The Democrats in Congress slipped into the health care reform bill passed in March expanded reporting requirements in an attempt to burden Americans with having to file billions of 1099s. The new mandate will require business owners to file billions more tax forms.
The new regulations, which kick in 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 of goods and services that year. That promises to launch a fusillade of new paperwork: An estimated 40 million taxpayers will be subject to the requirement, including 26 million who run sole proprietorships, according to a report released this week by IRS employee Nina Olson.
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,” Olsen wrote in a report released this week.
The cost could swamp the small companies, sole proprietors, and freelancers forced to generate it. Pennsylvania business networking organization SMC Business Councils surveyed its members and found that they currently average 10 filings a year of 1099 forms. The new rules would push that average to more than 200 filings per year for a typical small business, the industry group estimates.
The IRS is already showing signs that it will look for ways to hold back the paperwork flood. In other words, the IRS is trying to get around this idiotic new law. How are they going to administer billions of new forms?
IRS Commissioner Douglas Shulman announced a major exception to the new rules: The IRS plans to exempt transactions made through credit and debit cards. Shulman said. “Whenever a business uses a credit or debit card, there will be no new burden under the new law.”
How much of a sigh of relief you should breathe depends on what kind of purchases your business makes. Some big-ticket consumer items that are typically paid by card — airline tickets or hotel stays, for example — will be 1099-free. But SMC Business Councils President Tom Henschke, a vocal critic of the new law, estimates that exempting credit-card transactions would affect less than 10% of his members’ reporting requirements.
“Most of the small businesses out there that do small business [purchasing] don’t do it by credit card,” he said. “One of the reasons is the transaction cost is very high — 2% to 3%.”
Henschke thinks the main beneficiaries of the exemption are likely to be credit-card companies, which will gain an added hook to get small businesses to pay their fees. Nolan Newman, a Seattle CPA who specializes in small-business needs, says it’s certainly possible that card usage will rise as a result: “If I’m a small business and I use my credit card moderately, would I try to increase my volume with which I pay vendors with it? Maybe.”
Henschke foresees another unintended consequence of the new reporting provisions: that in order to cut down on tax forms to be filed, businesses will trim the number of vendors they do business with. “I’ve actually heard businesses talking about consolidating their purchases, going from 150, 200 vendors, down to less than 100,” he said. “That will most certainly lead to some small businesses being swept under the door.”
“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 IRS 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.”
That was just one of seven major pitfalls the IRS foresees in 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 won’t 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.
That could help explain one otherwise puzzling aspect of the new tax law, which is that despite the sweeping reporting requirements, the Joint Committee on Taxation — a nonpartisan Congressional committee that analyzes pending tax legislation — estimated that it would bring in only about $2 billion a year in new tax revenue.
Eric Toder of the Tax Policy Center, a nonpartisan think tank commented, “Does it close a lot of the tax gap? No.”
The Democrats brought us an avalanche of new reporting requirements for no appreciable gain in taxes. They just added another huge burden on Americans.
The IRS has some leeway in implementing the new law — but only some. “The regulations are supposed to implement the intent of Congress; they’re not supposed to be independent policy-making,” Toder said. “But obviously, there’s some discretion there.”
Shulman himself hinted that it may take new legislation — not just IRS regs — to fix what the Democratic Congress has wrought. “We won’t hesitate to consider alternate approaches,” he said in his speech, “including working with Congress to address any potential implementation issues that may arise during this process.”
The best legislative fix is to repeal the law. If we can throw the Democrats, who voted for this asinine law, out of office in November we can repeal the law altogether!.