Congress should fix 1099 debacle
There's a relatively small piece of foolishness we hope won't get lost amid the many big problems faced by the Congress.
As we've previously reported, buried in the 2,400 pages of the health care reform bill was verbiage that changes an obscure portion of the tax code.
Under current law, all business operations are required to report to the Internal Revenue Service payments totaling $600 or more for services performed by a person not treated as an employee, payments of rent totaling $600 or more, payments of prizes to one individual of $600 or more, and payments of royalties of $10 or more.
The reportable, cumulative payments are recorded each year on a Form 1099. Filers send a copy to the IRS, a copy to the payee and keep a copy for their records. The forms are meant to keep the person receiving the payment honest.
The federal government says an underground economy produces untaxed transactions, and estimates that $290 billion in tax revenues go uncollected each year. The IRS attributes the gap to individuals and businesses who either fail to file returns, understate income and overstate deductions on returns they do file, or fail to pay the full amount of tax indicated on the return.
To narrow this "tax gap," and help collect more money to pay for the massively expensive health care reform, the legislation greatly expands the reporting requirements on individuals and businesses.
Beginning in 2012, the new law expands the reporting requirement to virtually every purchase or series of purchases by a business of goods and services totaling more than $600 to a single person or entity.
While this will be a boon to accountants, printers and the Postal Service, operators big and small will find themselves awash in paper and picking up the tab for accounting for millions of now reportable cumulative purchases generated in the course of regular commerce.
No one knows how much this new requirement will cost businesses. Farmers and ranchers will have to either pay an accountant to tally the receipts, send out the 1099s and file the incoming documents, or do the work themselves.
The government says the effort is likely to yield no more than $87 billion in previously unpaid tax revenue a year. Now, that's real money. If it's legitimately owed, it should be paid. The IRS has yet to say how much it will spend in staff and infrastructure to collect the windfall.
A conservative estimate places the cumulative cost to businesses of complying with the new requirements at $8 billion. Farmers, ranchers and other businesses will, at a minimum, pay a 9 percent surcharge on those collections to keep less scrupulous operators honest.
Once it came to light, the new reporting requirement proved unpopular even with supporters of health care reform. Republicans and Democrats have promised to repeal the provision. We hope that fix doesn't get lost amid larger issues.