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Monday, June 21, 2010

Balancing Compliance and Collection - The Expanded 1099 Filing Requirement

One of my favorite statements about reducing the tax gap is from a 1995 GAO report. The statement is a good reminder regarding ideal tax system design. Here it is (GAO/GGD-95-157, page 13):

any change that would extend the reach of the tax system also would increase the extent to which the tax system would intrude into the public’s affairs and would need to be carefully considered. Thus, the bottom-line decision on whether to broaden the reach of the tax system to recover additional revenues due the government under current law would involve determining the right balance between (1) the acceptable level of compliance for each type of taxpayer and (2) the acceptable level of tax system intrusiveness to promote compliance."

I included this GAO observation when explaining the tax principle of "minimum tax gap" in the AICPA's Tax Policy Concept Statement on Guiding Principles of Good Tax Policy (2001).

I'm reminded of the GAO statement because of a recently released survey from the National Association for the Self-Employed. The survey looks at the increased compliance effort and cost for self-employed individuals due to the newly expanded information reporting rule requiring that 1099s be issued to corporations starting in 2012.

NASE reports that small business owners expect a 1250% increase in compliance work moving from about 2 filed 1099s to about 27. NASE also notes the costs from collecting the corporation's tax id number and if it is not provided, withholding taxes from payments. NASE observes that the new measure will require some small businesses to have to hire someone to handle the work for them.

NASE also points out that a bill has been introduced to repeal the expanded reporting - H.R. 5141 - Small Business Paperwork Mandate Elimination Act. This bill includes no revenue offsets so is unlikely to pass. The Joint Committee on Taxation estimated that the expanded 1099 filing requirement would generate about $17 billion over 10 years (JCX-17-10). I'm not surprised to see a bill to repeal the provision (and it has 87 co-sponsors as of June 21, 2010). With some of the health care provisions coming into effect in later years, there is plenty of time to call for repeal of some, but under PAYGO, that shouldn't happen unless the sponsor finds some way to replace the lost revenue.

Well, back to the compliance perspective of this post ... Will $17 billion really be raised by issuing 1099s to corporations? Are they really that non-compliant? Is there another way? What are the compliance costs of issuing the 1099s and the IRS processing them? Also, the bigger part of the tax gap stems from non-reporting of sole proprietors? Why is Congress ignoring this group? While it will be more difficult to reduce this tax gap, that doesn't mean Congress should not try. I refer to this as the "slow pace" of closing the tax gap (see August 2008 article).

So, does the expanded 1099 reporting requirement meet the proper balance of (1) improved compliance and (2) intrusiveness and cost of compliance? I think more information is needed. For example, which corporations will generate the $17 billion of revenue expected from this change? I doubt it is coming from publicly traded corporations or perhaps even those with audited financial statements. So, why not reduce the reporting?

What do you think?

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