The 1099 Drama Continues

The expanded 1099 filing requirement brought about in the March 2010 health care legislation and calls for its repeal are starting (continuing?) to look like soap opera drama. There have been a few efforts to repeal the requirement, but with the need to find an offset for the roughly $2 billion per year it was expected to generate, it is difficult to repeal. Also, conventional wisdom is that information reporting helps reduce the tax gap. So, what message is being delivered when a 1099 requirement is repealed? Of course, it needs to be appropriate information reporting to have any significant impact on the tax gap.

The latest news is that two efforts to repeal it this week have failed. See a New York Times article of 11/29/10 by Carl Hulse, "Senators Cannot Agree on Fix to the Health Law."

It is also a bit comical perhaps in that there are arguably more pressing matters, such as what to do about the 72 provisions that expired in 2009 as well as the 2001/2003 tax cuts - all matters that greatly affect filing 2010 returns which starts in less than six weeks! The 1099 requirement doesn't start until 2012. Of course, given the challenge of finding revenue to cover repeal, it very well might need to be considered before renewing provisions that expired in 2009.

What a mess!

For more:

• 1099s - The Good, the Bad and the Ugly, AICPA Corporate Taxation Insider, 11/11/10
• Blog post of 11/19/10

Maine Spending in Tax System Greater than Outside It

A November 15, 2010 article in the Bangor Daily News - "Study: Tax breaks exceed state spending" by Leary, refers to a report prepared by a few state tax agencies for the legislature. The tax expenditures are about $6.6 billion in a two-year budget period while direct spending is about $5.6 billion.

This appears to be a growing trends among states and some have taken action, such as Oregon in August 2009 adding sunset dates to many 0f their tax expenditures to ensure periodic review of them (see 8/19/09 post and June 2010 article in the AICPA Corporate Taxation Insider).

I think this happens for a few reasons including that the public seems to want more tax cuts and many politicians keep promising them (and delivering).

The problems of growing tax expenditures:

• Budget problems as evidence by almost all states having continual shortfalls.
• Lack of transparency - the tax expenditures do not show up in the budget because they are buried in the tax law.
• Inequities - special tax deductions provide a greater benefit to higher income individuals in a progressive rate structure income tax. If the benefits being provided via the tax system were instead handled as direct subsidies, they likely would not exist or at least not to the extent they do today. For example, imagine this bill going through any state legislature - To appropriate funds to the Housing Department to enable it to issue annual grants of up to $3,500 to homeowners, with those having mortgages of $1 million receiving the maximum grant of $3,500 and those with smaller mortgages receiving less. That is unlikely to occur, yet that is what exists in the income tax laws of all states with an income tax.
• Complications - the more special rules - exemptions, exclusions, special deductions and credits in the tax law, the more complicated it is.

It will be interesting to see what Maine and other states do with information such as that recently provided to the Maine legislature. As states continue to look for spending cuts, they will need to delve into the spending in the tax system as it represents significant dollar amounts. Doing so should also enable the law to better meet the principles of equity, transparency, simplicity and appropriate government revenues.

What do you think?

More on Colorado Use Tax Collection Approach

The Colorado Department of Revenue recently issued FYI Sales 79 - Sales of Taxable Items Over the Internet to provide specific guidance on which sellers are required to provide information to customers, such as on invoices, and file an annual report listing particular information about customer purchases for the year. For some reason, the information is not easily found on the Colorado DOR website - but here is their page with a few links about this reporting requirement that was enacted earlier in 2010.

This new Colorado system is a new approach to trying to improve use tax collection. They are not requiring the remote vendors to collect the use tax, but to help the state know about some of the people who owe it. (See my prior post - here.)

The Colorado rule applies to remote (non-present) vendors with annual gross sales of $100,000 or more to Colorado customers. Such sellers must provide a statement that is easy to find that is located near the price charged. The statement must note:

• The seller does not collect Colorado sales or use tax.
• The purchase is not tax-exempt just because it was purchased over the Internet.
• Colorado purchasers must self-report use tax at the end of the year.

The vendors must issue an annual report to Colorado and the customer if sales to that customer for the year exceeded $500. For details and examples, see the Colorado FYI Sales 79 document.

Is this a good approach? Well, it will help educate more people about the use tax? Why doesn't the state of Colorado just give vendors a link to add to their order page or a pop up page so that customers will know about the use tax with even less effort required of the vendor.

A problem will if more states do the same but with different rules. The MTC has a draft law - here.

Also, what about buyers that do not get the annual statement, do they get a hidden message that use tax is not owed?

What do you think?

Small Businesses and Expanded 1099 Filing Obligations

On November 18, the Senate Committee on Small Business and Entrepreneurship held a hearing - Assessing the Regulatory and Administrative Burdens on America’s Small Businesses. The focus was on the upcoming expanded 1099 filing requirements added by the health care legislation of March 2010.

I don't want to overlook the buried question of what is a small business? Dr. Winslow Sargeant of the Small Business Administration noted in his testimony - "There are over 27 million small businesses in the U.S. which is 99.7 percent of all businesses in America." It seems that to count the number, there must be some idea of what it means. The SBA does have definitions but they are different from the varied ones used in the Internal Revenue Code. For more on that topic, see my recent article, "The Many Sizes of "Small"."

Dr. Sargeant also notes a troubling point - "The cost to small businesses of tax compliance is over 300 percent greater per employee than the cost to large companies." I've written about these types of problems before and I think there are ways we can make compliance simpler and to remove obligations that are not really needed or where the cost benefit ratio doesn't justify them. The expanded 1099 requirement falls into that category.

Another person who testified was Larry Nannis on behalf of the National Small Business Association. With respect to the expanded 1099 requirement that become effective in 2012, he stated:

"The new 1099 reporting requirements stand to increase the average number of firms for which small-businesses must file a 1099 report from an average of 10 to an average of 86. Furthermore, small businesses reported that, among those 86 companies with which they spend more than $600 annually, only 30 percent of those purchases are made with a credit card." (The relevance of credit card purchases is that they will likely be exempt from 1099 reporting due to other 1099 reporting already required for such payments by the companies who process the credit cards (IRC Section 6050W)).

Mr. Nannis also refers to a proposal - the Information Reporting Modernization Act of 2010, that would raise the filing threshold from $600 to $5,000 and adjust it for inflation. He notes though that for his own business, instead of 2 1099s to file, he would have 37 (apparently because of the expansion of the filing requirement to businesses to which you have purchased goods, rather than just services).

I think the increase to $5,000 will increase the tax gap as more service providers will intentionally or unintentionally not report all of their income when fewer 1099s are received by them.

The Information Reporting Modernization Act (S. 3783) also proposed a technological improvement that really should be have been required as part of the 1099 expansion. It would require - "Enhanced Technology- With respect to returns required to be made in calendar years beginning after December 31, 2011, the Secretary of the Treasury shall upgrade the scanning technology of the Internal Revenue Service to allow for the submission of generic 1099-MISC forms downloaded from the Internal Revenue Service website, and shall establish a free online entry and submission mechanism."

For more on 1099s:

• The Senate hearing of 11/18/10 with links to testimony - here
• Small Business Administration testimony and letter supporting repeal of the expanded 1099 filing requirement - here
• The AICPA letter calling for repeal of the expanded 1099 filing requirement as well as the one added for landlords by the Small Business Jobs Act of 2010 (9/27/10) - here

Will the new 1099 reporting be repealed? It would be a good idea given that it is not really designed to lower the tax gap. Congress should find alternatives that really do address the tax gap without requiring compliant businesses to incur great costs. A challenge of course will be Congress to find a revenue offset that people will tolerate.

What do you think?

1099s - The Good, the Bad and the Ugly

Well, need I say more than that title? Information reporting forms are certainly a useful compliance tool, but perhaps not for everything. Having a small business issue 1099s for these purchases starting in 2012 would be pointless:

• $852 of office supplies purchased from Staples
• $2,592 of airline tickets purchased directly from the airlines
• $1,300 of services from their CPA firm

Issuing a 1099 for $700 of services rendered by a web designer makes sense though and existing law already covers that.

Where is the line between an action that improves compliance without causing unnecessary costs and burdens to reporters?

What are better steps to take to reach the taxpayers with the poorest compliance?

I've got a short article in this week's AICPA Corporate Taxation Insider on 1099s noting the problems with recent changes to greater use and alternatives - 1099s - The Good, the Bad and the Ugly.

What do you think?

How heavy are FAQs?

With the constant stream of new tax rules passed by Congress since 2008 for "economic stimulus" and the IRS's own initiatives, it is difficult to get traditional regulatory guidance out. Also, for short-lived provisions, the regulatory process doesn't work. So, while we have seen several revenue rulings and notices from the IRS, we are also seeing the new phenomenon of "frequently asked questions" or FAQs. Practitioners and taxpayers are relying on this guidance. Should they be?

Well, often, the FAQ ties right to statutory language so it is the equivalent of relying on that highest level of primary authority. But, often, the FAQ is the only interpretation out there on what the statute or IRS practice means.

I have an article that explores this topic in this week's AICPA Tax Insider. I encourage you to take a look. This is an issue that the IRS should address such as by officially stating that FAQs are administrative guidance equivalent to what is published in the Internal Revenue Bulletin, and creating a system of how these FAQs are updated, archived and referenced.

I applaud the IRS for finding a 21st century way of getting timely and useful guidance out to practitioners. I think just a few more actions are needed to make this be more reliable guidance.

Here is the link to the article - How Heavy is an FAQ? (11/11/10). The article has links to some of the IRS sets of FAQs and an analysis of how much reliance can be placed on FAQs.

What do you think?

Deficit Commission Co-Chairs Issue Their Draft Proposals

On November 10, 2010, the co-chairs of President Obama's Deficit Commission - Erksine Bowles and Alan Simpson released a draft of their proposal and a document showing how a variety of cuts could generate $200 billion of savings by 2015 (part of their recommendation package).

The draft (in the form of a Powerpoint presentation) starts with ten "guiding principles and values." At least two of them refer to tax changes - #7 on cutting spending includes spending in the tax law ("tax expenditures") and #9 specifically refers to tax reform. They highlight that their draft proposal "reduces tax rates, abolishes the AMT, and cuts backdoor spending in the tax code." For the area of tax reform, the co-chairs present three tax reform options.

The 10 principles and values are:

1. We have a patriotic duty to come together on a plan that will make America better off tomorrow than it is today.
2. The Problem Is Real –the Solution Is Painful –There’s No Easy Way Out –Everything Must Be On the Table –and Washington Must Lead
3. It Is Cruelly Wrong to Make Promises We Can’t Keep
4. Don’t Disrupt a Fragile Economic Recovery
5. Protect the Truly Disadvantaged
6. Cut and Invest to Promote Economic Growth and Keep America Competitive
7. Cut Spending We Simply Can’t Afford, Wherever We Find It
8. Demand Productivity and Effectiveness
9. Reform and Simplify the Tax Code
10. Keep America Sound Over the Long Run

The 3 tax reform options are:

1. The Zero Plan - highlights per the co-chairs:

• Consolidate the tax code into three individual rates and one corporate rate
• Eliminate the AMT, Pease, and PEP
• Eliminate all $1.1 trillion of tax expenditures
• Dedicate a portion of savings to deficit reduction and apply the rest to reduce all marginal tax rates
• Add back in any desired tax expenditures, and pay for them by increasing one or all of the rates from their zero-expenditure low

That really does say "eliminate all $1.1 trillion of tax expenditures"! The co-chairs suggest that doing so would allow the three individual rates to be 8%, 14% and 23% with a corporate rate of 26%. If the child credit and EITC were kept, the rates would be 9%, 15% and 24%.

2. Wyden-Gregg Style Reform

I have a brief summary of this - here.

3. Tax Reform Trigger - described as follows:

• Call on Finance and Ways & Means Committees and Treasury to develop and enact comprehensive tax reform by end of 2012
• Put in place across-the-board “haircut” for itemized deductions, employer health exclusion, and general business credits that would take effect in 2013 if reform is not yet enacted
• Haircut would limit proportion of deductions and exclusions individuals could take to around 85%* in 2015. Similarly, corporations would only take some proportion of their general business credits
• Set haircut to increase over time until tax reform is enacted

I am impressed at the boldness of the proposals as a good starting point for serious discussion of serious budget - spending and tax, issues. For example, noting what the tax rates could be with elimination of all tax expenditures should bring sunshine to the types of spending in the tax law and whether it is really needed. Elimination of all or many tax expenditures will make the tax law simpler and allow for lower tax rates.

I still need to read more and would like to see something beyond the bullet-point Powerpoint, but I think this is a good start that they are serious about highlighting that we need serious proposals to address serious problems!

Of course, it remains to be seen if the commission will be able to reach the necessary 14 out of 18 votes for consensus. But if not, the proposal of the co-chairs should be used by President Obama and the 112th Congress to get moving to resolve issues sooner rather than later because they just get harder to fix the longer we let them stay.

What do you think?

Expensing of Business Assets - New Treasury Report

Economic stimulus provisions of the past few years have included bonus depreciation and higher expensing amounts under IRC Section 179.

President Obama has suggested that broader expensing can provide additional stimulus by reducing the cost of capital for all businesses. In September 2010, President Obama released a proposal to "jump start private investment and job creation" by allowing full expensing of qualified investments through the end of 2011. He also noted that this would be the "largest temporary investment incentive in American history." (White House Blog, 9/8/10)

On October 29, 2010, the Treasury Department released an 18-page report, The Case for Temporary 100 Percent Expensing: Encouraging Business to Expand Now By Lowering the Cost of Investment, to further explain and justify the President's proposal. The report states that full expensing will "lower the effective tax rate on income derived from business investments, and thereby encourage additional demand for capital goods."

The report also notes the added benefit of a temporary rather than a permanent provision, namely the incentive to accelerate investment. Expensing also equalizes the effective tax rates on different types of eligible assets regardless of useful life or the MACRS recovery period.
Treasury also notes advantages of expensing of qualified assets outside of the IRC Section 179 expensing regime. That is, the expensing proposal has no limit based on the dollar amount of assets placed in service during the year and no limit based on current year income.

Whether broad-based, temporary expensing will take the place of the temporary 50% bonus depreciation depends on finding revenue offsets, whether Congress also finds that additional stimulus legislation is needed, and how the proposal ranks among other congressional tax priorities.

Over the years, both full and partial asset expensing have been suggested as part of major tax reform as well as an approach for reducing the effective corporate tax rate. So, I think the report may open the door to continued discussions not only on economic recovery approaches, but also on fundamental tax reform.

What do you think?