1099 rules seen as a major burden
taxnews
Although it’s just one of many new taxes in the health care
reform law, and its effective date is more than a year away, the
new Form 1099 reporting requirements are suddenly on every-
one’s radar screen.
The requirements, included as Section 9006
in the Patient Protection and Affordable Care
Act, will require the tracking of payments for
goods as well as services, and for payments to
corporations as well as individuals. All businesses, tax-exempt organizations, and federal, state and local government entities will
be required to issue Forms 1099 to vendors
from whom they make purchases totaling
$600 or more during a calendar year.
National Taxpayer Advocate Nina Olson
cited the new requirements as one of her
main concerns during the fiscal year ahead,
saying that the burdens “may turn out to be
disproportionate as compared with any re-
sulting improvement in tax compliance.”
During 2011, her office will study the im-
pact of the new reporting requirement more
closely and, depending on what the study
finds, may propose administrative or legis-
lative recommendations to modify the pro-
vision or suggest that Congress consider less
burdensome tax gap proposals.
“This will add an untold number of 1099s
to the mix, and it’s going to be a record-keep-
ing burden for the purchaser,” said Benson
Goldstein, senior technical manager at the
American Institute of CPAs. “What if they
have multiple locations, and the purchaser is
buying from many different vendors? There’s
a lot to be worked out, but it will be a very
burdensome task not only for the business
community, but also for the IRS.”
“It starts with the fact that Form 1099 was
focused on reporting compensation for
personal services, rather than goods,” said
Robert Kerr, senior director of government
relations for the National Association of En-
rolled Agents. “But when push came to shove,
it scored higher as a ‘pay for’ to include goods
as well.”
“It’s extremely intrusive on businesses, par-
ticularly small businesses,” Kerr explained.
“For example, if you run a small shop and
pick up doughnuts for the office every Friday,
eventually you will reach the $600 threshold,
BY ROGER RUSSELL
New reporting requirements look likely to hit small biz hardest
so do you ask for the vendor’s Taxpayer Iden-
tification Number on the day you get the first
doughnut, or on the day you have reached
the $600 mark? And what if you go to two
doughnut stores — they could be owned by
two different franchisees. Is it a reasonable
exercise for small business to keep track of
which Dunkin’ Donuts they buy from?”
Moreover, he noted, it is the responsibil-
ity of the owner to determine whether the
business will reach the $600 threshold for a
particular vendor. “They might just stop buy-
ing doughnuts because the paperwork is too
burdensome,” he said.
IRS Commissioner Doug Shulman has
acknowledged the burden the provisions
impose, and plans to use IRS administrative
authority to exempt business transactions
that use credit or debit cards. “These transactions will already be covered by reporting requirements on payment card processors,” he
said. The IRS is also looking for other ways to
reduce the burden (see TaxNews, at right).
Outright repeal, or at least the elimination
of funding for regulation of the provision, remains a possibility, as there is currently a bill
pending before the Ways and Means Committee designed to do just that. H.R. 5141, the
Small Business Paper work Mandate Elimination Act, proposed by Dan Lungren, R-Calif.,
would repeal the provision in its entirety. It
currently has 91 bipartisan co-sponsors.
However, it is unlikely to be taken up before the November elections.
all small businesses accept credit cards,” he
noted. “On the other side of the transaction,
it’s getting harder for small businesses to use
credit cards because banks have been lower-
ing their limits.”
Potential downstream issues will arise
when the IRS starts trying to match docu-
ments and issuing CP 2000s (Notice of Un-
derreported Income), Kerr said. “At the end of
the year you might have a stack of 1099s, but
also income from those that didn’t provide
1099s. How is the IRS supposed to make any
sense out of the 1099s by comparing them
with the income you report on your 1120S?”
Meanwhile, preparers are not necessarily
the same people who prepare 1099s, noted
John Ams, executive vice president of the Na-
tional Society of Accountants. “A typical small
preparer may not be equipped to prepare
1099s, but that’s what his clients will expect.
They will have to hire people for a three-week
period during tax season to get these out, at
the same time they‘re preparing taxes.”
“This is an example of someone who
thought they had a good idea but didn’t think
through all the implications,” he said.
IRS WANTS INPUT ON NEW 1099
WASHINGTON, D.C. — The Internal Revenue Service is asking for public comments on how to most effectively carry
out a law that will require businesses
to report a wider range of payments to
contractors, vendors and others, usually
on Form 1099, starting in 2012, to help
it implement the provision in such a way
that it would minimize the burden and
avoid duplicate reporting.
The Treasury and the IRS have issued
a proposed regulation under which many
business purchases made with credit or
debit cards would be exempt from the
new reporting requirement because they
will already be reported by banks and
other payment processors.
The change, enacted in March but not
effective until 2012, will expand the existing reporting requirements to include a
business’ payments related to goods and
other property, and payments to most
corporations.
Comments can be e-mailed to com-ments@irscounsel.treas.gov. Include
“Notice 2010-51” in the subject line.
SOME RELIEF, BUT NOT MUCH
Under a revenue offset provision in the Housing and Economic Recovery Act of 2008, aggregate dollar amounts of credit and debit
card transactions must be reported beginning in 2011.
This will help to exempt some transactions from the reporting requirement, but
still leaves an excessive burden in place, according to Marty Davidoff, of Dayton, N.J.-based E. Martin Davidoff & Associates. “Not
IMPACT ON SMALL BUSINESS
Olson noted in her report that the provision
might negatively impact small businesses
that lack the capacity to track customer pur-
chases, since small businesses seeking to
minimize recordkeeping burden “will have
an incentive to use large vendors that can
produce these reports for them.”
The consequences will be drastic, agreed
Paul Cinquemani, director of government
relations for the National Association of Tax
Professionals: “The large corporations can
issue 1099s to everyone as a matter of course,
but the small will have a great deal of addi-
tional accounting. They’re looking to ame-
liorate the tax gap and get their arms around
unreported income, but it’s a real concern
about what it will do to small businesses.”
“It exponentially increases the number of
1099s to file,” said Bill Rys, tax counsel at the
National Federation of Independent Busi-
ness, “and the auditing and other information
necessary to collect from other businesses. It
puts a tremendous new paperwork burden
on the small-business owner.” AT
IRS WARNS OF LIMITS ON
MORTGAGE DEDUCTIONS
WASHINGTON, D.C. — The Internal Reve-
nue Service is cautioning taxpayers about
restrictions on home mortgage interest
deductions. “The IRS reminds taxpayers
that interest deductions on home mort-
gages are limited, including limitations
for home acquisition and home equity in-
debtedness,” said IRS Headliner Volume
299. “There is one limit for loans used to
buy, build or substantially improve a resi-
dence — called home acquisition debt.
There is another limit for loans secured
by a qualified residence but used for oth-
er purposes — called home equity debt.
Internal Revenue Code Section 163(h) ( 3)
provides guidance for the limitations on
the home mortgage interest deduction.”
“The law allows taxpayers to deduct
interest on two categories of indebted-
ness secured by their residences. Acquisi-
tion indebtedness is used to acquire,
construct or substantially improve a resi-
dence, and cannot exceed $1,000,000.
Home equity indebtedness is any [other]
debt, and cannot exceed $100,000.”
