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?
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