Guest post by Troy Thibodeau:
It doesn’t matter what I think, it doesn’t matter what most of us think – the solution to collecting more revenue will ultimately be decided by the government and the IRS. So I thought it would be best to look at the evidence and propose what they think the solution might be – and it seems that the solution is more 1099 reporting regulation.
More Regulation Is Coming
Cheers were heard all around earlier this year, especially amongst small business lobby, when President Barack Obama repealed the so-called “1099 bill” within the Healthcare Reform Bill that would have required businesses to collect and report tax information from every vendor they purchased more than $600 worth of goods or services from each year.
Demanding reports on purchases of $600 or more certainly would have increased businesses’ regulatory burdens and its repeal wasn’t a surprise to many. But to think that the repeal of this particular law killed all aspirations to increase the number of tax information reports the IRS demands may be hasty.
The recent 1099 law provision repeal isn’t the end of the story; rather it’s just the first chapter in eventual tax reform.
More 1099 Bills Are In The Works (And Some Have Sneaked Through)
For legislators, 1099 regulation is a way to increase revenues without having to increase taxes. Just last month, the failed debt ceiling plan penned by Senator Harry Reid (D-Nev.) called for “enhanced third party data matching” to improve the efficiency and effectiveness of the IRS. Also last month, Senators Tom Carper (D-Del.) and Barbara Boxer (D-Cal.) put forward bill S.1289, which included reforms for more tax information reporting around mortgage interest deductions, reporting on deposits and for firms that use contractors.
And some bills have already passed into law. The Bush administration passed a law that expanded 1099 reporting to include payments made via credit cards and wire transfers which began this tax year. Now, because of ‘Section 6050W’, all merchants and processors of merchants’ credit card payments have to report all payments passed through their systems, significantly increasing the regulatory burden on banks and merchant processors.
These bills and laws are clear evidence that politicians at the highest level listened to IRS Commissioner Doug Shulman when he told a Congress committee in June: “the thing you have to remember about the [tax] gap is it’s like a deep shale oil reserve, it’s not money sitting there that’s easily tapped, in many ways we have tapped the easy money… the real answer, the place where we have leverage, is information reporting.
Washington’s Safer Word
Watch out for the language of Washington in the coming months – you’ll hear a lot more about “increased revenues” rather than “new taxes” – it’s a politician’s way of calling for collecting more of what’s currently owed rather than trying for new taxes. Even Republican Presidential hopeful Mitt Romney, former governor of Massachusetts, used the phrase alongside a promise of “no new taxes” when he successfully convinced Standard & Poor’s to upgrade the debt rating of the state in 2005.
“Increased Revenues” is a safe word, it means collecting more money but not asking for more money. That can be done with more information reports.
A Hard Sell
Of course, 1099 reform is a tough sell; this year’s repeal proved that and any attempts to increase regulation will be attacked. For example, Bill S.1506, penned by Senator Marco Rubio (R-Fla.) is currently in the Senate to try to veto the IRS’ attempt to increase reporting on interest payments on deposits held by non-resident aliens. The bill argues that increased reporting will mean “billions” of privately-held dollars will leave U.S. banks – an argument that may not win out when increased reporting could capture additional (and much needed) billions for the government.
Redefining The Argument
The small business lobby too will argue against any 1099 bills as it will be buoyed by its victory this year. But it is unlikely any new reforms will be quite so straightforward to argue – the IRS will position regulation as targeting businesses that should already have the systems in place to deal with the 2 billion information reports filed each year already. The 6050W law, for example, puts the burden on the banks, not on small business. Watch out for Congress and the IRS following this model going forward.
There’s also action underway to redefine “small business” to dampen the political rhetoric. This month, the Treasury’s Office of Tax Analysis redefined the term “small business owner” which almost halved the number of “small businesses” in America, from 20 million small businesses to just under 13 million. As William Beach, director of the Center for Data Analysis at the Heritage Foundation, a conservative think tank said, the new definition will create a “way to find additional revenues”.
The other and arguably weaker argument against 1099 reform is that the IRS cannot afford to increase regulation. It’s true that investment in the IRS is necessary to make it more efficient – Senator Reid’s plan suggests an investment of $27 billion over the next three years alone. But as Shulman reminded Congress in June, Each 1 percent improvement in compliance will produce an added $20 billion in revenues.
The IRS and the government may have lost the last round of 1099 reforms, but it’s back on the offensive this time around.
A Tough New IRS
1099 reform will continue to be pushed by legislators and the IRS will continue to crack down more heavily on 1099 misdemeanors than it has done in the past. The sense we get now is that the IRS will no longer be flexible around tax information reporting standards – penalties will be significantly higher for Tax Year 2011.
New rhetoric, a desperate need for more revenues, no sign of new taxes and a tougher tax collector all point to more 1099 bills as the choice solution. And we all should be prepared.
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Troy Thibodeau, VP at Convey, is a tax information reporting specialist from Minneapolis.
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This guest post was submitted in response to my query about how the best way to deal with the current economic situation. This post does not necessarily reflect my thoughts and feelings.
Your comments and reactions are, of course, appreciated. Just play nice. I have standards. And I don’t want to have to delete you.
