New 1099 Headache

Heath reform law hides massive change in 1099 reporting

A few lines buried in the 2,409-page Patient Protection and Affordable Care Act of 2010 (the new health reform law) will require U.S. companies to issue 1099s to every business where they spend $600 or more, not just individual contract workers. Starting in tax year 2012, the law expands 1099 coverage to tangible goods and services, thereby also expanding not only reporting but data collection for every payee and vendor with which companies do business throughout the year.

The IRS estimates that the federal government fails to collect $290 billion a year in tax revenue on income that is not reported. “This new reporting requirement boils down to closing the tax gap,” says John W. Roth, senior tax analyst at CCH, a Wolters Kluwer business. “When third parties are required to report, compliance increases,” he says.

“Now, transactions previously considered a routine part of doing business will need to be reported to the payee as well as the IRS,” Roth says. For example, under the new rules, a freelancer who buys a new computer from the local Apple Store will have to send Apple a 1099. A company that buys raw materials used in its manufacturing will have to track those purchases throughout the year and send all of its suppliers a 1099 by Jan. 31 that tallies the total spent.

Some details still need to be worked out, Roth says. For example, will a $599 purchase cross the threshold because of state sales taxes, excise taxes or surcharges? “The IRS has been silent on this so far because of higher priorities, such as the health care mandates and tax changes that will affect tax year 2010.”

The year 2012 seems like a long way off, but because the new 1099 rules pose such a procedural burden, it’s a good idea to start thinking through the issues involved.

“Corporations will need to figure out how they are going to track all this and compile it at the end of the year so they can file 1099s in a timely way,” Roth says. “On the flip side, companies will need to track 1099s as they come in, to make sure they get to the right person and onto the tax return.”

The silver lining: “Software companies like CCH are certain to come up with ways to streamline the process and make compliance easier.”

This story is from the CCH e-newsletter Figures, written specifically for corporate tax professionals. Figures offers tips, tricks and ideas about how to increase your organization’s productivity and efficiency.  Every issue also features insights with a corporate tax professional

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