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US Business Faces Burden From New IRS Reporting Rule–Report

July 07, 2010

WASHINGTON – An Internal Revenue Service watchdog warned Wednesday that the burdens on small businesses from a new reporting requirement in the recently passed health-care law may outweigh any benefits from increased tax compliance.

About 40 million businesses, charities, and other entities will be required to report payments to vendors starting in 2012, the IRS Taxpayer Advocate Service said in its mid-year report to Congress.

The reporting regime is aimed at giving the IRS more information to help it collect taxes from the vendors. But the report said it could disrupt commerce and that IRS systems might not be equipped to make much use of the information anyway.

Businesses are already required to report payments to non-corporate service providers that exceed $600 in a given year.

The health-care law expanded that to cover incorporated service providers, and also vendors of goods. That means that a self-employed person who pays the same vendor more than $600 for office supplies, equipment, or consulting services in the same year must now generate a 1099 form for that vendor and send it to the IRS.

“The Office of the Taxpayer Advocate is concerned that 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,” wrote National Taxpayer Advocate Nina E. Olson.

The Taxpayer Advocate is an office within the IRS charged with assisting taxpayers and identifying unfair policies and practices.

The IRS has announced that businesses wouldn’t have to report payments made by credit card, since those payments will be picked up by a separate reporting regime.

Nevertheless, Olson highlighted several potential problems with the new requirement.

For instance, the law requires that the vendor provide its business customers with a taxpayer identification number, which the customer must then include on the 1099 form. If the vendor doesn’t provide an ID number, the business is required to back-up withhold, on behalf of the IRS, 28% of the purchase price.

“A vendor may simply refuse to sell goods to any purchaser that refuses to pay the full purchase price. Such an outcome could significantly impair the normal course of commerce,” Olson wrote.

In addition, she said large company vendors will have an advantage over small firms because they may offer to keep track of payments for their customers to help meet the IRS requirement.

The new reporting requirements were included in the health-care bill to help offset the cost of new health-insurance subsidies. They were estimated to raise $17 billion for government coffers over the next 10 years.

The information-reporting requirement is one of two main areas of concern on which the Taxpayer Advocate said it will focus during the coming year. The other is what Olson called declining levels of IRS taxpayer services.