Among the revenue proposals detailed in the administration’s fiscal 2010 budget are some provisions that might negatively affect small businesses and tax preparers. The American Institute of CPAs has weighed in on a number of these, including the codification of the economic substance doctrine, information reporting on payments to corporations, increasing the level of the information penalties, and expanding the requirement for electronic filing by return preparers.

In a comment letter to the Treasury Department, the Institute said that requiring business taxpayers to report to the IRS payments over $600 that are made to corporations would be “extremely burdensome” and would result in millions of additional 1099 forms being filed that are of “little value to the IRS.” Small businesses would be especially hard hit, and would impose compliance burdens far in excess of any appreciable gains in federal tax revenues.

Moreover, the AICPA noted, many corporations operate on a fiscal year basis while Forms 1099 are prepared on a calendar year basis, and most corporations report income on an accrual basis while Forms 1099 are prepared on a cash basis. This would result in the filing of tens of millions of information returns that would prove of little value to the IRS, while potentially triggering a burdensome income reconciliation process for corporations in order for them to complete their tax returns or respond to questions about the difference in amounts reported on their tax returns and the amounts reported to them on Forms 1099.

Given the potential burden resulting from these reporting responsibilities, the Institute urged, fairness demands that the IRS be in a position to manage and utilize the additional Forms 1099 that it will receive.

The budget proposals address abusive transactions with a provision to codify the economic substance doctrine. The AICPA predicted it would have a long-term, negative effect on both taxpayers and the government, and would introduce statutory complexity for small businesses and a broad cross section of taxpayers.

“As past experiences with abusive tax shelters show, fixed rules are often easy to avoid and can lead to new abuses,” the Institute stated. “In addition, past experiences also show that severe penalties, without a reasonable cause safety net, based on standards that are not clearly defined, can unfairly penalize the innocent and unduly burden small business.”

Although the AICPA said it supports an increase in the threshold amount for the information reporting penalties to foster an increase in tax compliance, it urged caution in increasing the calendar year maximum for small filers, defined as generally having $5 million or less in average annual gross receipts for the most recent three taxable years.

Under the proposal, the first-tier penalty under Code Section 6721(b) is increased from $15 to $30, and the calendar year maximum is increased from $75,000 to $250,000, with the calendar year maximum for the first-tier penalty for small filers is increased from $25,000 to $75,000. This could cause a detrimental cash flow problem for small filers, especially during periods of economic downturn, the Institute warned.

The revenue proposals seek to expand electronic filing by amending the Code, first to permit the IRS to require preparers to electronically file tax returns if they file more than 100 tax returns in a calendar year (in contrast to the statutory threshold of 250, which would remain unchanged); and second, to require return preparers who file more than 100 returns to electronically file individual, estate and trust tax returns.

The proposal should provide for a taxpayer “opt-out,” the AICPA urged, so that if an individual client does not want his or her return e-filed, the preparer would not be required to e-file the return. The proposal should also provide the IRS the authority to grant waivers from the e-file mandate based on reasonable requests made by tax return preparers, and permit the IRS to abate tax penalties assessed against a preparer for failure to comply with the mandate for reasonable cause. And the proposal itself should be phased in over several filing seasons rather than in one year.

While none of the proposals are yet law, some are already included in proposed legislation, according to AICPA senior technical manager for tax Benson Goldstein. “They will likely receive serious consideration by the tax-writing committees as offsets to major initiatives by Congress or the President,” he said.

For tax preparers and small businesses, these are points that are well taken. Here’s hoping our lawmakers take the suggestions to heart.

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