Slipped into the health care reform bill passed in March was a new tax reporting regulation likely to create a huge burden for businesses, something we wrote about recently. Now a government watchdog, the National Taxpayer Advocate, is questioning the rule’s potential unintended consequences for small companies.
Plus, it looks like the regulation won’t raise a heck of a lot of money anyway.
The rule would require anyone with business income to issue 1099 tax forms to all vendors from whom they bought more than $600 worth of goods and services that year.
In her report, Nina Olson, the Taxpayer Advocate, warned that the rule could prove to be an unacceptable added burden for small businesses, which would face a virtual cyclone of new paperwork to comply with the regulation. “The new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate as compared with any resulting improvement in tax compliance,” she wrote. And the rule could also give an unfair advantage to large suppliers that have the resources to help customers track purchases.
What’s really going on here? The regulation, which would take effect in 2012, seems to be yet another attempt by federal and state government agencies to shore up revenues by cracking down on unpaid tax liabilities–and taking steps that intentionally or unintentionally impact small businesses in particular. For example, a bevy of agencies, plus Congress, are on a regulatory jihad against corporate misclassification of independent contractors. And there are reports that the IRS is especially eyeing small businesses in that crackdown.
Thing is, like that effort, the new 1099 tax reporting regulation isn’t likely to reap a whole lot of money. For example, the nonpartisan Joint Committee on Taxation recently estimated the rule would raise an underwhelming $2 billion annually in added revenue, according to CNNMoney.com.
Will the Taxpayer Advocate’s remarks have any effect? Even before Olson’s report, there were signs that the IRS had started to backtrack. For example, the IRS announced in May that the rule won’t include transactions made through credit and debit cards. As the tax agency addresses all the compliance complexities of the rule, it’s likely to make other changes, as well.
But with government agencies in desperate need of money, the reporting rule isn’t going to disappear completely.