The healthcare reform bill contains a provision expanding IRS 1099 reporting requirements to include payments to corporations and for merchandise over $600 annually beginning in 2012. This will greatly increase the reporting burden on small businesses who will have to issue many more 1099 forms. However, the additional reporting is aimed at reducing the tax gap by documenting currently untracked transactions. Efforts are underway to modify the requirements, but for now businesses need to prepare for the changes by evaluating their ability to comply with the expanded 1099 filing rules.

1. 's
ISSUES & INSIGHTS
1099 Reporting Changes Found in Healthcare Reform Bill
Although seemingly irrelevant to
healthcare reform, buried deep in the
newly enacted Healthcare Reform
Bill’s 2,409 pages is a 1099 reporting
requirement change that will instate a
big shift in how businesses report to
the IRS payments to other business-
es. Previous to this bill, if a business
makes a payment to a person or busi-
ness in excess of $600 a year, a 1099
must be issued to report the payment;
payments made to corporations and
for merchandise were excluded. With
the new Healthcare Reform Bill, a
1099 form must now be filed to the
IRS for the previously excluded pay- compliance costs and forms gener- which prompted this enactment, ac-
ments. ated will be phenomenal. counting for approximately 350 bil-
lion in annual funds: under-reporting
Although the bill will affect all busi- For example, if a small business pur- of taxable income, underpayment of
nesses, it no doubt will be the small chases computers from Dell to help taxes and non-filing of tax returns.
businesses impacted the most by the run their business, they would then A significant majority of the tax gap
change. In a recent survey, small em- have to issue a 1099 to Dell. If they is created by those that under report
ployers typically issue an average of cater a large luncheon and order from their taxable income. Using 1099s to
ten 1099 forms per year, with an av- Jill’s Deli down the street, they would document all the transactions that are
erage preparation time of thirty min- have to issue a 1099 to Jill’s Deli, and currently not tracked is one way to
utes. Extending the 1099 to account so on, and so on. Dealing with the begin to close the gap.
for payments made to corporations administrative aspects of these filings
(without accounting for purchases) could be burdensome to many small Changing the Change
increased that number to at least 200 operations. Currently, the new requirements
filing per year, adding an estimated would go into effect January 1, 2012.
$6,000 to the cost of preparing an Closing the Debt Gap However, due to the administrative
average tax return. By further add- There are three areas of noncompli- burden these additional filings would
ing the payments made for merchan- ance, identified by the U.S. Govern- cause, there is movement within leg-
dise into the equation, the increase in ment Accountability Office (GAO), islature to create new bills designed
© 2010 Armanino McKenna LLP. All Rights Reserved.

2. 's
ISSUES & INSIGHTS
to the limit the scope of the first by not it can handle obtaining Taxpayer Preparing now is crucial so compli-
increasing the amount for 1099 is- Identification Numbers (TINs) from ance is met when the new rules go
suance from $600 to anything over all vendors and is able to issue large into effect. The penalties for non-
$5,000. There’s also a proposed reg- volumes of 1099s. Business should compliance will double from its
ulation to exempt any business pur- also determine the current popula- current state; $50 per item for non-
chases made with a credit or debit tion of 1099s for 2010 to measure issuance or incorrect TINs to $100
per item. There is also the issue of
backup withholding if W-9s are not
completed by vendors previous to
any payment being issued. To ensure
proper adherence, the IRS has added
between 4,000 and 5,000 new rev-
enue agents specifically to assess and
collect taxes.
Here to Help
Armanino McKenna has experienced
professionals who are at the forefront
of interpreting the 1099 reporting re-
quirement change and what it means
to the accounting function within
card since those purchases are already what the worst case scenario will be businesses. We can assist companies
reported by banks and other payment for 2011; it should be assumed that in identifying whether or not their
processors. As of December 1, 2010, all vendors will receive a 1099. A few businesses and/or systems are pre-
the motion to repeal the reporting re- questions to consider as your busi- pared for this change and assist with
quirements altogether was denied by ness readies for the change: the accounts payable function to es-
the Senate, but efforts will continue tablish processes to ensure compli-
to be put forth through 2011. • Does my business have the ca- ance.
pacity to handle the 1099 prepa-
Bracing for Impact ration?
For questions or com-
Until a repeal or modification to the • How will my business gather
ments regarding this
2012 1099 requirements is made, TINs and completed W-9s from
article, contact Mindy
businesses should prepare for the all the vendors? Harada, Director of
new change. All businesses should • How will my business verify Payroll Tax at Armanino
evaluate their current accounts pay- TINs to ensure the B Notices are McKenna at 408.200.6444 or by email at
able system to determine whether or kept to a minimum? Mindy.Harada@amllp.com.
© 2010 Armanino McKenna LLP. All Rights Reserved.