IRS Advisory Committee Criticizes 1099 Expansion

An Internal Revenue Service advisory committee has issued a report calling for a number of changes in the IRS’s information reporting rules, including the controversial provision in the health care reform bill that mandates expanded 1099 information reporting for businesses.

“The changes enacted by the Patient Protection and Affordable Care Act of 2010 raise numerous issues about the utility of the data to be reported and the ability of the IRS to process it,” said an appendix to the 2010 report of the IRS’s Information Reporting Program Advisory Committee. “The expected exponential increase in the number of returns filed, especially paper returns, and the hurdles the IRS must overcome in actually utilizing the return information in any matching program between information returns and tax returns, cry out for a series of exceptions where the utility of the data is small relative to the cost to produce and process it. It is important that these exceptions be optional as reporting all payees will be more efficient for some payers. To minimize the significant burdens these reporting changes will engender, payers should have maximum flexibility to determine when and whether to report payees that potentially qualify for an exemption, even refusing a claim of exemption of Form W-9, and to change that determination at any point.”

The report also deals with health care reporting on Form W-2 for 2011. In that case, the committee also suggests drastic changes in policy. “Based on the lack of guidance and time necessary to implement system-wide W-2 changes, IRPAC recommends that the IRS make health care reporting optional for 2011 or waive penalties for failure to comply,” said the report.

Other sections of the report deal with cost basis reporting by financial institutions of customer cost basis in securities transactions; payment reporting (Section 6050W) made in settlement of payment card and third party transactions; and withholding and tax information reporting of payments of U.S. source income to foreign financial institutions and non-financial foreign entities, under the Foreign Account Tax Compliance Act.

IRPAC provides a public forum for the IRS and members of the information reporting community in the private sector to discuss relevant information reporting issues. The IRPAC is administered by the National Public Liaison Office of the IRS. IRPAC draws its members from the tax professional community.