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Business pressure could kill 1099 rule

By   /   Monday, November 15th, 2010  /   Comments Off on Business pressure could kill 1099 rule

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Among the many political casualties of mid-term elections this year may be an obscure tax-reporting rule that it seems no one — even people within the IRS itself — will miss.

The 1099 rule, as it has come to be known, was a little-noticed part of the health-care legislation passed earlier this year. It requires businesses to file a Form 1099 any time they spend more than $600 on goods with another business or contractor.

Rack up more than $600 at your favorite power lunch spot over the course of a year? Get ready to send a form detailing the precise amount spent. Ditto for just about every expense you can think of.

The intention was to help close the $350 billion gap the IRS estimates exists between taxes owed and taxes paid and to help pay for health care. But the result, critics say, is an unmitigated — and largely useless — paperwork flood for businesses large and small.

The IRS estimates that 40 million businesses would be affected by the new requirement. The problem is that small-business bookkeepers usually track credit card and cash transactions by type rather than vendor.

“They’ll just put it all in one line — ‘office supplies, $300,’ ” said Ken Jurgensen of the accounting firm Nasif, Hicks, Harris & Co. in Santa Barbara. “To try to break out credit card statements by vendor is a huge increase in bookkeeping. Whether it’s petty cash or credit card charges, it’s going to be a lot harder to track.”

For big multistate businesses, the law change could result in literally millions of extra forms each year.

“Even if it’s just a flag on the vendor record in the system, large businesses do transactions with thousands and thousands of suppliers who weren’t 1099s before and now are a 1099,” said Peter Iannone, a director at CBIZ Accounting, Tax & Advisory Services in Oxnard. “Somebody has to go in and make that change.”

What’s more, the forms are mostly useless to the receiving business because the sum totals they reveal won’t add up to more than the income an honest businesses would have reported anyway.

“They don’t add up the 1099s they get. A lot of them just throw them away,” Jurgensen said.

The IRS, of course, will receive a copy as well. But the millions upon millions of extra forms are only useful if the IRS can manage them well enough to come up with actionable intelligence for its enforcement arm. Otherwise, the policy won’t have teeth and won’t drive compliance, Iannone said. “It’s not going to be useful data,” he said. “It’s just going to be a lot of information.”

The requirement is becoming unpopular across the political spectrum. In September, the Treasury Department sent a letter to then Senate Majority Leader Harry Reid, D-Nev., calling the provision’s burdens “too great.” The Taxpayer Advocate Service, an independent ombudsman within the IRS, is concerned that the extra workload for businesses “may turn out to be disproportionate as compared with any resulting improvement in tax compliance.” And President Barack Obama has called the regulation “too burdensome” and “probably counterproductive.”

Business advocates have called for eliminating the requirement since it was announced.

“This is not the time to be layering on even more red tape on small businesses who are struggling just to survive through this recession,” Joe Armendariz, executive director of the Santa Barbara County Taxpayers Association, told the Business Times via e-mail. “The federal government should be streamlining the maze of bureaucracy that our small business owners have to navigate just to keep their doors open.”

Rep. Lois Capps, a Democrat who represents much of the tri-county region, voted for the health care bill earlier this year that brought the 1099 rule into being. But in August she also voted for a bill that would eliminate the requirement. The bill failed, Capps still wants the rule gone, a spokeswoman said.

“The Congresswoman feels that the intention behind the 1099 reporting provision — to combat fraud — was a good one, but she has heard the concerns of the business community loud and clear,” said Ashley Schapitl, a spokeswoman for Capps. “She recognizes that the reporting requirement could prove too onerous for small business and supports amending it.”

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