Full Disclosure Part Deux: IRS to Require Millions of New 1099′s
Stealth IRS changes mean millions of new tax forms
By Neil deMause, contributing writerMay 21, 2010: 1:51 PM ET
NEW YORK (CNNMoney.com) — The massive expansion of requirements for businesses to file 1099 tax forms that was hidden in the 2,409-page health reform bill took many by surprise when it came to light last month. But it’s just one piece of a years-long legislative stealth campaign to create ways for the federal government to track down unreported income.
The result: A blizzard of new tax forms that the Internal Revenue Service will begin rolling out next year.
“It was actually something that we were following back under the Bush administration under the 2008 budget — we started to see these kinds of rumblings about the ‘tax gap’ and whether or not businesses were paying their fair share,” says Tom Henschke, president of the Pennsylvania-based SMC Business Councils, which was one of the first organizations to call attention to the health care amendment when it was introduced last fall. “So two administrations can claim credit for this.”
The first tax-reporting expansion was buried in a different bill, the Housing Assistance Tax Act introduced by House Speaker Nancy Pelosi and signed into law by President George W. Bush in July 2008. Best known for its first-time homebuyers’ credit, the bill also created a new addition to the family of 1099 tax forms: the 1099-K.
The 1099 is a catch-all series of IRS documents used to report non-wage income from a variety of sources like contract work, dividends, earned interest and pension distributions. The new 1099-K aims to shine a light on a currently hard-to-track payment stream: credit cards. Starting in 2011, financial firms that process credit or debit card payments will be required to send their clients, and the IRS, an annual form documenting the year’s transactions.
The rule comes with a floor to weed out the most casual retailers: The 1099-K is only required when a merchant has at least 200 payment transactions a year totaling more than $20,000. But it applies to all payment processors, including Paypal, Amazon.com, and others that service very small businesses.
The goal of the new regulations is to catch income that is going unreported to the IRS. The federal government loses an estimated $300 billion each year from the “tax gap” between what individuals and businesses owe and what they actually pay.
“Better information reporting helps the tax system work better by ensuring that everyone pays what they owe,” IRS Commissioner Doug Shulman explained last year as his agency unveiled the 1099-K. “The new law gives us an important new tool for closing the tax gap and also provides business taxpayers better documentation to compute and report their income and expenses.”
For companies that currently report all their credit card and Paypal sales to the IRS, the 1099-K requirement will have little impact. All the paperwork will be done by the bank or payment processing service, and business owners will simply receive a form at the end of the year listing their total receipts.
The 1099 changes attached to the health care reform bill are another kettle of fish. These massively expand the requirements for filing the “1099-Misc” form, which companies use for recording payments to freelance workers and other individual service providers. Until now, payments to corporations have been exempt from 1099 rules, as have payments for the purchase of goods.
Starting in 2012, that changes. All business payments or purchases that exceed $600 in a calendar year will need to be accompanied by a 1099 filing. That means obtaining the taxpayer ID number of the individual or corporation you’re making the payment to — even if it’s a giant retailer like Staples or Best Buy — at the time of the transaction, or else facing IRS penalties.
In essence, the 1099-Misc is having its role changed from a form for tracking off-payroll employment to one that must accompany virtually any sizeable business transaction.
“Just with business travel it would include hotels, rental cars,” Henschke says. “Phone service: 1099. Computer service: 1099. Whoever does your postage meter: 1099. You do a little advertising, Yellow Pages: 1099. Your landlord: 1099. You might as well just keep them in your pocket and hand them out as you go around every day.”
This is just a proposal. The rules are not out yet. Individuals always put their SSN on W-9′s when requested by customers or they don’t get paid.
If your brother is in business the dealer would have to issue a 1099 under the proposal. The dealer most likely would make him fill out a W-9, which is a certification of the tax ID of the recipient of payments, since he could not confirm whether or not your brother was a sole proprietor. In your brother’s case the tax ID would be his SSN. All sole proprietors have to disclose SSN’s to customers on a routine basis, so this is not unusual.