NEW YORK (CNNMoney.com) — An all-but-overlooked provision of the
health reform law is threatening to swamp U.S. businesses with a flood
of new tax paperwork.
Section 9006 of the health care bill — just
a few lines buried in the 2,409-page document — mandates that
beginning in 2012 all companies will have to issue 1099 tax forms not
just to contract workers but to any individual or corporation from which
they buy more than $600 in goods or services in a tax year.
The stealth change radically alters the nature of 1099s and means
businesses will have to issue millions of new tax documents each year.
Right
now, the IRS Form 1099 is used to document income for individual
workers other than wages and salaries. Freelancers receive them each
year from their clients, and businesses issue them to the independent
contractors they hire.
But under the new rules, if a freelance
designer buys a new iMac from the Apple Store, they'll have to send
Apple a 1099. A laundromat that buys soap each week from a local
distributor will have to send the supplier a 1099 at the end of the year
tallying up their purchases.
The bill makes two key changes to
how 1099s are used. First, it expands their scope by using them to track
payments not only for services but also for tangible goods. Plus, it
requires that 1099s be issued not just to individuals, but also to
corporations.
Taken together, the two seemingly small changes
will require millions of additional forms to be sent out.
"It's a
pretty heavy administrative burden," particularly for small businesses
without large in-house accounting staffs, says Bill Rys, tax counsel for
the National Federation of Independent Businesses.
Eliminating
the goods exemption could launch an avalanche of paperwork, he says: "If
you cater a lunch for other businesses every Wednesday, say, that's a
lot of information to keep track of throughout the year."
The paper trail
Why did these tax code
revisions get included in a health-care reform bill? Welcome to
Washington. The idea seems to be that using 1099 forms to capture
unreported income will generate more government revenue and help offset
the cost of the health bill.
A Democratic aide for the Senate
Finance Committee, which authored the changes, defended the move.
"Information
reporting improves tax compliance without raising taxes on small
businesses," the aide said. "Health care reform includes more than $35
billion in tax
cuts for small businesses … indicating that during these tough
economic times, Congress is delivering the tax breaks small businesses
need to thrive."
The new rules could drastically alter the
tax-reporting landscape by spotlighting payments that previously went
unreported. Freelancers and other independent operators typically write
off stacks of business expenses; having to issue tax paperwork
documenting each of them could cut down on fraudulent deductions.
More
significantly, the 1099 trail would expose payments to small operators
that might now be going unreported. If you buy a computer for your
business from a major chain retailer, the seller almost certainly
documents the revenue. But if you buy it from Tim's Computer Shack down
the street, Tim might not report and pay taxes on his income from the
sale.
The IRS estimates that the federal government loses more
than $300
billion each year in tax revenue on income that goes unreported.
Using 1099s to document millions of transactions that now go untracked
is one way to begin to close the gap.
While all but unnoticed at
the time — a Pennsylvania business group issued the first warning last October as the idea emerged in
draft Senate legislation — the 1099 rule changes began sparking
attention in the blogosphere in the last week. The libertarian Cato
Institute called it a "costly, anti-business nightmare"; Rep. Dan Lungren, R-Calif., introduced legislation last week that would repeal the
new 1099 requirements.
The notion of mailing a tax form to Costco
or Staples each year to document purchases may seem absurd to small
business owners, but that's not the worst of it, tax experts say.
Marianne
Couch, a principal with the Cokala Tax Group in Michigan and former chair of a
citizen advisory group to the IRS on small business and self-employed
tax issues, thinks the bigger headache will be data collection:
gathering names and taxpayer identification numbers for every payee and
vendor that you do business with.
But she also sees a silver
lining in the new law.
Her firm already recommends collecting tax
data on all vendors, since the IRS requires that you have it on hand at
the time of the transaction, not just at tax-filing time. And
eliminating the corporate and goods exemptions at least means that
businesses will no longer have to pour over every transaction to
determine if it needs a 1099. The new rule is simpler: If it crosses the
$600 threshold, it's in.
"There are probably going to be some
hiccups along the way, because systems will need to be redesigned," says
Couch. "But overall I believe it will make compliance on the payor end a
lot more streamlined and easier."
In any case, the final impact
of the law won't be known until the IRS issues its regulations on the
new law, which aren't expected to arrive until sometime next year. The
IRS has not yet commented on when it will release regulations or
schedule public hearings, and an agency spokesman was unsure when it
will do so. The new requirements kick in January 1, 2012.
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