Revenue-raising provisions in the Patient Protection and Affordable Care Act, and the Health Care and Education Reconciliation Act of 2010, like their health care provisions, have far-reaching implications. One could even fundamentally change the way we do business and keep records in the United States—by dramatically increasing information reporting requirements for business transactions.
The Senate voted to repeal this provision of the Health Care Reform Act of 2010 on February 2, but the House is stuck in political wrangling to get it through on a bill that both the Senate and House will agree upon. As of this February 18, 2011, the House Ways and Means Committee has voted to send the repeal to the floor of the House; however it is attached to a provision that has caused some disagreements in all camps. There is a high number of House and Senate members who want to repeal this law but at the moment there is no agreement on how.
Beginning in January 2012, virtually all payments by a trade or business aggregating $600 or more to any single vendor during any calendar year will have to be reported at the end of each calendar year to the vendor and to the IRS on Form 1099. Vendors include almost anyone a trade or business pays in the course of doing business, other than its employees whose compensation is already reported on Forms W-2.
Depending on any relief granted through yet-to-be-published regulations, the new provisions will, as a practical matter, require businesses to track all payments made directly or through their employees or owners. Presumably, they could even include repeated business meals at the same restaurant, office supplies and equipment, or inventory for resale.
Implementing this change will require collaboration among businesses and software vendors and likely the help of CPAs to correctly identify characterize and report these transactions. Purchases affected could range from inventory to payments for advertising services to the electricity bill. IRS Commissioner Doug Shulman, however, said in a speech in May that the Service plans to administratively exempt business transactions conducted using payment cards such as credit and debit cards, because those transactions would already be reported by the payment processors.
It is not too soon to start thinking about the massive increase in record-keeping that will be required. Billions of transactions will have to be identified and re-sorted by vendor, summarized, and reported to the IRS by more than 30 million U.S. businesses. Unless the IRS makes changes, businesses will be required to record the taxpayer identification number (TIN) of the payee, or some other unique identifier, for each transaction during the year.
Ignoring the requirements could lead to expensive penalties for failure to provide information returns. Unless a waiver or other relief is granted, a business could face a $50 penalty under section 6721 for each required information return it fails to file, or that it files with incomplete or incorrect information. For an intentional disregard of the requirement, the penalty could increase to $100 per return or more. Meeting these requirements will, nevertheless, be a far less daunting task for those who plan ahead and who maintain a good expense database from which they can aggregate purchases by vendor and retrieve full vendor information.
While the IRS is expected to provide guidance on the section 6041 requirements, the drafting, exposure and finalization of any regulation of this magnitude typically can take a year or more to complete. We can only hope there will be enough time for the business community to react. You can increase the likelihood of a smooth transition by learning about these new reporting requirements now, and preparing for them and making any necessary changes to your record keeping this year.
Adapted from ‘The Coming 1099 Revolution: Are You and Your Clients Ready? By David Lifson, CPA