Paul L. Caron

Tuesday, February 1, 2011

Push to Repeal ObamaCare's 1099 Requirement Ignores Tax-Gap Problem

Bloomberg, Push to ‘Correct’ IRS Small Business Rule Ignores Tax-Gap Data, by Ryan J. Donmoyer:

A year ago, Congress had instructed the Internal Revenue Service to improve small businesses’ compliance with tax laws and created rules to make it more difficult for entrepreneurs to hide their income.

Now, rules requiring businesses to report to the IRS transactions with vendors may become collateral damage in a political fight over the health-care law. President Barack Obama in his State of the Union address on Jan. 25, backed an effort to “correct” the “unnecessary bookkeeping burden” before the rules take effect in 2012, forgoing an estimated $1.9 billion annually to pay for the overhaul of the health-care system.

The about-face is designed to appease congressional Republicans and business groups such as the U.S. Chamber of Commerce that have criticized the rules along with the broader health-care law. It also shows how difficult it is to take steps to close the tax gap among small businesses, which data show have lower tax payment rates than corporations and salaried workers. ...

The IRS estimates that about $345 billion in taxes owed are unpaid every year. Auditors recover about $55 billion of that, leaving $290 billion that goes uncollected, a figure known as the tax gap. The agency attributes $109 billion of the gap to underreported business income earned by individuals. The IRS estimates that this group also fails to pay about $39 billion in self-employment taxes. The figures are drawn from a study of 2001 tax returns and are likely higher today, according to the Congressional Research Service.

The IRS says small businesses are able to underreport their taxes because many business-to-business transactions aren’t reported independently to the government as wages and investment income are. By contrast, about 98% of salaried workers pay what they owe because their employers report their wages to the IRS. The Bush administration, in response to demands from Senate Finance Committee Chairman Max Baucus, a Montana Democrat, in 2008 proposed requiring businesses to report to the IRS when they pay vendors more than $600 for goods. Similar requirements exist for purchases of services.

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Fact: over 90% of individuals/entities that receive a 1099 voluntarily report that income on their return.

The 1099 provision (information reporting) is the only real way to reduce the tax gap and collect taxes from individuals/entities that are responsible for > 50% of the tax gap.

As for the $500 circumvention, it is possible. But most businesses are keen on taking a reduction in price for ordering large quantities rather than pay more to stay under $600. And do not forget the disgruntled spouse and/or employee who who turns the employer/spouse into the IRS based on a grudge or even perhaps a whistle blower award.

The 1099 provision was not aimed at big business; it is aimed at small time business cheaters. Heck, they even have zapper on their cash registers so that the books are cooked (one set of cash register info the IRS, a second set of info for the owner, and perhaps a 3rd set for the wife. Information reporting may eliminate the use of zappers to wipe out income.

I think that perhaps instead of repeal, the program should be given a few years to operate and then the IRS (and others0 can develop a conclusion as to whether the 1099's work or not (and are merely a burden). Is there really any harm in letting this law stay on the books for 4 years or so so that it gives the iRS time to administer the program, collect data on the efficiency and outcomes of the program, and make an up or down recomendasion to Congress (keep it of dump it).

I fail to see, however, in a time of economic crises and absurdity (where middle class Feds get a pay freeze and the wealthy get a tax cut a factor on 10 larger than the pay freeze) how Congress and the IRS could ignore an immense revenue raiser -- to cut the deficit and whatever else the government is a wise use of the increased tax revenue (although it is likely not be wise).

Posted by: tax guy | Feb 5, 2011 1:27:51 AM

I understand what you are saying regarding the tax gap and enforcement. However, I believe that us CPAs have the more reasonable position for this particular issue, given we deal w/ the matter of creating reporting systems on a regular basis.

Note that your emphasis of revenue impact ignores the expenditures issue of the budget, making your points unenlightening and unrevealing. In turn, budget implications should be left out when discussing the burden it represents to small businesses, which is our concern.

Separately, I have yet to stumble upon a CPA (left or right wing) in favor of expanded 1099 reporting for small businesses.

Please see the below link for the report for figures you referenced earlier.

Posted by: Cody Liddicoat | Feb 3, 2011 5:57:43 PM

Mithras, if that's your claim and the best that you can do, then you're better off sticking to commenting with your left-wing buddies rather than picking fights with the big boys.

Posted by: Woody | Feb 3, 2011 1:13:22 PM

Woody- if you ever develop the ability to write a substantive comment, I'll respond to you in a substantive way. Otherwise, not.

Posted by: Mithras | Feb 3, 2011 12:01:17 PM

Mithas, do you really know much about taxes or do you just come over here to pick fights? Your web site sure doesn't indicate any qualifications of your being a tax expert.

Posted by: Woody | Feb 3, 2011 8:49:19 AM

Why, Mithras, isn't it apparent to you that I stuck a sword in your claim about Republicans protecting "tax cheats," which, itself, had nothing to do with closing the tax gap. However, if Democratic "rulers" paid their taxes as required, that would be a nice start.

And, I am not a Republican, as you incorrectly conclude, which led to your false accusation. The Republican Party has become "Democratic Lite," and does not represent me. I'm a conservative and have learned over many years that the Democratic Party is not my friend. That is the basis for what I said. Of course, a liberal could not realize that there are possibilities other than what they want them to be.

You know, you will never win an argument with me.

Posted by: Woody | Feb 3, 2011 7:12:59 AM

Woody- where did you present facts or an argument about policy on closing the tax gap? Not in this thread.

Posted by: Mithras | Feb 3, 2011 6:14:34 AM

Mithras, you have to be a liberal. You attacked me personally while completely ignoring the facts that I presented. Facts and logic drive liberals crazy.

Posted by: Woody | Feb 2, 2011 9:06:51 PM

When I first heard of the provision, I wigged out. It's the kind of issue that the GOP would use to beat up on the Dems, and in this case, deservedly so. But as we repeal this provision, we have to acknowledge that it was there for a good reason (closing the tax gap) and it might very well have worked.

Making this law go away doesn't fix the underlying issue: Some small business owners are committing tax fraud. The estimate I've seen is that 2/3rds of the hundreds of billions of dollars of unpaid taxes every year relates to small business, and 85% of that is under-reporting of income. I think we ought to do something about that, and in the absence of something that's helpful in targeting the bad actors, the only other option is to throw a boatload of IRS auditors out in the field and inconvenience innocent business owners (whose compliance with the audit process will cost them money as well as time) in the hopes of uncovering the cheats.

Posted by: Mithras | Feb 2, 2011 5:48:33 PM


I'm not disagreeing with your assertions regarding the tax gap or enforcement. I just had a suspicion that your willingness for “experimentation” with increased 1099 reporting was strongly influenced by your distance from the issue.

Posted by: Cody Liddicoat | Feb 2, 2011 1:59:52 PM

Of course they can fiddle the books in other ways, but what this does is create another audit flag for the IRS computer to find. If legitimate businesses of a certain size in a given industry usually file 1099s related to an expense category (because on average such businesses use only one vendor for whatever that category relates to), then the businesses of that size in that industry which don't file 1099s for the same expense stick out a bit, don't they?

Ah, yes, last time I talked to you, you were claiming not to be a Republican. You are so credible.

1) None, since I am an attorney who does not prepare returns, and 2) they hate it. I'm not arguing that's it a popular law and I'm not even sure that the extra revenue is worth the expense imposed on businesses. What I am arguing is that, if enforced, the law would certainly help close the tax gap among small business taxpayers, which is where it is largest.

Posted by: Mithras | Feb 2, 2011 11:52:42 AM


To clarify, how many 1099s did you prepare during the month of January?

Similarly, how have your clients responded to the scheduled increased 1099 reporting requirements?

Posted by: Cody Liddicoat | Feb 2, 2011 10:23:54 AM

Mithras: "the GOP, the tax cheat's friend"

So, the Republican Party is the bff of Democrats - Tim Geithner, Charlie Rangle, John Kerry, Tom Daschle, and a whole list of others nominated by Obama.

Why don't we just pass a law that businesses have to submit 1099's on payments made to Democrats? Think of all the cash in the underground economy that would turn up! I have more faith in ticket scalpers reporting income than I do of Democrats.

The real issue is that Republicans want laws - something that is legal and not cheating - to keep down taxes while the Democrats just do it on the sly for themselves.

Posted by: Woody | Feb 2, 2011 8:19:42 AM

So if they are required to report anything over $600, and they are so dishonest that they aren't reporting it already, wouldn't they just start double charging/paying at the $500 level?

No, they are too honest and not smart enough to do that.

Posted by: Reputo | Feb 2, 2011 7:30:01 AM

Of course this would have helped close the tax gap, since it would address both underreporting of income and overreporting of expenses. Any business which wished to deduct more than $600 in expenses to another business would have to issue the 1099. The business receiving the 1099 would have to report that income on their tax return or challenge the veracity of the figure; that is, it would throw up a red flag when evasion was occurring, targeting audits on the cheats and leaving the innocent alone.

Would it cure all fraud forever? No. But it would certainly have helped. Whether the expense to business of complying with the 1099 requirement would have justified the increased tax revenue is an empirical question, but one we'll never get to answer because of the GOP, the tax cheat's friend.

Posted by: Mithras | Feb 2, 2011 6:43:44 AM

Ah, we're going to catch those who take "cash under the table." I don't think so. This is just another burdensome requirement for small business. Those who take "cash under the table" can just deny they ever received it. Crafty, aren't they? Even more to the point, the IRS won't go bothering them. It wants to bother those with higher income, for obvious reasons. (The returns--no pun intended--are higher.) In an odd way, that makes sense.

This is posted by one who has seen jerks who want "cash under the table," & who don't want to take a job where their earnings would be reported. They're so smug.

Posted by: Fed Up TAXPAYER | Feb 2, 2011 5:03:26 AM

Thank you, save-the-rustbelt. You are so right.

Posted by: Marie | Feb 2, 2011 3:42:03 AM

And the 1099 requirement will fix the tax gap? Not likely. People will still under-report income because the risk of getting audited will still be low.

Posted by: Tyler DeGroot | Feb 1, 2011 7:17:08 PM

How about keeping the reporting, but exempting 'small' businesses (to be defined). Staples, and businesses of its size, can easily keep track of who it does business with, and having it report that to the IRS is a cost it, and other large businesses, can handle. Partial reporting (one side of the small business-large business transactions) is, possibly, better than none.

Posted by: peregrine | Feb 1, 2011 5:34:03 PM

So, we should believe, small businesses that fail to accurately report their income, on Schedule C or Form 1120S or Form 1065, as the case may be, can be trusted to accurately report every penny they spend on Form 1099? This logic escapes me.

Years ago the IRS announced that small businesses were required to report barter exchanges on Form 1099-MISC. How many small businesses actually do so?

The solution to the small business tax gap is not increased 1099 reporting, but higher examination rates.

Posted by: Jake | Feb 1, 2011 2:24:11 PM

This rule would result in small businesses sending many 1099s to large businesses, and will have very little impact on the tax gap.

I'm fairly certain my purchases at Staples are being recorded into income.

People who do not understand tax evasion should not try to fix tax evasion.

Posted by: save_the_rustbelt | Feb 1, 2011 10:37:22 AM