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Friday, March 18, 2011

1099 Information Reporting Requirements and Penalties as Modified by the Patient Protection and Affordable Care Act and the Small Business Jobs Act of 2010

Carol A. Pettit
Legislative Attorney

Edward C. Liu
Legislative Attorney

Generally, taxpayers are more likely to report items of income on their tax returns if they know that a third party has reported it to the Internal Revenue Service (IRS); therefore, expanding information reporting requirements under the Internal Revenue Code (IRC) can improve the collection of federal tax revenue. However, as those requirements are expanded, those who must comply with the requirements generally will face an increased administrative burden. Recent expansions of the reporting requirements in IRC § 6041 have been met by protests that the changes impose too great a burden, particularly on small businesses.

The Patient Protection and Affordable Care Act (P.L. 111-148; PPACA) and the Small Business Jobs Act of 2010 (P.L. 111-240) both amended IRC § 6041, which requires payments totaling at least $600 in a single calendar year to a single recipient to be reported to the IRS. The required returns are generally Form 1099s, which are prepared by the entity making the payment and show to whom payment was made, the amount of the payment, and the general reason for the payment. The form is filed with the Internal Revenue Service (IRS) and a copy is provided to the payee. The form is required only when the payer is considered to be engaged in a trade or business and has made the payment in connection with that trade or business.

Beginning with payments made in 2011, § 2101 of the Small Business Jobs Act makes most landlords subject to the reporting requirements of IRC § 6041 by stipulating that, for purposes of IRC § 6041(a), they are considered to be engaged in the trade or business of renting real property, with certain exceptions. Landlords generally have not been considered to be engaged in a trade or business and, therefore, have not been subject to IRC § 6041. The Small Business Jobs Act also increased the penalties for failure to file an information return (IRC § 6721) and the penalties for failing to provide a copy of the information return to the payee (IRC § 6722). These changes will apply to any information returns required to be filed after December 31, 2010.

Beginning with payments made in 2012, § 9006 of PPACA changes the reporting requirements in two ways. Payments to corporations will no longer be exempt from reporting. Additionally, § 9006 expands the types of payments that will trigger the reporting requirement. Until 2012, the type of payment that most commonly triggers the reporting requirement is payment for services. Beginning in 2012, IRC § 6041 will also require reporting of payments for goods or other property as well as gross proceeds.

Various groups have asserted that the reporting requirements will be too burdensome on both the payer and the payees. For payments made by credit card, the reporting burden may be eased somewhat by a recent change in the law that will require payment settlement entities to report credit card payments and payments through third party networks (e.g., PayPal). Under a new Treasury regulation, if reporting is required under that law, no reporting of the payment will be required under IRC § 6041 if payments are made after December 31, 2010.

In the 111
th Congress, several attempts were made to either repeal or modify § 9006 of PPACA. A number of bills have been introduced in the 112th Congress that would repeal that section (e.g., H.R. 4, H.R. 60, H.R. 144, H.R. 417, H.R. 584, H.R. 705, S. 12, S. 18, S. 72, and S. 223). Some of these would also repeal the changes made by § 2101 of the Small Business Jobs Act. Both the House and Senate have passed bills that would repeal § 9006 (H.R. 4 and S. 223), but the two bills differ on whether the changes made by the Small Business Jobs Act would also be repealed, and on how the tax revenue estimated to be lost would be offset.

Date of Report: March 04, 2011
Number of Pages: 19
Order Number: R41504
Price: $29.95

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