New 1099 Reporting Requirements Revisited

  • In a previous post Welcome to Healthcare Tax Compliance Hell, a little known clause that was slipped into the Health Care legislation, was highlighted.  This clause required that any taxpayer, with business income,  is required to issue a 1099 form to any, and all vendors that they purchase goods or services from, and spend more than $600 per year with.

    As highlighted previously, this means that when a painter or contractor goes to Home Depot or Lowes and purchases goods that total more than $600 in a year, they must issue Lowes or Home Depot a 1099.   This is applicable to all individuals that generate business income regardless of how small they are.

    The IRS is starting to come to grips with how extensive and onerous this new law is for individual taxpayers, small business owners and large businesses.

    As always there are unintended consequences when provisions like the 1099 reporting requirements are implemented.  One significant unintended consequence is that a number of companies may scale back on the number of vendors they use in order to minimize the number of vendors they have to track and issue 1099s to.

    Neil deMause, in an article posted on CNN, IRS Starts Mopping up Congress’s tax reporting mess, highlights information from a report released by National Taxpayer Advocate Nina Olson.

    An estimated 40 million taxpayers will be subject to the requirement, including 26 million who run sole proprietorships.

    The article goes onto comment how Nina Olson is concerned with the new requirement.

    Like may who have delved into the new rules, Olson is concerned about the far-reaching scope and potential unintended consequences.

    “The new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate with any resulting improvement in tax compliance,” the taxpayer advocate wrote in a report released this week.

    The intent of the law is to create a paper trail for all business transactions.  However, the massive burden and requirements for small business owners to comply may outweigh the benefits.  In the CNNMoney article, they highlight how Pennsylvania business networking organization, SMC Business Councils, surveyed its members and found the requirement for issuing 1099s will increase on average from 10 to over 200.

    In a previous post, Does Your Business Accept Credit Cards, If so, be Aware of What Awaits You in 2011, we highlighted how starting in 2011, credit card companies will be required to issue merchants a 1099.  The purpose is so the IRS can track income to a business from credit card sales.  This was a little known provision slipped into the Housing Assistance Tax Act of 2008.

    IRS commissioner, Douglas Shulman, announced in May that credit card and debit card transactions to vendors would be exempt from the new 1099 reporting requirements.  The reason, being is that the IRS will be capable to track the information based on the 1099s issued from the credit card companies.

    This could be a a big boost to credit card processing companies, as more companies may use debit or credit cards in an effort to minimize the 1099s required to be issued.  However, it could also drive up costs, since credit card processing fees are typically 2%-3%. of the purchase price.  At some point in time, these costs will be passed on, in the form of higher prices.

    In addition, it would also be likely that a number of business that use a number of different vendors, would try and consolidate to fewer vendors in order to reduce the reporting requirements.   Finally, this law promises to drive up administrative and record keeping costs for businesses in order for the businesses to comply with the new regulations and filing requirements.

    All of these new reporting requirements are all about tracking revenue and identifying businesses that are underreporting income.   With the issuance of 1099s by the credit card companies, and taxpayers who generate business income, the IRS can cross reference the 1099 payments to  reported business income listed on the year-end tax return for that business.  If there is a disparity between the 1099s issued to that business and the reported income on the tax return, the return could be flagged.