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Tuesday, November 30, 2010

1099 Information Reporting Requirements and Penalties as Modified by the Patient Protection and Affordable Care Act and the Small Business Jobs Act of 2010

Carol A. Pettit
Legislative Attorney

Edward C. Liu
Legislative Attorney

Generally, taxpayers are more likely to report items of income on their tax returns if they know that a third party has reported it to the Internal Revenue Service (IRS); therefore, expanding information reporting requirements under the Internal Revenue Code (IRC) can improve the collection of federal tax revenue. However, as those requirements are expanded, those who must comply with the requirements generally will face an increased administrative burden. Recent expansions of the reporting requirements in IRC § 6041 have been met by protests that the changes impose too great a burden, particularly on small businesses.

The Patient Protection and Affordable Care Act (P.L. 111-148; PPACA) and the Small Business Jobs Act of 2010 (P.L. 111-240; Small Business Act) both amended IRC § 6041, which requires payments totaling at least $600 in a single calendar year to a single recipient to be reported to the IRS. The required returns are generally Form 1099s, which are prepared by the entity making the payment and show to whom payment was made, the amount of the payment, and the general reason for the payment. The form is filed with the Internal Revenue Service (IRS) and a copy is provided to the payee. The form is required only when the payer is considered to be engaged in a trade or business and has made the payment in connection with that trade or business.

Beginning with payments made in 2011, § 2101 of the Small Business Act makes most landlords subject to the reporting requirements of IRC § 6041 by stipulating that, for purposes of IRC § 6041(a), they are considered to be engaged in the trade or business of renting real property, with certain exceptions. Landlords generally have not been considered to be engaged in a trade or business and, therefore, have not been subject to IRC § 6041. The Small Business Act also increased the penalties for failure to file an information return (IRC § 6721) and the penalties for failing to provide a copy of the information return to the payee (IRC § 6722). These changes will apply to any information returns required to be filed after December 31, 2010.

Beginning with payments made in 2012, § 9006 of PPACA changes the reporting requirements in two ways. Payments to corporations will no longer be exempt from reporting. Additionally, § 9006 expands the types of payments that will trigger the reporting requirement. Until 2012, the type of payment that most commonly triggers the reporting requirement is payment for services. Beginning in 2012, IRC § 6041 will also require reporting of payments for goods or other property as well as gross proceeds.

Various groups have asserted that the reporting requirements will be too burdensome on both the payer and the payees, and there have been several attempts to repeal § 9006 of PPACA (H.R. 5141, H.R. 5982, H.R. 6213, H.R. 6367, S. 3578, S. 3946 and several Senate amendments to H.R. 5297 and S. 510). For payments made by credit card, the reporting burden may be eased somewhat by a recent change in the law that will require payment settlement entities to report credit card payments and payments through third party networks (e.g., PayPal). Under Treasury Regulation 1.6041-1(a)(1)(ii), if reporting is required under IRC § 6050W, no reporting of the payment is required under IRC § 6041. Thus, payments made by credit card after December 31, 2010, generally will not be required to be reported by the payer.

Section 6041 of the IRC continues to draw the interest of Congress, and that interest has taken many forms. In addition to proposals to repeal PPACA § 9006, other legislation (S.Amdt. 4595 to H.R. 5297, S. 3783) has proposed modifying those provisions. Still other legislation (H.R. 5994, S. 3795) has proposed expanding the reporting requirements.

Date of Report: November 24, 2010
Number of Pages: 17
Order Number: R41504
Price: $29.95

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