Laws as complex as the recently enacted 2,000 page health care reform bill often bring about unexpected consequences. Example? To help pay for the new bill, tucked inside it is a provision that will release a potential tidal wave of unwanted paperwork for businesses ranging from huge corporations to mom and pop shops.
A little-known provision of the recently enacted law requires that, starting January 1st, 2012, all businesses, from Exxon to a one-man eBay store, will be required to send out 1099 tax forms to every corporation and person from whom they’ve purchased virtually anything totaling more than $600 during the tax year.
Below is a recent news story I did on this. Check it out, then get more details on the other side.
As I said in the above story, what the IRS is hoping to accomplish is to collect some of the $300 billion annually they estimate Uncle Sam loses in taxes from unreported income. The idea is that by forcing businesses to use 1099s to document every purchase exceeding $600 – goods as well as services, from individuals as well as corporations – those on the receiving end will be more likely to report that income. It might also encourage those taking the deductions not to overstate them.
For example, let’s assume that in 2012, my company buys a video camera from your eBay store for $750. When we place the order, we’ll have to get your social security or tax ID number. Then we’ll send you (and the IRS) a 1099 saying we spent $750 at your store. Since the IRS now knows your business got $750 from mine, you’re much more likely to report that income. And since the $750 we spent is also documented, we’re less likely to overstate that expense to create a larger deduction.
While the idea might be good in theory, the obvious problem is the sheer volume of additional paperwork, hassle and expense it’s going to entail. Obtaining social security or tax ID numbers from every person and corporation a business deals with, then sending them all 1099s, will be an onerous burden. Big companies are more likely to have the staff to accommodate the new tidal wave of additional paperwork, as well as the means to automate the process. It’s the mom and pops who will likely suffer most, since they’re the ones least likely to be able to afford additional staff and most likely to be doing their own paperwork.
The IRS is expected to schedule public hearings and issue regulations regarding the new provision some time in 2011. If it gets that far. California representative Dan Lungren, along with 77 co-sponsors, recently introduced H.R. 5141, a bill to repeal the new tax requirement.
For more information, check out this article from CNN/Money. And if you’d like to make your voice heard, contact your congressional representatives.