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Healthcare legislation includes 1099 regulations
- By Jim Rizzolo
- Published 07/13/2010
- Accounting
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Healthcare legislation includes 1099 regulations
The Internal Revenue Service, prompted by the new healthcare legislation passed in March, has begun the process of determining how it will turn the law's sweeping demands into actual rules for taxpayers.
The new regulations, scheduled to take effect at the start of 2012, require any taxpayer with business income to issue 1099 forms to all vendors from whom they purchased more than $600 worth of goods and services in a given year. According to a report released this week by National Taxpayer Advocate Nina Olson, the new law contends to launch a barrage of new paperwork demands.
It is estimated that 40 million taxpayers will be subject to the requirement; 26 million of whom are sole proprietors. Olson's office, which operates independently within the IRS, flagged the new reporting requirements as one of its priority issues for the next year. Like many who have delved into the details of the new rules, Olson is concerned about their far-reaching scope and potential unintended consequences.
"The new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate as compared with any resulting improvement in tax compliance," the Taxpayer Advocate Service wrote in a report released this week.
The new rules are aimed at reducing the "tax gap." The tax gap is the difference between the amount of tax revenue the government receives from taxpayers versus the amount that, under IRS law, taxpayers are supposed to pay. The tax gap is estimated to be $300 billion annually. The expanded reporting requirements, which Congress slipped into the health care reform bill passed, are an attempt detect business-to-business payments that might otherwise not be reported.
The cost, to taxpayers, of implementing these expanded reporting requirements could potentially swamp small companies. Surveys have found that most small businesses currently average 10 filings of Forms 1099 annually. The new rules could very easily push that average to more than 200 filings per year for a typical small business
Speaking before two payroll industry trade groups, IRS Commissioner Douglas Shulman announced a major exception to the new rules: IRS plans to exempt transactions made through credit and debit cards. A separate reporting requirement kicks in next year that will cover credit/debit card transactions and help the IRS spot unreported payments made through those channels. Shulman said "Whenever a business uses a credit or debit card, there will be no new burden under the new law."
SMC Business Councils President Tom Henschke thinks that the main beneficiaries of this exemption are likely to be credit-card companies, which will gain added revenue due to an expected increase in credit card transactions. It is entirely possible that card usage will rise as a result of the new regulations. Another unintended consequence of the new regulations may very well be that businesses will trim the number of vendors with whom they do business. If this proves true, it will undoubtedly lead to some small business failures.
The taxpayer advocate's office shares that concern. "Many large vendors already have computer systems that can track purchases by customer. They are likely to advertise that they will track each customer's total purchases and send them a report at the end of the year that business customers can use to comply with the Form 1099 filing requirement," the office wrote in its report. "Small businesses that lack the capacity to track customer purchases may lose customers, leaving the economy with more large national vendors and less local competition."
This is just one of seven major pitfalls that the Taxpayer Advocate Service expects as a result of the new rules. It also questions whether they will actually do much to close the tax gap. Because of product returns and other complications, the payments documented by the 1099 trail will not match up cleanly against the revenue businesses report.
"The IRS will face challenges making productive use of this new volume of information reports," Olson's office concluded. As well, the Joint Committee on Taxation - a nonpartisan Congressional committee that analyzes pending tax legislation - estimated that the legislative requirement would bring in only about $2 billion a year in new tax revenue.
The new regulations, scheduled to take effect at the start of 2012, require any taxpayer with business income to issue 1099 forms to all vendors from whom they purchased more than $600 worth of goods and services in a given year. According to a report released this week by National Taxpayer Advocate Nina Olson, the new law contends to launch a barrage of new paperwork demands.
It is estimated that 40 million taxpayers will be subject to the requirement; 26 million of whom are sole proprietors. Olson's office, which operates independently within the IRS, flagged the new reporting requirements as one of its priority issues for the next year. Like many who have delved into the details of the new rules, Olson is concerned about their far-reaching scope and potential unintended consequences.
"The new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate as compared with any resulting improvement in tax compliance," the Taxpayer Advocate Service wrote in a report released this week.
The new rules are aimed at reducing the "tax gap." The tax gap is the difference between the amount of tax revenue the government receives from taxpayers versus the amount that, under IRS law, taxpayers are supposed to pay. The tax gap is estimated to be $300 billion annually. The expanded reporting requirements, which Congress slipped into the health care reform bill passed, are an attempt detect business-to-business payments that might otherwise not be reported.
The cost, to taxpayers, of implementing these expanded reporting requirements could potentially swamp small companies. Surveys have found that most small businesses currently average 10 filings of Forms 1099 annually. The new rules could very easily push that average to more than 200 filings per year for a typical small business
Speaking before two payroll industry trade groups, IRS Commissioner Douglas Shulman announced a major exception to the new rules: IRS plans to exempt transactions made through credit and debit cards. A separate reporting requirement kicks in next year that will cover credit/debit card transactions and help the IRS spot unreported payments made through those channels. Shulman said "Whenever a business uses a credit or debit card, there will be no new burden under the new law."
SMC Business Councils President Tom Henschke thinks that the main beneficiaries of this exemption are likely to be credit-card companies, which will gain added revenue due to an expected increase in credit card transactions. It is entirely possible that card usage will rise as a result of the new regulations. Another unintended consequence of the new regulations may very well be that businesses will trim the number of vendors with whom they do business. If this proves true, it will undoubtedly lead to some small business failures.
The taxpayer advocate's office shares that concern. "Many large vendors already have computer systems that can track purchases by customer. They are likely to advertise that they will track each customer's total purchases and send them a report at the end of the year that business customers can use to comply with the Form 1099 filing requirement," the office wrote in its report. "Small businesses that lack the capacity to track customer purchases may lose customers, leaving the economy with more large national vendors and less local competition."
This is just one of seven major pitfalls that the Taxpayer Advocate Service expects as a result of the new rules. It also questions whether they will actually do much to close the tax gap. Because of product returns and other complications, the payments documented by the 1099 trail will not match up cleanly against the revenue businesses report.
"The IRS will face challenges making productive use of this new volume of information reports," Olson's office concluded. As well, the Joint Committee on Taxation - a nonpartisan Congressional committee that analyzes pending tax legislation - estimated that the legislative requirement would bring in only about $2 billion a year in new tax revenue.
Jim Rizzolo
Rizzolo Group has many years experience helping small business owners decrease taxes and improve profitability. You need the right financial data and the right tax preparer who knows accounting bookkeeping, payroll services and gives you timely advice. Rizzolo Group does that! www.rizzologroup.net
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