New information return reporting

[Bees Knees]

A little known and discussed issue concerning the new health care act:

Effective for payments made after December 31, 2011, a business is required to file an information return for all payments aggregating $600 or more in a calendar year to a single payee (other than a payee that is a tax-exempt corporation). The payments to be reported include gross proceeds paid in consideration for property or services.

The new law adds two new categories of payments subject to reporting requirements:

1. Payments to corporations (other than tax-exempt organizations), and
2. Payments for property and other gross proceeds.

Thus, in addition to the new information return reporting requirements for payments to corporations, the new law also requires information return reporting for the purchase of merchandise, supplies, fixed assets, and other purchases where the payee recognizes the payment as gross proceeds from the sale of property. This means bookkeeping just got a whole lot more complicated. For example, inventory purchases should now be broken out into sub-categories for each supplier. The purchase of supplies should now be broken out into sub-categories for each supplier. The purchase of depreciable assets should now be broken out into sub-categories for each supplier, and so on. Virtually every expense category on the income statement will need sub-categories that total the amounts paid to each payee during the year.

[New York Enrolled Agent]

A follow-up to Bees' post. Commissioner Shulman spoke to the American Payroll association.

One snip - [start]While businesses do not need to file information returns on these payments until January of 2013, business groups – particularly those that represent small businesses - have raised concerns about the burden that this new provision may impose. I want to assure the business community that the IRS will look for opportunities to minimize burden and avoid duplicative reporting. That is why we will be spending the next several months soliciting input from businesses of all types and sizes before proposing regulations to implement the law. We will also look to service providers who help those businesses understand and adapt to new laws and regulations, to help us craft a process that is as efficient as possible. We know that there is no “one-size-fits-all,” so we want to hear your ideas.

At the risk of getting ahead of the game, I wanted to share with you just one example of how we are analyzing this provision, and looking for opportunities to streamline implementation and minimize burden. We plan to use our administrative authority to exempt from this new requirement business transactions conducted using payment cards such as credit and debit cards. These transactions will already be covered by reporting requirements on payment card processors, so there is no need for businesses to report them as well. So, whenever a business uses a credit or debit card, there will be no new burden under the new law. [end]

[Bees Knees]

Imagine the conversation a traveling salesman will have with the drive thru lady when he tries to order lunch at McDonalds while on out-of-town business:

Salesman: I’ll have a Big Mac, large fries, and a diet Coke.

Drive thru lady: That’ll be $5.43.

Salesman: You need to first fill out this W-9.

Drive thru lady: Sir, we do not take personal checks.

Salesman: This isn’t a personal check. You need to fill out this W-9 before I can give you $5.43.

Drive thru lady: I’m not authorized to fill out paperwork. You need to give me $5.43 if you want your food.

Salesman: If you do not fill out this W-9, then I must withhold $1.52 for federal income taxes. Here is $3.91 for the difference.

Drive thru lady: The price is $5.43. If you want your food, please give me the full amount.

Salesman: You are in violation of Internal Revenue Code section 6041. If you don’t give me my food, I will report you to IRS for failing to provide me with the proper information I need to issue you a 1099-MISC.

Drive thru lady: Please pull over to lane #3 and I will have my manager come out and speak with you.

[Bees Knees]

We plan to use our administrative authority to exempt from this new requirement business transactions conducted using payment cards such as credit and debit cards. These transactions will already be covered by reporting requirements on payment card processors, so there is no need for businesses to report them as well. So, whenever a business uses a credit or debit card, there will be no new burden under the new law.

A good planning tip, and a new reason to avoid paying by cash or check. I can see the trend for businesses to stop paying by check and using credit and debit cards for all transactions in the future.

[Snaggletooth]

Paying Agents

This new requirement was kept very quiet during the drafting of the HealthCare bill, so quiet in fact that no one knows who is responsible for adding it in committee. However, just in the last week or two, the full impact of this is now being discussed in horror by various financial publications.

As has been suggested earlier, the requirement may give rise to the emergence of various "paying agents" who will allow their constituency to avoid direct payment and the responsibility to issue 1099s. These agents already exist in the form of such things as credit cards, debit cards, Paypal, and others. However, I believe the number and nature of paying agents will grow, as few small companies will want to have the responsibility of issuing 1099s.

This may have several unintended effects, for example:
1) None of the paying will be done without service fees. My estimation is it will be ultimately more expensive than the cost of issuing 1099s.
2) As small companies buy in to the idea credit cards/debit cards, a shift in the concentration of capital will occur from small companies, small banks, and small towns, to the Citibanks, Bank of America, Chase Manhattan, or others. Small local banks will elect to not involve themselves with the issuance of 1099s.
3) Trading and bartering will profusely impact the economy, as well as provide a haven for taxing authorities. This "haven" will exist even though IRS and states have statutes to properly report.
4) Paying agents will insist on W-9s. Most 1099s for Non-employee compensation are not supported by a W-9 in the payers' file. W-9s will be asked from every conceivable recipient - from WalMart to Lemonade stands.
5) There will be an increase in payments purported for non-business services. What may have a business purposes, such as installing a sprinkler-system for a warehouse may suddenly be recharacterized as a sprinkler-system for owner's personal residence. Of course this situation already exists, but it will be made much worse. Also, this removes the cost as a deductible item when it is made personal, but again, this factor already exists and doesn't appear to bother some people.
6) The requirement apparently does not take effect until after the 2012 election. This is no accident. Those who would respond by voting for a different political party would be better served if they could find out who added this albatross in committee to the Healthcare bill.

This may INCREASE, rather than decrease, the underground economy. An example is the sudden increase of $2 per pack state tax on cigarettes in Oklahoma. Of course, the drafters did not realize Oklahoma was the last of the Indian territories. Smokers are just simply addicted, not stupid. So they found an Indian reservation nearby and bought their cigarettes. Result was a huge net tax drain for the state.

Already we have bulldozer contractors who will operate for $75/hr on a 1099, but will also work for $45/hr if owner agrees to not issue a 1099 and pay in cash. The problem is even worse in some high-tax European countries like the Scandinavians. The owner understands full well he cannot deduct what he pays. And some recipients can simply give out a false SS#. These situations already exist, but will be made worse.

If this requirement does not get rescinded, get ready for a brave new world.

[ChEAr$]

This new requirement was kept very quiet during the drafting of the HealthCare bill, so quiet in fact that no one knows who is responsible for adding it in committee. However, just in the last week or two, the full impact of this is now being discussed in horror by various financial publications.

(much snipped here for brevity)

If this requirement does not get rescinded, get ready for a brave new world.

Actually the whole health care bill was kept under wraps before passage. Who knew what was in? No congressperson actually read the whole thing before voting.

You hit the nail on the head there. The part about credit card processors reporting may not get rescinded before 2011, but I predict (deep breath!) the other provisions due in 2012
will be scrapped.