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1099s for Everyone – Coming in 2012!
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(July 23, 2010) On Christmas Eve 2009 the Senate passed a bill entitled the “Patient Protection and Affordable Care Act.” It was signed into law by President Obama on March 23, 2010. Buried in this 2,400 page bill is an upcoming nightmare for US taxpayers and businesses.
Section 9006 of the health care bill requires all businesses, starting January 1st, 2012, to issue 1099 tax forms to any person or company, including corporations, from which they purchase, cumulatively in a tax year, $600 or more in goods or services.

This is a radical change in reporting laws. Previously, 1099-miscellaneous forms were intended to document services or labor, and 1099-b forms documented barter and trade transactions, and broker/dealer commodity trades of substantial size, including bullion.

This new provision has the stated purpose of claiming for the government some $17 billion in uncollected income tax revenue over a ten-year period, and was inserted during the jockeying, lobbying, and horse-trading that went on when the bill was created. Why is it in a health care bill? To help maintain the fiction that somehow the net effect of this federal expansion of health-care entitlement will be ‘revenue neutral’ for the government, i.e., not cost the taxpayers a dime.

So who will pay the costs? Anyone who owns or engages in business, no matter how small. This section of the bill will require any business that buys goods (or services) from any person or corporation to document those transactions on a 1099 form, and file that form with the IRS at year’s end. Spend over $600 at an office supply store, computer retailer, software vendor, restaurant, tire store, feed store, garage, wholesale supplier, or, for that matter, with your landlord, caterer, gas station, florist, what have you – your business will have to collect the federal EIN number or Social Security number of that business, track your purchases (the $600 is an aggregate over the year), and make an accurate filing at the end of the year, under penalty of law.

This 1009 abomination will be a disastrous example of unintended consequences if implemented. Here’s a good example from the website of the accounting firm Moody, Famiglietti & Andronico:

I own a 1 woman yarn shop. I stock as many types of items that I can get in that my customers might use. I have 350 vendors on my books, at least half of which will need the forms. I also sell a custom yarn to other yarn shops. I have 3000 customers. Let’s see: I will need to put out about 175 1099’s to established businesses, and I will be receiving about 1000 1099’s from other yarn shops. I can cut down on the number of vendors I buy from. I expect to do that in an effort to minimize the enormous impact this will have on me. My vendors are already going out of business at an appalling pace, but there is little I can do about that.

The 1099’s that I get in will have to be individually checked to make sure the numbers are correct, and that I actually got a 1099 for the amount they paid me rather than the amount they owed me. Otherwise, the IRS will be down my throat. That will be about 3,500 hours of work if they are all correct. It looks unlikely many 1-2 person shops will be staying open. One wonders if that is the law’s intent.

It would be easy to say that such an onerous provision, so burdensome to small businesses and so unlikely to bring in any significant tax revenues. In fact, the extra work involved may have the effect of making tens of thousands of small businesses so much less profitable, that there will be NO income to tax due to these horrific requirements.

Our poor yarn merchant is not exaggerating. The National Federation of Independent Business describes the requirements:

Currently, businesses report on Form 1099 any service-related transactions over $600 involving an unincorporated business (sole proprietor, partnership and LLC). Beginning in 2012, the new healthcare law requires businesses to send Form 1099s for every business-to-business transaction of $600 or more for both property and service, creating a tremendous new paperwork compliance burden for small business.

This means that a small business owner will have to file two forms—one with the vendor and one to the IRS—for almost every business-to-business transaction. In addition, since Form 1099 reporting requires the inclusion of a Taxpayer Identification Number for the vendor they do business with, small business owners will also be forced to spend time tracking down the number for each and every vendor requiring a Form 1099.

"It's a pretty heavy administrative burden, particularly for small businesses without large in-house accounting staffs, says Bill Rys, tax counsel for the National Federation of Independent Business." "If you cater a lunch for other businesses every Wednesday, say, that's a lot of information to keep track of throughout the year."

Not to mention that this provision makes small businesses the repository of very personal information – name, address, Social Security number for many sole-proprietor headed businesses, large and small. This raises concerns about the actual physical security of that data, whether on a computer or kept via paper files. It’s a simple question of Too Much Information being trusted to too many businesses.

Identity theft concerns become very real with this massive national sharing of EIN and Social Security numbers. Any Mom-and-Pop business will be required to maintain a database of dozens, or hundreds of such personal identifiers. For that matter, it’s not unforeseeable that bad guys could set up small businesses as fronts to collect personal identity information for criminal profit.

Of course, the costs of collecting this information and filling out 1099 forms will be immense – data entry costs, new computer programs, and additional personnel hired just to do government paperwork. An article written by the staff of WebCPA tells us:

According to a Taxpayer Advocate Service analysis of 2009 IRS data, about 40 million businesses and other entities will be subject to the new requirement, including roughly 26 million non-farm sole proprietorships, 4 million S corporations, 2 million C corporations, 3 million partnerships, 2 million farming businesses, 1 million charities and other tax-exempt organizations, and more than 100,000 government entities. All of these nearly 40 million businesses and other entities are subject to the new reporting requirement.

Let’s say you operate a hotdog cart. If you purchase $50 in buns every week, at the end of the year you will send the Acme Bun Company and the IRS a 1099 detailing your bread purchases. Buy $100 worth of franks every week, and at the end of the year the same forms are filled out and sent documenting your business with Consolidated Tube Steak, Inc. How about condiments? Repairs to your cart? Dry cleaning your uniforms every week? If in the course of running your business you patronize any entity to the tune of $600 or more per year, you will be required to obtain their federal ID information and issue a 1099 to them, while filing another with the IRS.

And if you as an individual sell anything to a business - this is where the unintended consequences get really tricky. For instance, let’s say that you clean out your jewelry box, and take some of your unwanted old jewelry and sell it to a convenient scrap gold buyer. If the sale comes to $600 or more, you and the IRS will receive a 1099 documenting the transaction. Okay, come tax time, now what? You might have received some of the jewelry as gifts, you might have paid full retail for some of it, none of it faintly resembles an investment, and you certainly don’t have receipts to document your cost basis. So exactly what are you supposed to do on April 15th?

Likewise you sell a used auto to a car dealer for $3,000, and at the end of the year, you and the IRS both have a 1099 form with your name and Social Security number on it. You bought the car new many years ago, and paid, say, $15,000 for it. The $3,000 is clearly not income, nor proceeds from the sale of an investment gain, but neither can you write off the depreciation of a car that was purchased for private use. Again, come April 15th, what are you expected to do? No one knows.

An incredible amount of media attention has been focused on coin and bullion transactions under this new law, and coin and bullion dealers are up in arms. A big part of this business involves buying from private individuals, and while dealers have long been required to file 1099-B forms to document sales by individuals of physical bullion of the sorts and quantities that comprise commodity contracts, this hidden provision in the health care bill will have coin and bullion dealers and brokers now issuing 1099 forms for transactions of gold in amounts less than an ounce, and silver for as few as 35 ounces at today’s prices. Also, dealers will have to track individual trades of any size no matter how small, in order to meet the new federal requirement to track and aggregate all the business that they do with an individual or corporation over a calendar year.

So, this burden will fall disproportionately on coin and bullion dealers. As Diane Piret of our lobbying group, the Industry Council on Tangible Assets, said:

Coin dealers not only buy for their inventory from other dealers, but also with great frequency from the public. Most other types of businesses will have a limited number of suppliers from which they buy their goods and products for resale.

This is absolutely true, as we see at our coin and bullion store here in Phoenix, where a steady stream of people come in here and sell us coins and bullion all day. Sell us a Krugerrand, or a couple of rolls of silver dollars, or a small accumulation of old coins, and the whole transaction might be done in a few minutes. If, starting January 1, 2012, we have to take all your personal information so that we can track your whole calendar year’s selling activity, most likely by entering the information about all our trades and customers into a computer program, you can bet that the time to do that trade will at least double, thereby making our business a whole lot less efficient.

But our business is far from alone. Chris Edwards is a tax policy analyst for the Cato Institute, and he had this to say about Section 9006 of the health care bill:

This provision of Obamacare will make us all poorer because businesses will be spending more time with paperwork and adjusting their computer programs, fighting with the IRS. There are going to be so many disparities between what records match up with what records. Small businesses do not need this, and the economy does not need this…This provision is going to be enormously unpopular come January 2012, and many, many businesses have no idea what is coming down the road.

Fortunately, there has been a deluge of media coverage about Section 9006 over the past week or so, so most people in business are now quite aware of what’s coming. Rep. Daniel Lungren, a Republican from California, has introduced a bill (HR 5141, the “Small Business Paperwork Mandate Elimination Act”) to repeal Section 9006 of the health care bill.

Lungren, in a statement sent to ABC News, said:

Large corporations have whole divisions to handle such transaction paperwork but for a small business, which doesn't have the manpower, this is yet another brick on their back. Everyone agrees that small businesses are job creators and the engine which drives the American economy. I am dumfounded that this Administration is doing all it can to make it more difficult for businesses to succeed rather than doing all it can to help them grow.

Lungren’s bill to repeal 9006 was introduced on April 26, 2010, and it is currently under consideration by the House Ways and Means Committee.

By any measure of economic logic or plain common sense, Section 9006 should be repealed.

We strongly suggest that you urge your representative to not only support HR 5141, but do whatever possible to help affect its swift passage. Although Section 9006 doesn’t go into effect until January 1, 2012, its first unintended consequence – uncertainty - has already set in.

 

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