Health Care 1099 Reporting Rule Will Create New Tax Burden (10/10)

Buried deep in the Patient Protection and Affordable Care Act, the 2,000-plus page health care reform legislation passed earlier this year, is a new reporting requirement that will increase the paperwork of almost every employer in the United States.  The provision, section 9006 of the Act, greatly expands when employers must file information returns (the so-called Form 1099) to report certain business transactions to the Internal Revenue Service (IRS).  Under current tax law, employers are required to issue 1099s in limited circumstances when they pay over $600 to an individual or a business for services rendered, such as when paying outside consultants and other independent contractors.  Payments made to corporations or in exchange for goods and merchandise do not require the form.  The 1099s are sent both to the IRS and the person or business receiving the payments.  The intent behind the reporting requirement is to allow the IRS to track the payments and to insure that proper taxes are being paid on them.      Under the new Act, every transaction over $600 would be covered and payments to corporations or for merchandize are no longer exempted.  The provision takes effect January 1, 2012, and is supposed to raise over $17 billion to help pay for the Act’s overhaul of the health care system with the extra taxes that will be collected.  However, the IRS’ National Taxpayer Advocate, in a June 2010 report to Congress, expressed concern that the potential administrative burden of the new requirement on businesses, their vendors, and the IRS outweighed any resulting improvement in tax collections.  Since the requirement would apply to businesses of all sizes, charities and other tax exempt organizations, and government entities, the Taxpayer Advocate estimates that it will cover 26 million non-farm sole proprietorships, four million S corporations, two million C corporations, three million partnerships, two million farming businesses, one million charities and other tax-exempt organizations, and probably more than 100,000 federal, state, and local government entities.        Public outcry over the new requirements was muted at first, likely because most employers missed the provision tucked into the health care bill.  But, as the mid-term elections loom, more business groups and farm advocates have questioned the wisdom of imposing this new burden on organizations already struggling in the current economic climate.  Recognizing the potential negative impact on employers, Senate Republicans and Democrats have proposed bills to limit the new 1099 reporting requirements.  However, the lost $17 billion in projected revenues has proven a sticking point.  A Republican proposal would have repealed the provision entirely, paying for it by changing certain public health coverage initiatives, such as delaying funding of wellness and prevention programs.  A Democratic proposal would have changed the reporting requirements’ threshold so that it applied only to employers with 25 or more employees and to transactions of $5,000 or more and would have included taxes on energy companies to pay for the changes.  Both proposals were defeated primarily because of the funding provisions.  At this point, it seems unlikely that the current Congress will be able to eliminate or even modify the provision, but if there is a significant shift in the Congressional seats from Democrat to Republican, the chances for a complete repeal of the provision are much more likely.