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Wednesday, December 8, 2010

Economic Analysis of the Enhanced Form 1099 Information Reporting Requirements

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 business 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 Representative Sander Levin (H.R. 5982), Senator Mike Johanns (S. 3578, S.Amdt. 4596 to H.R. 5297, and S.Amdt. 4702 to S. 510 ), Senator Max Baucus (S.Amdt. 4713 to S. 510), 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. Senator Nelson’s proposal would increase the reporting threshold to $5,000 for payments in exchange for goods, and exempt businesses with no more than 25 employees from the reporting requirements for payments in exchange for goods. The $600 reporting threshold for payments in exchange for services would be unchanged. On November 29, 2010, a motion to suspend the rules so that S.Amdt. 4702 to S. 510 and S.Amdt. 4713 to S. 510 could receive a vote was rejected.

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: December 3, 2010
Number of Pages: 15
Order Number: R41400
Price: $29.95

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