Under current law, a business paying more than $600 for services provided by an individual other than an employee must report that payment to the IRS on Form 1099. One of the revenue provisions in the Patient Protection Act expands the Form 1099 reporting requirements to include payments to corporations (other than exempt organizations), and payments for property and other “gross proceeds.” The provision, which applies to payments after 2011, is aimed at preventing tax avoidance by individuals and companies receiving those payments. It has the virtue of raising government revenue without imposing a tax increase, yet it’s controversial because of the paperwork burden it imposes on companies making the payments. Senate debate of the small business tax bill early next month will include consideration of amendments to repeal or amend this requirement before it goes into effect.
The tax gap
They call it the tax gap — the difference between what taxpayers are required to pay and what they actually pay on a timely basis. The last year for which it was studied in detail was 2001, when it was estimated at more than $300 billion. While it comes from a variety of sources, such as claiming deductions and credits that aren’t allowed, the biggest single source of the tax gap is underreporting of income.
A news report on the gulf oil spill noted that some of its victims were unable to obtain full compensation for business losses because the amount of income they reported on tax returns for years prior to the oil spill was smaller than their actual profits.
Closing the gap
Closing the tax gap would reduce the federal budget deficit and ultimately relieve some of the burden an law-abiding taxpayers. Stepped up enforcement efforts by the IRS would contribute to that goal but would be highly unpopular. Increased reporting is a kinder, gentler approach, but can result in costly paperwork obligations.
Consider Fairmark Press Inc., the tiny publishing company that maintains this website. Currently we don’t have to file Forms 1099 because we have no non-employees providing more than $600 per year in services. Beginning in 2012, however, the new law would require us to obtain employer identification numbers from companies that manufacture our books and others from which we obtain web hosting services, computer equipment and other items that total more than $600 per year. At the end of the year we would have to go through our records to total up the amount paid to each of these companies and prepare Forms 1099, sending copies to each of the companies and submitting the forms electronically to the IRS. We’re pleased that the reporting requirement will reduce the amount of cheating on taxes, but not at all pleased with the paperwork obligation it will impose on our long-suffering accountant.
Repeal or amend?
Republicans favor outright repeal of the provision, but this may be a hard sell as it would result in revenue loss to the government estimated at nearly $20 billion over a ten-year period. An alternative that would provide relief for tiny companies like Fairmark without doing away with the provision altogether has been proposed by Senator Bill Nelson of Florida. His amendment would exempt companies with 25 or fewer employees from the expanded reporting requirement, and set the reporting threshold for payments for property at $5,000 rather than $600.
The $600 threshold for 1099 reporting has been in effect at least since 1954, with no inflation adjustment or other changes. During this period, the personal exemption amount, which was also $600 in 1954, has grown to $3,650.
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