23 May 2010
1099 Tax Form Blizzard
May 26, 2010
Stealth IRS Changes Mean 1099 Tax Form Blizzard
The massive expansion of requirements for businesses to file 1099 tax forms that was hidden in the 2,409-page health reform bill took many by surprise when it came to light last month. But it's just one piece of a legislative stealth campaign to create ways for the federal government to track down unreported income. The result: A blizzard of new tax forms that the Internal Revenue Service will begin rolling out next year.
"The 1099 changes were something that we were following back under the Bush administration under the 2008 budget. We started to see these kinds of rumblings about the "tax gap" and whether or not businesses were paying their fair share," says Tom Henschke, president of the Pennsylvania SMC Business Councils, which was one of the first organizations to call attention to the amendment when it was introduced last fall. The goal of the new regulations is to catch income that is going unreported to the IRS. Back in 2007, the General Accountability Office conducted a tax-gap study estimating that establishing additional 1099 paper trails could produce up to $345 billion annually resulting from the "tax gap" between what individuals and businesses owe and what they actually pay.
1099-K (Credit Cards)
The first tax-reporting expansion was buried in the Housing Assistance Tax Act introduced by House Speaker Nancy Pelosi and signed into law by President George W. Bush in July 2008. Best known for its first-time homebuyers' credit, the bill also created a new tax form: the 1099-K.
The new 1099-K attempts to track a currently hard-to-track payment stream: credit cards. Starting in 2011, financial firms that process credit or debit card payments will be required to send their clients and the IRS an annual form documenting the year's transactions. The rule comes with a minimum floor to exclude the most casual retailers: The 1099-K is only required when a merchant has at least 200 payment transactions a year totaling more than $20,000. But it applies to all payment processors, including Paypal, Amazon.com and others that service very small businesses.
For companies that currently report all their credit card and Paypal sales to the IRS, the 1099-K requirement will have little impact. All the paperwork will be done by the bank or payment processing service and business owners will simply receive a form at the end of the year listing their total receipts. The IRS has a draft version of the 1099-K form available now for public feedback, and will begin requiring the form's use next year.
1099-Misc (Everything Else)
New and different 1099 changes attached to the health care reform bill passed in March 2010 are another kettle of fish. These massively expand the requirements for filing the "1099-Misc" form, which companies use for recording payments to freelance workers and other individual service providers. Until now, payments to corporations have been exempt from 1099 rules, as have payments for the purchase of goods.
Starting in 2012, that changes. All business payments or goods purchased that exceed $600 in a calendar year will need to be accompanied by a 1099 filing. That means purchasers will need to obtain the taxpayer ID number of the individual or corporation that the payment is made to, even if it's a giant retailer like Staples or Best Buy, at the time of the transaction, or else face IRS penalties. This provision is a desperate search for "revenue enhancers" to bring in easy cash without raising tax rates.
In essence, the 1099-Misc is having its role changed from a form for tracking off-payroll employment to one that must accompany virtually any sizeable business transaction. "Just think about the immediate business impacts: for travel it would include hotels and rental cars," Henschke says. "Phone service: 1099, computer service: 1099, whoever does your postage meter: 1099. You do a little advertising in the Yellow Pages: 1099. Pay your landlord: 1099. You might as well just keep them in your pocket and hand them out as you go around every day."
How did this sweeping provision end up hidden in the health reform bill? No one is willing to take credit for introducing the new legislation, which appeared in the Senate Finance Committee's version of the health bill last fall.
Henschke's group had previously surveyed its members and learned that they average 10 filings a year of 1099 forms, each of which takes about half an hour to prepare. That's in line with the GAO's report, which found that a typical small business spent between three and five hours per year filing 1099s. But SMC's survey found that extending 1099s just to services purchased from corporations would push that number to at least 200 filings per year for a typical small business, which would add an estimated $6,000 to the cost of preparing the average tax return. And that's without even accounting for the requirement that 1099s be filed for purchases of goods, a provision that Henschke's group didn't know about when it conducted its survey last year.
"Small businesses are doing their paperwork in the evenings and on the weekends already," he says. "This certainly adds to the burden substantially."