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Tuesday, December 28, 2010

1099 Reporting Changes Found in Healthcare Reform Bill

Although seemingly irrelevant to healthcare reform, buried deep in the newly enacted Healthcare Reform Bill’s 2,409 pages is a 1099 reporting requirement change that will instate a big shift in how businesses report to the IRS payments to other businesses.

Previous to this bill, if a business makes a payment to a person or business in excess of $600 a year, a 1099 must be issued to report the payment; payments made to corporations and for merchandise were excluded. With the new Healthcare Reform Bill, a 1099 form must now be filed to the IRS for the previously excluded payments. 

Although the bill will affect all businesses, it no doubt will be the small businesses impacted the most by the change. In a recent survey, small employers typically issue an average of ten 1099 forms per year, with an average preparation time of thirty minutes. Extending the 1099 to account for payments made to corporations (without accounting for purchases) increased that number to at least 200 filing per year, adding an estimated $6,000 to the cost of preparing an average tax return. By further adding the payments made for merchandise into the equation, the increase in compliance costs and forms generated will be phenomenal.

For example, if a small business purchases computers from Dell to help run their business, they would then have to issue a 1099 to Dell. If they cater a large luncheon and order from Jill’s Deli down the street, they would have to issue a 1099 to Jill’s Deli, and so on, and so on. Dealing with the administrative aspects of these filings could be burdensome to many small operations.

Closing the Debt Gap
There are three areas of noncompliance, identified by the U.S. Government Accountability Office (GAO), which prompted this enactment, accounting for approximately 350 billion in annual funds: under-reporting of taxable income, underpayment of taxes and non-filing of tax returns. A significant majority of the tax gap is created by those that under report their taxable income. Using 1099s to document all the transactions that are currently not tracked is one way to begin to close the gap.

Changing the Change
Currently, the new requirements would go into effect January 1, 2012. However, due to the administrative burden these additional filings would cause, there is movement within legislature to create new bills designed to the limit the scope of the first by increasing the amount for 1099 issuance from $600 to anything over $5,000. There’s also a proposed regulation to exempt any business purchases made with a credit or debit card since those purchases are already reported by banks and other payment processors. As of December 1, 2010, the motion to repeal the reporting requirements altogether was denied by the Senate, but efforts will continue to be put forth through 2011.

Bracing for Impact
Until a repeal or modification to the 2012 1099 requirements is made, businesses should prepare for the new change. All businesses should evaluate their current accounts payable system to determine whether or not it can handle obtaining Taxpayer Identification Numbers (TINs) from all vendors and is able to issue large volumes of 1099s. Business should also determine the current population of 1099s for 2010 to measure what the worst case scenario will be for 2011; it should be assumed that all vendors will receive a 1099. A few questions to consider as your business readies for the change:

Does my business have the capacity to handle the 1099 preparation? How will my business gather TINs and completed W-9s from all the vendors? How will my business verify TINs to ensure the B Notices are kept to a minimum? Preparing now is crucial so compliance is met when the new rules go into effect. The penalties for noncompliance will double from its current state; $50 per item for non-issuance or incorrect TINs to $100 per item. There is also the issue of backup withholding if W-9s are not completed by vendors previous to any payment being issued. To ensure proper adherence, the IRS has added between 4,000 and 5,000 new revenue agents specifically to assess and collect taxes.

Here to Help
Armanino has experienced professionals who are at the forefront of interpreting the 1099 reporting requirement change and what it means to the accounting function within businesses. We can assist companies in identifying whether or not their businesses and/or systems are prepared for this change and assist with the accounts payable function to establish processes to ensure compliance.


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