuts for the office every Friday, eventually you will reach the $600 threshold, so do you ask for the vendor's Taxpayer Identification Number on the day you get the first doughnut, or on the day you have reached the $600 mark? And what if you go to two doughnut stores - they could be owned by two different franchisees. Is it a reasonable exercise for small business to keep track of which Dunkin' Donuts they buy from?"
Moreover, he noted, it is the responsibility of the owner to determine whether the business will reach the $600 threshold for a particular vendor. "They might just stop buying doughnuts because the paperwork is too burdensome," he said.
IRS Commissioner Doug Shulman has acknowledged the burden the provisions impose, and plans to use IRS administrative authority to exempt business transactions that use credit or debit cards. "These transactions will already be covered by reporting requirements on payment card processors," he said. The IRS is also looking for other ways to reduce the burden (see TaxNews, at right).
Outright repeal, or at least the elimination of funding for regulation of the provision, remains a possibility, as there is currently a bill pending before the Ways and Means Committee designed to do just that. H.R. 5141, the Small Business Paperwork Mandate Elimination Act, proposed by Dan Lungren, R-Calif., would repeal the provision in its entirety. It currently has 91 bipartisan co-sponsors.
However, it is unlikely to be taken up before the November elections.
SOME RELIEF, BUT NOT MUCH
Under a revenue offset provision in the Housing and Economic Recovery Act of 2008, aggregate dollar amounts of credit and debit card transactions must be reported beginning in 2011.
This will help to exempt some transactions from the reporting requirement, but still leaves an excessive burden in place, according to Marty Davidoff, of Dayton, N.J.-based E. Martin Davidoff & Associates. "Not all small businesses accept credit cards," he noted. "On the other side of the transaction, it's getting harder for small businesses to use credit cards because banks have been lowering their limits."
Potential downstream issues will arise when the IRS starts trying to match documents and issuing CP 2000s (Notice of Underreported Income), Kerr said. "At the end of the year you might have a stack of 1099s, but also income from those that didn't provide 1099s. How is the IRS supposed to make any sense out of the 1099s by comparing them with the income you report on your 1120S?"
Meanwhile, preparers are not necessarily the same people who prepare 1099s, noted John Ams, executive vice president of the National Society of Accountants. "A typical small preparer may not be equipped to prepare 1099s, but that's what his clients will expect. They will have to hire people for a three-week period during tax season to get these out, at the same time they're preparing taxes."
"This is an example of someone who thought they had a good idea but didn't think through all the implications," he said.
IMPACT ON SMALL BUSINESS
Olson noted in her report that the provision might negatively impact small businesses that lack the capacity to track customer purchases, since small businesses seeking to minimize recordkeeping burden "will have an incentive to use large vendors that can produce these reports for them."
The consequences will be drastic, agreed Paul Cinquemani, director of government relations for the National Association of Tax Professionals: "The large corporations can issue 1099s to everyone as a matter of course, but the small will have a great deal of additional accounting. They're looking to ameliorate the tax gap and get their arms around unreported income, but it's a real concern about what it will do to small businesses."
"It exponentially increases the number of 1099s to file," said Bill Rys, tax counsel at the National Federation of Independent Business, "and the auditing and other information necessary to collect from other businesses. It puts a tremendous new paperwork burden on the small-business owner."
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