This week, the internet is abuzz about a provision included in The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act that expands reporting requirements related to forms 1099. As per usual, there’s some good information out there and some bad… Let’s see if we can’t sift through it.
The best place to start when you’re trying to make some sense out of changes to the tax laws – or any laws for that matter – is the actual source. In other words, take a peek at the law. A good place to find laws that are either pending or on the books is the THOMAS web site at thomas.gov, maintained by the Library of Congress “in the spirit of Thomas Jefferson.” You can find a bunch of information on the site including the sponsors of a particular bill, actions related to the bill, the status of the bill and, perhaps most importantly, the text.
So here’s the specific text of the health care bill that has everyone aflutter:
SEC. 9006. EXPANSION OF INFORMATION REPORTING REQUIREMENTS.
(a) INGENERAL.—Section 6041 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsections:
(h) APPLICATION TO CORPORATIONS.—Notwithstanding any regulation prescribed by the Secretary before the date of the enactment of this subsection, for purposes of this section the term ‘person’ includes any corporation that is not an organization exempt from tax under section 501(a).
(i) REGULATIONS.—The Secretary may prescribe such regulations and other guidance as may be appropriate or necessary to carry out the purposes of this section, including rules to prevent duplicative reporting of transactions.’’.
(b) PAYMENTS FOR PROPERTY AND OTHER GROSS PROCEEDS.—
Subsection (a) of section 6041 of the Internal Revenue Code of 1986 is amended—
(1) by inserting ‘‘amounts in consideration for property,’’ after ‘‘wages,’’,
(2) by inserting ‘‘gross proceeds,’’ after ‘‘emoluments, or other’’, and
(3) by inserting ‘‘gross proceeds,’’ after ‘‘setting forth the amount of such’’.
(c) EFFECTIVE DATE.—The amendments made by this section shall apply to payments made after December 31, 2011.
I know, it sounds a bit like gibberish. What it does is modify a section of the Tax Code – that section is 6041, Information at source. You can find the whole text of that section here.
It’s important to read both sections for context. If you don’t, you’re liable to believe statements made on *other* web sites that imply that forms 1099 (which is the form used to report much of the information referred to in section 6041) are now required for every single transaction ever.
What you get when you mash the two sections together is this, more or less:
All persons engaged in a trade or business and making payment in the course of such trade or business to another person (including corporations otherwise not exempt), of rent, salaries, wages, amounts in consideration for property, premiums, annuities, compensations, remunerations, emoluments, or other gross proceeds, fixed or determinable gains, profits, and income … setting forth the amount of such gross proceeds, gains, profits, and income, and the name and address of the recipient of such payment.
That’s my own little mash-up of the law. I suspect it’s pretty close to what the revised section 6041 will look like.
And here’s what it means now:
1, Previously, forms 1099 were issued only to individuals and partnerships, not to corporations. That has changed. Corporations are now included in the potential pool of form 1099 recipients.
2, Previously, forms 1099 were issued only for rents, services and financial transactions. That has also changed. The sales of tangible goods are also potentially reportable.
What stays the same:
1, The $600 reporting threshold.
Since I’m a pretty Pollyanna type of girl, I’ll point out the positives first… The current reporting requirements stink. They constantly confuse taxpayers. A huge reason for the confusion: who the heck knows whether a vendor or service provider is a corporation? When entity choices were simple (sole proprietor, partnership, corporation), it was much easier. But now there are more choices (LLP, LLC, s corporation, LLLP, PC, etc.) made even more confusing by the notion that an entity can have a completely different tax classification (an LLC can be taxed as a partnership, a c corporation or an s corporation). Like many other taxpayers, I don’t know whether my plumber for my business is an individual or a corporation – I just hired him off of Angie’s List. So I don’t know whether to report those payments or not – and neither do most taxpayers… Every tax season, I get a slew of “do I have to issue a 1099 to (fill in the blank)?” type questions because the current law is just so confusing.
So what I think Congress was trying to do was make things easier.
But Congress being Congress, they didn’t. As a practical matter, expanding the definition of person to include corporation means more reporting requirements. And for small businesses, in particular, that can be fairly burdensome.
What Congress also did is expand the definition of what’s reportable to include sales of goods. While the $600 threshold remains, the inclusion of goods will definitely up the quantity of required paperwork.
Again, I think Congress was trying to do a good thing here. I think they were trying to make it more difficult for businesses who sell goods online, etc., to hide income. It’s also intended to cut down on fraudulent deductions – if you report that your business spent money on window cleaning services to Clear, Inc. – and you have to issue Clear, Inc. a form 1099 for that amount – you’re more likely to report it accurately. Cause you’re not going to tell Clear, Inc. that you spent $1,000 when you actually spent $500. So the result is more accurate reporting. That’s good, right? It’s all about closing the tax gap and trying to recover some of that $300 billion in unreported income each year.
But again, Congress just made it more difficult for taxpayers. The expanded reporting requirement means that not only must businesses (not individual taxpayers) keep excellent records of payments, they must keep addresses and TIN numbers on hand for all of their vendors. That’s a bit of a nightmare in the making.
But all of that said, I don’t think it’s going to be quite as nightmarish as some in the blogosphere would have you believe. There is an important phrase in the new law that’s likely to ease the potential reporting chaos:
The Secretary may prescribe such regulations and other guidance as may be appropriate or necessary to carry out the purposes of this section, including rules to prevent duplicative reporting of transactions.
In other words, the IRS has some leeway here. And let me give you a heads up: the IRS doesn’t want this to be a reporting nightmare anymore than businesses do. I suspect we’ll get some guidance – and some relief – once the IRS issues Regs on the matter. If I had to guess, I would think that there will be some sort of exception for large national retailers or regular/repeat transactions – meaning that you won’t have to report your monthly shopping sprees at Staples via a form 1099.
If any of this matters to you (and if you’re a business person, it should), plan on following this discussion pretty closely. The IRS will hold public hearings on any proposed Regs and give you, as a taxpayer, the right to put in your two cents. They usually also accept public comment via US mail and email. Take advantage of the opportunity to make your voice heard.
Since the new law is effective January 1, 2012, you can likely count on seeing those proposed Regs and public hearings in 2011.
Of course, I’d love to hear your comments on this now… Chime in below!
(Hat tip to readers Jeff Day and Mary A.)
Similar Posts:
- Online Merchants Brace for New Reporting Requirements
- No Tax on Health Care Benefits for 2010 or 2011 or…
- New 1099 Rules Remain In Place – For How Long?
- Repeal, What Repeal? We’ve Got Egos to Stroke! Special Interest Groups to Pacify!
- Taxing Health Care Benefits
{ 34 comments… read them below or add one }
I’m a bookkeeping service provider. I handle bookkeeping for over 30 clients. Already, the 1099 requirements make us all crazy. I don’t see this making it easier (you can be all Pollyanna if you want I’ll be Marilyn Mason *laugh*). I actually have no problem with “send them to everyone”. It’s the ridiculous low threshold that leaves me annoyed. They need to raise it to $10k or even $5k. THEN I’ll complain less.
The thing is that this means more money for me. I can now charge my clients extra because I have to get even more forms from their suppliers/contractors. And I have a few construction companies too. Score! Right? Well, yeah, but I really don’t want to have charge clients for, what I consider to be, useless work. And I would much rather spend that time helping them move their businesses forward instead of filling out yet another form.
Hopefully the IRS will catch up with the SSA and allow easier paperless filing for the 1099s too. But well, that’s another rant for another day
Kelly,
Good post.
Although it can be difficult to ascertain why certain rules are put into affect we can certainly speculate. Here it would appear to ‘simplify’ the rules, have them apply more broadly and ultimately get more compliance. The government has indicated they will pursue the “tax gap”, the difference between what they are collecting and what they expect they should be collecting. The underreporting of income would likely be one area they would focus on.
There are existing rules on the books for filing 1099’s now, confusing as they may be. You have to wonder how effective the current rules are, how much they are actually enforced and what the expansion of these rules will result in.
Regards,
Thomas F. Scanlon, CPA, CFP®
Kelly,
Condolences on the passing of Robin Roberts. He was a treasure.
Jim Hayden
Is there any precedence that the IRS regulations reduced the scope of the actual statute? If the statute didn’t create any exceptions for large national retailers (how large is large?), can IRS really do that?
TFB,
I didn’t mean to imply that the IRS can alter the statute willy-nilly. But I think that Congress left a pretty big door open – the whole “including rules to avoid the duplicative reporting of transactions” bit. If the IRS is satisfied, for example, that certain corps are already reporting income, I could see them saying no need for the smaller corps to report it on their side.
I think you’re missing the larger picture.
No one really expects this to stand as is. OK the IRS has some leeway. Whatever. (Though I’m not necessarily willing to trust the IRS, or a succession of appointees to interpret this rationally.)
The big picture is that Congress passed a 2400 page bill they’d never read, full of obscure stuff like this. What this is really saying is either “Congress doesn’t have a clue about how things actually work in this country” or “we didn’t read the bill, so there’s a 1000 provisions just like this, surprise!”.
In the past few days I’ve started to see a number of posts linking the new 1099 reporting requirements to a VAT. There’s a vast conspiracy out there of folks who are convinced that this provision of the PPACA/HCER is the camel’s nose in the tent. I may have to get a bag of popcorn and sit back to watch this unfold.
Hi, Kelly — I’m doing the books for a gift/stationery shop she’s opening in a few weeks. Just to get this straight, I have to send a 1099 to any supplier (of stationery, gifts, etc.) from whom she buys >=$600 in merchandise during the year, in addition to anyone else she pays more than that amount for work done on the shop, correct?
Urb
@Kelly – Thank you for your reply. Since you have experience and advanced education in taxation, I’m trying to find out from you what other matters in the tax law also have similar “The Secretary may prescribe such regulations and other guidance as may be appropriate or necessary …” language and what the IRS actually did in those situations.
In other words, what actions are within the IRS’ power with that language and what are not possible and thus require Congressional action. For example:
- Can the IRS rasie the $600 minimum?
- Can the IRS exempt the paying businesses by size (# of employees, revenue, …)?
- Can the IRS exempt the recipient businesses by size or industry (you mentioned large national retailers)?
- Can the IRS exempt by the nature of the purchase (e.g. office supplies versus items for resale or assembly)? You also mentioned repeat versus one-time purchases.
If the IRS can’t do any of the above but they can only say whether the filing should be on paper or electronically, or on forms printed with special red ink versus regular black ink, then we are talking about entirely different levels of power. Any precedence will help us non-professionals understand where the line is drawn between the law and regulations. Thank you.
Jim, thanks! Unfortunately, I wasn’t here to see him play – but I have read and heard so much about him. The City really seemed to adore him.
Vinny, hmm. That’s extremely interesting. If you see anymore posts linking the two, shoot them my way, ok?
Urb, not under the current rules. But under the anticipated rules, that could happen.
TFB,
Here’s my quick thoughts on this…
I don’t think the IRS can change the minimum. That amount is in the statute.
In terms of exemptions, I do think the changes in the law gives the IRS leeway to do some of that. The language specifically allows, for example, for avoidance of duplicative transactions. An argument could be made that certain transactions need not be reported via a form 1099-MISC because the IRS believes that they are already being reported via a corporate tax return – a little tenuous, but I think you get the point.
In terms of what the IRS can do, this sentence might help (from the IRS web site): Treasury regulations (26 C.F.R.)–commonly referred to as Federal tax regulations– pick up where the Internal Revenue Code (IRC) leaves off by providing the official interpretation of the IRC by the U.S. Department of the Treasury.
Nice article,
I think the link to VAT is pretty clear. If the government can get a handle on the tax gap…real or perceived, it can then use the gathered information to detail how much a VAT could raise from not only the reported income but revenue from the alleged tax gap.
In reality, if large corporations/retailers are exempted from receiving 1099′s, it will just further drive people to those companies to avoid the need to create a 1099 if they don’t have to. Further, attacking the “tax gap” is always the bogeyman since there is always alleged tax gap that needs to be closed or waste in the government needs to be extinguished. In reality, it just drives costs up that never covers the increase in the tax refund found.
I would guess that 40%-50% of small businesses under $3 million in revenue have a difficult time complying with the current 1099 rules and don’t get it 100% right. If Treasury doesn’t step in and simplify this all Congress will have accomplished is to create a system where 80%-90% of those same small businesses will be filing inaccurate or incomplete 1099′s. Part of me hopes there is an alternative motive (VAT perhaps) because otherwise we’re left to conclude that lawmakers have no idea what they’re……never mind.
Setting aside the VAT conspiracy worry warts, I think this small but far reaching textual change should be seen as the second pincher in a long-run enclosure movement, focused on the gray and black market parts of our economy. I write as a seeker of tax fairness _and_ tax efficiency.
The exemption of “corporations” from 1099s was based on a myth: That corporations were well regulated, cleanly run, straight shooting good folks who could be trusted to self police, report honestly, and pay up. That may have been true in some mythical Leave It To Beaver past, but it sure ain’t the case these days. As you rightly point out, the great flexibility of business forms introduced in the last 20 years, and the flexibility of check-the-box selection for entity, has made the corporate form indistinguishable and indistinct from the partnership, Subchapter S, or a company of gentlemen adventurers. At the low to middle end, there are all to many of these morphing beasts that don’t have to report much of anything to anybody, whereas partnerships were supposed with the 1099.
The other half of the pincher movement is the IRS’s reach to get at credit card transaction data, of which a growing amount is already slated for reporting to the IRS in the next couple of years. There is an extension afoot, I believe, to get at eBay data, which should bring a lot of Grannies in the Attic out into the open, as well as a lot of materially larger dealers. Put the great expansion of credit card data together with expanded 1099s into the IRS data analytic tools, and there will be a lot of daylight shed on some now-dark spaces. They gonna need a lot of big fancy ‘puters to grind all that stuff up and make any sense out of it.
This new extension to require 1099s of corporations won’t be much of hit for the giant corporations with big systems, ample budgets, competent procurement departments, and smallish numbers of well-tracked vendors. They’ll just spin these changes into the process and flip more data to the IRS. And by the way: could not these same systems be flipped about to do the reporting on business-sized transactions to the IRS from the sell side rather than the buy side? Raise the limit so that Sears doesn’t have to report every refrigerator and fancy dishwasher. But let’s get Sears and Staples and Best Buy and Home Depot to shoulder some of the reporting work here – they have the efficiency of scale to make it happen, fast.
As noted by other commentators here, the real pain will be for mid sized to smaller and mid sized businesses who will have a lot more reporting of transactions that they currently don’t report. Electronic means will be key, and the IRS will need to think hard about new, more efficient ways of accepting the piles of filings that this will require.
And the real likely outcome will be to further bifurcate our economy, driving the edges of the gray market further into the black world of unreported cash-based transactions. That may not be very fair for those that comply and report.
How or does this apply to independent contractors?
Hey guys – I think come 2012 and it is time to do all those 1099s things may actually be easier than they are now –
In addition to the points made by Tax Girl – that you will no longer have to try to figure out the type of entity your plumber is and whether you paid for services or goods when you redid the rest room in your office – and have to add to what you paid by credit card to what you paid by check –
the new law says:
“all persons shall report”
This includes your purchasing or credit card company (check out IRC (Internal Revenue Code) Section 6050W – this passed in 2008 as part of the (yes) continuing effort to close the tax gap – the banks and card companies have to start reporting to payees and the IRS payments made to vendors accepting cards.
“including rules to prevent duplicative reporting of transactions.”
This should mean that if the card company is reporting payments to the vendor, you don’t have to – this relieves the burden on both you and the IRS – so I expect it to happen – Duplicate reporting makes it more difficult for the IRS to properly match what is reported on the tax return. That is, if both the end user and the merchant acquirer issue 1099s for the same payment, that doubles the reported gross proceeds. That would really screw things up for the IRS.
The “P” card regulations are already moving in this direction. Check out Rev Proc 2004-43 at http://www.irs.gov/irb/2004-31_IRB/ar17.html , Notice 2009-19 IRB 2009-10 March 9, 2009 (particularly the request for comments item #8), and proposed Reg 139255-08 in IRB (Internal Revenue Bulletin) 2009-49 Dec 7 2009.
What this all seems to mean is that the card companies (merchant acquirers) will be reporting ALL payments to merchants (including non business payments) and to avoid duplicate reporting of transactions, persons paying the card companies (cardholders or “end users”) should not be required to issue 1099′s for payments made through those third parties. The third parties include banks. So I’m looking at it this way – Right now, the only non-corp payee I pay (by check) is the landlord for my office – nearly everything else is by card. By 2012, I am not sure I will be paying even my landlord by check. In 2012, if I have to report anything at all, it will be to the card companies.
W-9? The card companies have that info on the merchant payees before they make any payments to them.
The big problem will be for those who are skimming the currently unreported income and those inflating deductions because they don’t have to report them. I suspect some businesses will get squeezed on both ends.
Kelly,
I run a small electronics company and have to watch spending all of the time.
This 1099 reporting will hurt a lot of the smaller vendors and cost us more
money than we save by shopping around for better prices.
We will just consolidate our purchases to just one office supplier, one or two
parts suppliers and outside service providers to just a few. We will not shop
around like we do now to save a few bucks on a purchase.
Time is money and wasting more time on 1099 reporting is lost time that
can be better spend on producing more products.
This is how a small business can cut out the extra cost of the new 1099
reporting rules.
Consolidate your vendors into just a few, then you only have to issue
a few 1099s.
What a great resource!
Thank you for an open-minded and interesting assessment of the tax issue with the new healthcare reform law. Most commentators seem to be dwelling on the worst possible reading and scaring everyone to death with it. I know your analysis will be appreciated by those of us who already have enough to worry about. Please keep up the good work!
To answer TFB’s question:
IRC Sec 6039F requires foreign gifts exceeding $10,000 to be reported. The IRS has administratively raised this to $100,000. See Form 3520.
Also, the IRS declines to impose penalty for late filing of Form 8606.
My family has owned and operated a small glass business for 34 years. It is amazing how much red-tape, paper work, reporting requirements, paper work, paper work, paper work, did I say paper work?….is required just to attempt to earn a meager living!! All I can say is “Thanks, Big Government, for making every possible effort to close my small business doors!” As far as this health reform, what a joke! My little family business has forked out over a million or more dollars as it is to offer employees and their families insurance coverage. When do we get a break????????
ANOTHER EXAMPLE OF THE INCOMPETENCE (INSANITY?) OF BUREACRATS. A PART OF THE HEALTH CARE BILL? WHAT
OTHER SURPRISES ARE IN STORE? HOPEFULLY AFTER THE
NOVEMBER ELECTIONS, SOME SANITY WILL RETURN.
I, too, own a bookkeeping company and have been trying to educate the business owners in this area about this new rule. I appreciate the well written and easy to read article. I am sharing it with others to help them understand the issues.
One of my clients received a letter today from Fifth Third Merchant Processing about this subject. The jist of their letter was that beginning January 1, 2011 they will have to start collecting W9s from their customers for reporting in 2012. My impression all along has been that we don’t have to start collecing data until 1-01-2012 to be reported in 2013. I see in your recital of the bill that my impression of the dates is correct. I appreciate you providing the evidence I needed to be able to say, “I’m sure.”
I found this article http://bit.ly/9KTtVj that has an IRS email address people can send feedback to.
I also found this article http://bit.ly/dCwgrV that says four senators have written to the IRS commissioner with concerns about this issue. Do you believe that it would benefit if we contacted our own senators and let them know how we feel about this?
I thank you again and in advance for your comments.
Thanks again.
I can agree that the threshold is too low, our company (a dive shop) spends a minimum of 1k per order to receive the free shipping. One particular person in our outfit (well known as a conspiracy theorist and therefore more prone to panic) believes that every six hundred dollars we spend with a vendor will mean that we have to fill out this 1099 form. However I’m of the opinion that it only applies at the end of the year when the taxes are due, one for each vendor. This is to keep us honest (not that we aren’t) and also to keep the vendors honest. I know how hard it is to bring order out of the chaos and to hold people accountable so I’m not opposed to this new regulation however I need to know if this is going to be for each transaction over six hundred dollars or for just each vendor that we spend more than six hundred dollars to at the end of the year.
Please advise,
Nicole
So – does this mean 1099s to Utility providors (Gas – Elec – Phone)?
would this mean the grocery store at the end of the year we would have to send them and the place’s we eat out all year long a 1099 it is well over 600.00 or they would send us a 1099?
The old law was very clear, and easy to apply – regardless of the Tax Girl’s opnion. Simple ask, simply had a W-9, if TIN and reporting is requried do not pay until the TIN or W-9 is submitted. The new law is very brudensome and do not expect help for the business owner from the IRS. The IRS may add additional burdens to require the business additionally to track payments by check separately from payments by credit card (or Debit card) and to report only payments by check on the 1099, but continuing the requirement to report payments made to every entity. Personally – I think this is so insane that it will be repealed. We are not discussing the planning with clients, until 2011 – because we suspicion it will be repealed.
Bob, I understand your reasoning but in practice, the law was very confusing for many folks. One major issue is that Social Security numbers are really only intended to be for tax reporting. However, because of the overwhelming abuse and concerns about identity theft, many folks are hesitant to hand out their numbers when asked because they don’t understand why it’s needed. That can lead to confusion and legal woes: you cannot refuse to pay someone for services if they fail to complete a form that they are not required to complete. This is a recurring problem. If you’re a regular reader of the site, you’ll see that a number of the questions that I receive revolve around whether to issue 1099 or whether to complete a form W-9.
I’m not implying the new law is better – I agree that it’s burdensome. I also think that there will be some significant changes. I do think, however, that IRS has to get a handle on the reporting. Chasing small businesses after the fact isn’t the best way to close the tax gap.
OK. What purpose does this new law serve? I spent the last 20 years educating small business clients on the need to keep good records. However I am not blind to the fact that business in America is largely conducted on an as needed basis by people who dropped accounting to be in “marketing” before the third week of each semester. The ruling may be good or bad idea based on ease of accounting but it is simply a time and cost burden, yes I am billing for this, on an already weak and fragile small business community which is currently contracting. If you doubt this check the breakdown of current double digit unemployment. The legislation to collect this $300 billion of unreported revenue is an interesting number. Does anyone have any idea how they came up with this one? I would be interested in the actual amount this would collect net of GDP shrinkage, the cost of new unemployment claims and collection costs. I guess Congress took marketing too since they do not seem to be able to manage spending, debt or the definition of net proceeds from the increase in compliance.
I run the back end of a 15-person advertising media management service. We have about a dozen clients and have paid at least $600 to about 700 media vendors in the past 12 months. (We have another 3,000 vendors that have received payments in the last 10 years.) We order about $50M in media placements from media companies, our clients pay us for those placements plus $2-3M in fees and commissions, and we pay the media invoices. This sounds like a January nightmare, unless by 2012 we’re able and allowed to handle all of those 1099s electronically. (Albeit, scores of those vendors will never have the capability to receive electronically.)
What are the chances that a company of our size will have to comply with this?
I keep the books and run payroll for an auto repair shop. We have probably 350 -400 vendors we make purchases from. Majority of the transactions are by debit card. This looks like a major nightmare to me in separating transactions and correctly reporting 1099 information. All of this is very confusing and makes my head hurt…lol.
I said from the beginning that Obamacare was pushed through way too fast and small businesses would get it in the end.
Thanks for your insight Taxgirl. I appreciate your comments.
The bill puts an unbelievable burden on small businesses that buy from vendors and the general public. My coin shop is an example. I buy supplies and coins from a list of about 20 vendors, including the U.S. Government. I also sell material to all of my vendors except the U.S. Givernment. I sell to the general public, as well as buy from them. Each individual person (customer) that walks thru my door to sell me material will have to be tracked for potential reporting purposes. I have thousands of “walk-in” customers that now need files to see if they sell me more than $600 of material in a year, requiring me to send them a 1099. Social Security numbers will have to be used, since individuals don’t have TIN’s. I’ll have to maintain thousands of records, including ss numbers and addresses. Even if I could manage the paperwork, there is a huge issue with security of all of the personal records. We need to repeal this portion of the law before it puts me out of business. Thanks you for the opportunity to voice my concerns. Keep up the reporting!
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