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Wednesday, May 4, 2011

Economic Analysis of the Enhanced Form 1099 Information Reporting Requirements

Mark P. Keightley
Analyst in Public Finance

Beginning January 1, 2012, businesses were to be required 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 were $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 were 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) estimated that the new reporting requirements would have raised $17.1 billion over 10 years, or about $1.7 billion on average annually.

On April 14, 2011, the new reporting requirements were repealed by the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (P.L. 112- 9). Several other proposals had been introduced in the 112
th Congress that would have also repealed the new 1099-MISC reporting requirements. These proposals include ones made by Representative Dan Lungren (H.R. 144), Representative Steve Scalise (H.R. 60), Representative Joe Courtney (H.R. 584), Senator Mike Johanns (S. 18), and Senator Max Baucus (S. 72). Several proposals were also offered in the 111th Congress to repeal or modify the new reporting requirements, including ones 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to S. 510 ), Senator Max Baucus (S.Amdt. 4713 to S. 510), and Representative Dan Lungren (H.R. 5141) that would have repealed the new requirements. A proposal made by Senator Bill Nelson (S.Amdt. 4595 to H.R. 5297) would have increased 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 have been unchanged.

This report analyzes the 1099-MISC requirements that were enacted by P.L. 111-148, but have since been repealed. 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.

Date of Report: April 26, 2011
Number of Pages: 12
Order Number: R41400
Price: $29.95

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