After significant controversy, the Comprehensive 1099 Taxpayer Protection Act of 2011 ("1099 Act") was signed into law by President Obama on April 14, 2011. The 1099 Act repeals the expanded Form 1099 information reporting requirements enacted by the Patient Protection and Affordable Care Act ("Healthcare Act") and the Small Business Job Act ("Job Act"). In an effort to increase tax revenues, certain provisions of the original Form 1099 rules ("Original Rules") were amended by the Healthcare Act and the Job Act to expand the types of payments that had to be reported by the payor to the IRS on Form 1099. The government believes that a taxpayer is less likely to underreport income if payments to the taxpayer are reported to the IRS by the payor. However, taxpayers complained that the expanded reporting requirements would be extremely time-consuming and expensive. In response to the uproar, Congress repealed the expanded rules under the 1099 Act. Below is a brief overview of the Original Rules that remain in effect and the controversial expanded rules that were repealed.
Payments Aggregating $600 or More
In general, under the Original Rules (which now remain in effect), a business making payments aggregating $600 or more to a single taxpayer in a calendar year must report the payments to the IRS on an information return (Form 1099). Only certain types of payments (such as payments for services) trigger the reporting requirement under the Original Rules. But many types of payments (such as payments for goods and property) are not required to be reported. Also, the longstanding exception for payments made to corporations significantly reduced the number of information returns required.
Starting in 2012, the Healthcare Act would have expanded the Original Rules to require the reporting of payments for goods, for property, and to taxable corporations. Taxpayers argued that the expansion of the Rules would be a reporting and recordkeeping nightmare. In fact, some critics pointed out that the expanded rules would require many businesses to issue a Form 1099 to major corporations (such as Wal-Mart) if their annual purchases from that corporation totaled at least $600.
Real Estate Owners
The Original Rules apply to payments made in the course of a trade or business. Under the Original Rules, a determination of whether a real estate owner is engaged in the trade or business of renting real estate is based on certain facts and circumstances. The Job Act provided that as of January 1, 2011, any recipient of rental income from real estate would be deemed to be engaging in a trade or business for information reporting purposes. As a result, rental property owners making payments aggregating $600 or more to a service provider (such as a painter) would be required to report the payments to the IRS. Critics argued that the expanded rules would unfairly impose a Form 1099 reporting requirement on rental property owners even if the rental activity was a passive investment for the owner.
Compliance with IRS information reporting requirements can be difficult, but at least the 1099 Act prevented it from becoming a crushing burden on small businesses and individuals. However, the 1099 Act did not repeal the increase in penalties for the failure to comply with the reinstated Original Rules. Although the expanded Form 1099 reporting requirements were like a bad dream, taxpayers should brace for future information reporting rules designed to increase taxpayer compliance.
© 2011, Ward and Smith, P.A.
For further information regarding the issues described above, please contact Deborah B. Andrews.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.