Because of the speed in which the recent Health Care Reform Act was passed, and the enormous scope of the bill, practitioners are only now learning about some of the significant tax changes enacted by the Act. One change which is now receiving publicity, while not having a direct tax cost, will significantly raise the cost of tax compliance for both small and large businesses.
As part of the Health Care Reform Act, Congress enacted a massive new Form 1099 filing requirement which will apply to all persons engaged in a trade or business – whether large or small. Under current law, payments to corporations and payments for the purchase of goods were both exempt from Form 1099 filing requirements. In 2012, that familiar rule will end. In 2012, all business payments (including payments for purchases of goods) which exceed $600 within a calendar year will need to be accompanied by a completed Form 1099 (1099-MISC). Copies of the Form 1099 must be given to the payee and the IRS. This means that the business must obtain the taxpayer ID number of the individual or corporation to which it is making the payment – even a national retailer such as Wal-Mart – at the time of the transaction and complete a Form 1099, or face potential IRS penalties.
This change was enacted as a revenue raiser under the Health Care Reform Act as a way to close the “tax gap” – which refers to income earned by businesses which is subject to income tax but no income tax is paid. The change modifies the role of the 1099-MISC form from a means to track payments to independent contractors to a tracking mechanism for virtually any sizable business transaction.
This change only applies to persons engaged in a trade or business who are making a payment in the course of such trade or business. However, the filing requirement would apply to payments of rent, salaries, wages, amounts in consideration of property, premiums, annuities, and other gross proceeds – a standard broad enough to include most every business transaction.
You may recall that Congress, as part of a 2008 tax package, also enacted a law which requires financial firms that process credit or debit card payments to send their clients, and the IRS, a new Form 1099-K which documents the amounts paid by credit card to that client. The 1099-K is only required when a business has at least 200 payment transactions a year which total more than $20,000. However, the mandate applies to all payment processors, including Amazon.com, PayPal, and other banks or financial institutions which may service small businesses.
In combination, these changes will result in substantially more Form 1099s between businesses and substantial new compliance costs on businesses of all sizes. Small business owners may be required to spend enormous amounts of time filling out tax paperwork. Large businesses will likely have to hire additional accounting staff to process and complete all the new Form 1099s. While this may be a solution that would help to close the tax gap, one wonders if the additional costs placed on business will be a substantial multiple of the amount of additional federal income tax that will be collected following this reporting requirement.