Mark P. Keightley
Analyst in Public Finance
Beginning January 1, 2012, a business will have to file a Form 1099-MISC information return with the Internal Revenue Service (IRS) if the total amount of payments made to most businesses in exchange for goods or services is $600 or more in a year. Previous law only required that an information return be filed for payments made in exchange for services and exempted payments made to corporations. The new reporting requirements were enacted as part of the Patient Protection and Affordable Care Act (P.L. 111-148) and are intended to increase tax payment compliance and reduce the net tax gap. The net tax gap is estimated to be around $356 billion in 2010 after adjusting for inflation and recouped taxes. The Joint Committee on Taxation (JCT) estimates that the new reporting requirements will raise $17.1 billion over 10 years, or about $1.7 billion on average annually.
This report analyzes the new 1099-MISC requirements. Data on the tax gap and tax payment compliance are presented. Small businesses taxpayers are shown to be the largest single contributor to the tax gap and are also shown to have one of the highest rates of noncompliance. The JCT revenue score is used to estimate that the new requirements will reduce the tax gap by 0.50%, and increase tax payment compliance by 0.40%. The value of the new requirements is evaluated from the perspective of the revenue raised in comparison to the compliance costs imposed on businesses and the administrative costs imposed on the government.
Several proposals for change have been offered and are evaluated in this report. Legislation has been introduced by Senator Mike Johanns (S. 3578) and Representative Dan Lungren (H.R. 5141) that would repeal the new requirements, and a proposal by Senator Bill Nelson (S.Amdt. 4595 to H.R. 5297) that would modify the particular parameters of the requirements. There is some uncertainty, however, as to how exactly S.Amdt. 4595 to H.R. 5297 should be interpreted. As the amendment currently is written, it could be interpreted as increasing the reporting threshold to $5,000 for payments in exchange for goods but not services, and exempting businesses with no more than 25 employees from the reporting requirements for payments in exchange for goods only. But at least one outside source is interpreting the amendment to imply that the $5,000 threshold increase would apply to both goods and services and that businesses with no more than 25 employees would be exempted from reporting requirements altogether. There is a consensus that the S.Amdt. 4595 to H.R. 5297 would exempt payments made with credit and debit cards where the payment processor is already subject to reporting requirements.
Another option, which has been included in several budget proposals of both the Bush and Obama Administrations, is to require reporting for payments in exchange for goods but continue to exempt payments to corporations. Other options offered include simplifying the tax code to reduce the incentive to evade or avoid taxes, and upgrading information reporting infrastructure at the IRS to reduce the burden of being compliant.
Date of Report: September 10, 2010
Number of Pages: 15
Order Number: R41400
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Wednesday, September 15, 2010
Mark P. Keightley