Small Business Burdened By New IRS Tax Reporting Laws

Written by Adam Peck Category: Injury Law January 16th, 2013 3 min read

An Internal Revenue Service watchdog warned recently that the paperwork burdens on small businesses may outweigh the benefit of tax collections generated as part of the new health-care law.

Starting in 2012, about 40 million businesses, charities and other entities will be required to report to the IRS payments they make to suppliers and service providers, the IRS Taxpayer Advocate Service said in its midyear report to Congress says California Business Attorney Steven C. Peck.

The reporting regime is aimed at giving the IRS more information to help it collect taxes from the vendors. But the report said it could disrupt commerce and that IRS systems might not be equipped to make much use of the information anyway.

Businesses are already required to report payments to noncorporate service providers that exceed $600 in a given year.

The health-care law expanded that to cover incorporated service providers, and also vendors of goods. That means that a self-employed person who pays the same vendor more than $600 for office supplies, equipment or consulting services in the same year must now generate a 1099 form for that vendor and send it to the IRS.

The IRS has announced that businesses wouldn’t have to report payments made by credit card, as those payments will be picked up by a separate reporting regime.

That isn’t much comfort, as many transactions within a single industry — like the payments between manufacturers and distributor — are handled by check.

The Taxpayers advocate, which represents a variety of industries from electricians to toy makers, has fought the new requirements.

The rules could well push more small businesses toward making payments by credit card in order to avoid the extra paperwork, “The credit-card companies get a major windfall out of this.”

For instance, the law requires that the vendor provide its business customers with a taxpayer identification number, which the customer must then include on the 1099 form. If the vendor doesn’t provide an ID number, the business is required to back-up withhold, on behalf of the IRS, 28% of the purchase price.

“A vendor may simply refuse to sell goods to any purchaser that refuses to pay the full purchase price. Such an outcome could significantly impair the normal course of commerce,”

In addition, she said large company vendors will have an advantage over small firms because they may offer to keep track of payments for their customers to help meet the IRS requirement.

The new reporting requirements were included in the health-care bill to help offset the cost of new health-insurance subsidies. They were estimated to raise $17 billion for government coffers over the next 10 years.

The information-reporting requirement is one of two main areas of concern on which the Taxpayer Advocate said it will focus during the coming year.

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Written by Adam Peck

Expertise: Personal Injury

Adam J. Peck, ESQ is a principal with Peck Law Group, APC. In 2008, Mr. Adam Peck received his Juris Doctorate from Whittier Law School where he graduated Cum Laude. His practice is primarily dedicated to representing Elders, Dependent Adults, along with their loved ones and family members, who have suffered horrific personal injuries.