IRS Reporting Requirement Creates Greater Burden

By Thomas J. Donohue, President and CEO, U.S. Chamber of Commerce

Buried deep in the 2,500-page health care law is a requirement that governments, nonprofits, and businesses of all sizes file 1099 forms with the IRS when goods or services purchased without a credit card from another business exceed $600 in a year. Currently, a 1099 filing is required only for services—not goods—provided by self-employed independent contractors.

While this requirement is ostensibly designed to close the so-called tax gap, small businesses will bear the cost. While cracking down on tax cheats is a noble endeavor, this paperwork mandate could be held up as the poster child of unintended consequences, costing the economy far more than the $17 billion in additional tax revenue it’s expected to generate.

When job creation and economic growth should be their highest priority, beginning in 2012, some 40 million organizations impacted by the 1099 requirement will be forced to devote more resources to collecting vendor information and keeping track of all their non-credit card purchases. Aside from having to endure this administrative nightmare, businesses can expect higher accounting fees, as the IRS’ inability to match 1099 returns with a company’s reported revenues could result in increased company audits.

Moreover, this provision could dramatically alter behavior in the marketplace. Many purchasers of goods and services will be reluctant to establish new business relationships, deterred by the additional record-keeping burden. Startups and smaller vendors will suffer as purchasers, eager to avoid the paperwork mandate, consolidate purchases from larger businesses that have a broad geographic presence and more diverse product lines.

In short, lawmakers, in an attempt to address taxpayer noncompliance and a costly health care bill, created an even bigger problem. Unfortunately, such destructive behavior has become a pattern for this Congress and administration.