Bury Me in Tax Paperwork Absurdity

Unless Congress changes the law, starting in the year 2012, businesses are going to have to issue Forms 1099 not only to individual independent contractors they pay more than $600 for services, but also to any individuals or corporations they pay more than $600 for services or goods. This is a radical change in the law, and one that will impose a very significant paperwork burden on people in business.

As summarized by the IRS:

“For example, if a self-employed individual makes numerous small purchases from an office supply store during a calendar year that total at least $600, the individual must issue a Form 1099 to the vendor and the IRS showing the exact amount of total purchases.”

This means that if you are in business (say, as a solopreneur) and buy a new computer from Apple that costs more than $600, you will have to issue Apple a Form 1099, or if you regularly buy office supplies from Office Depot that total to more than $600, you will have to issue Office Depot a Form 1099.

If you are in business, you are going to have to keep track of all purchases you make by vendor so that you can comply with the new law or face tax penalties for failure to comply.

The new provision will apply to businesses of all sizes. There is no exception for small business or startup businesses.

The IRS acknowledges “[t]he … new reporting requirement contained in the Patient Protection and Affordable Care Act may impose significant compliance burdens on businesses, charities, and government agencies.” 

As summarized in more detail by the IRS:

Beginning in 2012, all businesses, tax-exempt organizations, and federal, state and local government entities will be required to issue Forms 1099 to vendors from whom they purchase goods totaling $600 or more during a calendar year.  To meet this requirement, these businesses and entities will have to keep track of all purchases they make by vendor.  For example, if a self-employed individual makes numerous small purchases from an office supply store during a calendar year that total at least $600, the individual must issue a Form 1099 to the vendor and the IRS showing the exact amount of total purchases.

As reported by the National Taxpayer Advocate:

Old LawNew Law
Information reporting was required for the purchase of services but was not required for the purchase of goods; prior law generally did not require a person to report payments to purchase goods presumably because the purchaser could not determine the amount that (less cost of goods sold) would have been income to the vendor.Persons making payments in the course of a trade or business will soon be required to issue information reports to sellers of goods as well as providers of services.
Under a longstanding regulatory regime, moreover, there was an exception for payments to corporations as well as to tax-exempt and government entities.Businesses will also will have to report payments to a corporations.

This is going to result in a substantial increase in the paperwork burden for businesses. The National Taxpayer Advocate has issued a report which identifies a number of problems, including:

  1. First, vendors will have to furnish, and businesses will have to collect, TINs.
  2. If a vendor fails to furnish a correct TIN, the business is required by law to impose back-up withholding at the rate of 28 percent of the purchase price.
  3. Businesses will now have to keep records of all purchases sorted by TIN. Under the new law, the business will have to segregate its records by vendor TIN to determine whether the $600 annual threshold is met for each vendor.
  4. If a business makes qualifying purchases from at least 250 vendors during the calendar year, it will be required to file Forms 1099 electronically.
  5. Penalties may be imposed for failure to comply.
  6. Small business may be put at a competitive disadvantage to larger companies with systems already in place to handle this burden.

Obviously, we have reached a point of absurdity in our tax law. Hopefully, Congress will change this law before it becomes effective.

For other good resources on this issue, see:

The seemingly innocuous but troublesome provision causing the trouble:

 SEC. 9006. EXPANSION OF INFORMATION REPORTING REQUIREMENTS.

(a) In General- Section 6041 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsections:
`(h) Application to Corporations- Notwithstanding any regulation prescribed by the Secretary before the date of the enactment of this subsection, for purposes of this section the term `person’ includes any corporation that is not an organization exempt from tax under section 501(a).
`(i) Regulations- The Secretary may prescribe such regulations and other guidance as may be appropriate or necessary to carry out the purposes of this section, including rules to prevent duplicative reporting of transactions.’.
(b) Payments for Property and Other Gross Proceeds- Subsection (a) of section 6041 of the Internal Revenue Code of 1986 is amended–
(1) by inserting `amounts in consideration for property,’ after `wages,’
(2) by inserting `gross proceeds,’ after `emoluments, or other’, and
(3) by inserting `gross proceeds,’ after `setting forth the amount of such’.
(c) Effective Date- The amendments made by this section shall apply to payments made after December 31, 2011.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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