Friday, January 21, 2011

New 1099 Requirements: A Heavy Burden?

The new health care law will require increased 1099 reporting for businesses. Currently, businesses must generally report payments of greater than $600 to non-corporations. Starting in 2012, they may also need to report payments to corporations. This could prove to be a significant burden. A small business which has no employees but purchases supplies from 10 different stores will suddenly have to acquire tax information from stores and learn how to generate and issue 1099 forms. But, the IRS has proposed a regulation to only exclude most credit and debit card payments since they are already reported by the issuing banks. The IRS is exploring other ways to eliminate duplicate reporting so as to limit the burden of the new law.

Fox News reports that the law may increase tax evasion and cash payments. Considering the credit and debit card regulation the IRS is likely to put into effect, I don't think there will be such a net effect. Credit and debit card business payments will incur few, if any, additional reporting requirements, so businesses would have little reason to change those. Cash and check business payments would incur new reporting requirements. Businesses which make cash and check payments of over $600 would be faced with a choice:

  • Switch to using credit or debit cards.
  • Start reporting the payments.
  • Hide the payments.
Some businesses will switch to credit/debit cards while others will try to evade reporting, possibly switching check payments to cash to minimize the "paper trail". But, the costs of switching to credit/debit cards is low, whereas cash transactions incur loss, theft, and evidence-of-payment risks which simply don't exist for credit cards. So, I believe relatively few businesses will take the cash/evade approach. And, since the additional requirements will increase reporting and IRS knowledge, I think some businesses which currently hide some transactions will think twice in the future.

No comments:

Post a Comment