New Information Reporting Provisions Getting Lots of Press

The Health Care Legislation included many revenue raising provisions. Even though this provision doesn't take effect until 2013, the expansion of information reporting is getting a lot of press. Tax Partner Patricia Thompson recently appeared on the NBC 10 News Sunrise program with Frank Coletta to discuss the impact on small business, what happens if you don't comply as well as potential problems with the legislation.

Can you explain the provision?

• The provision of information reporting is expanded to require information reporting for goods as well as services and for payments to corporations made starting 2012. For example, your small business purchases its cleaning supplies from Walmart and the total payments are over $600 in a year. Under this provision, your small business will be required to send a Form 1099 to Walmart indicating the total amount spent in Walmart during the particular year.
• This is on top of the current requirement for a business to issue Forms 1099, the information reporting form, to any unincorporated business you paid for providing a service to your business.

Why was this provision included in the legislation?
• Provision intended to reduce the "tax gap". Studies show that taxpayers are more likely to report income that has been reported to the IRS. The provision was included as a revenue raiser.
What is the impact on small business?
• The small business will need to track the payments to each vendor.

• They may need to modify their bookkeeping systems to be able to accumulate the information necessary for reporting.

• They will need to contact the vendor to obtain the vendor's identificaiton number. The small business may use a Form W-9 to request the information. If the vendor doesn't provide the information, the small business must withhold 28% from all subsequent payments due to the vendor. The small business person who is the payee is subject to a $50 penalty for not providing the information to the small business.

• The number of information returns that is 1099 forms prepared by the small business will increase

• All of these will require more time by the small business on administrative matters.

• Many businesses may reduce the number of vendors to minimize the administrative burden.

• Taxpayers renting real estate are not considered in a trade or business. As a result, they are exempt from the information reporting requirements.

What if you don't comply with the legislation?
• There is a failure to file an information return of $50 for each return not submitted. The penatly is doubled if the failure is intentional.

• There is another $50 penalty if the information return is for the wrong amount.

What is wrong with the provision?
• The IRS will be receiving millions of information reports. They will need to address computer capacity.

• IRS will not be able to match the information returns to the taxpayer if the taxpayer is on the accrual method of accounting or if it has a fiscal year. The returns are prepared on the basis of cash payments and on the basis of a calendar year covering January 1 to December 31.

• The requirement for the annual filing limit of $600 paid to a vendor is too low. The $600 level has been the same since 1954. The dependency exemption was also $600 in 1954 but has increased to $3,650 in 2010. It is easy to spend over $600 on small items.

Any solutions?
• Use your debit or credit card for as many purchases as possible. Recently, the IRS Commissioner indicated that an information return would not be required if the payment was made by either a debit or credit card. The payments by debit and credit card are already being reporting by the financial institutions and if these payments were not excluded it would result in duplicate reporting.

• It is not likely the provision for filing 1099’s will be repealed but maybe it can be modified to make some exceptions from reporting certain types of payments or to payments to certain types of entities.