On March 23, 2010 President Obama signed the comprehensive health care overhaul legislation known as the Patient Protection and Affordable Care Act into law. The much publicized portions of the law dealt with the expansion of health care coverage through market reforms, tax incentives and the expansion of eligibility for Medicaid. A not so publicized portion of the law has dramatically changed the requirements in regards to the informational reporting done on forms 1099. It is important to note that this change will not take effect until January 1, 2012, absent any Congressional action between now and then.

Under the current law, section 6041 of the Internal Revenue Code (IRC) requires information reporting to report payments totaling over $600 during the year to an individual in the course of a trade or business for rents, services, and various other income payments. In general, 1099-MISC forms are filed on behalf of individual workers for payments other than wages or salaries. Payments for property are exempt from reporting under the current law. Currently, payments to corporations are also exempted from reporting requirements. 

Effective January 1, 2012 the Health Care Bill will change section 6041 of the IRC to require information reporting for payments made in "amounts in consideration for property" and for "other gross proceeds". In other words, the IRC will require informational reporting for gross proceeds paid in consideration for property, goods, and services over $600 in a calendar year. This new reporting rule will cover the most common day-to-day business transactions. Also under this new legislation, there will no longer be an exemption for payments made to corporations. Businesses and self-employed individuals will be required to issue a 1099-MISC form for most (if not all) of the purchases it makes during the year.

One of the more difficult aspects of reporting all of these transactions will be the gathering of the names, addresses, and taxpayer ID numbers of the corporations and/or individuals that payments are made to during the year. All of that information would be needed to issue an accurate 1099. Taxpayers are going to be spending a significant amount of time gathering this information, especially during the first few years this rule will be in effect.

As a result of all these additional 1099 forms being sent out, there is a real concern about the effect it could have on tax reporting of businesses that both issue and receive 1099 forms. The more paperwork that is filed, the greater likelihood of a preparation or processing error either by the generator of the 1099 form or by the IRS in processing the 1099 forms. This could cause a lot of headaches for businesses if the IRS feels the information doesn't match on either end of the transaction. The IRS will most likely end up sending out notices notifying taxpayers if the IRS's records show that the income reported by the taxpayer does not match their records. This could lead to costly battles with the IRS over which records are accurate.

The IRS hopes that the new law will require self-employed individuals and corporation to more accurately document their income and expenses in order to properly file the 1099 forms. The flow of the additional 1099 forms from businesses to businesses is expected to cause companies and individuals to more accurately report their income and expenses each year. The IRS estimates that the federal government loses around $300 billion annually in tax revenue that goes unreported. The expanded 1099 filing is one way for the IRS to attempt to close that gap.

Another potential benefit of this new reporting rule is the removal of the confusion that can take place when deciding if an entity is required to be issued a form 1099. Under the new rules, all entities that are paid over $600 during the year will be issued a 1099. There will no longer be the need to verify if the entity is a corporation, as the exemption for corporations will no longer exist.

The transition to the new reporting rules that take effect on January 1, 2012 can lead to many questions. We encourage you to contact a tax professional at Dermody, Burke & Brown to assist you with any questions related to this change in tax law.

The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.