Compliance Blog

Written by Steve Van Beek

Anthony wrote about the hidden 1099 issue in the Health Care law earlier, but I wanted to add a bit more background to the changes.  The instructions to the current 1099-MISC form do a good job of explaining situations where a 1099-MISC must be filed and detailing certain exceptions:

"Exceptions. Some payments are not required to be reported on Form 1099-MISC, although they may be taxable to the recipient. Payments for which a Form 1099-MISC is not required include:

• Generally, payments to a corporation; but see Reportable payments to corporations on page 2;
• Payments for merchandise, telegrams, telephone, freight, storage, and similar items;
• ........ "

Those are two huge exceptions.  Businesses, including CUs, are not required to send 1099-MISC forms reflecting payments to a corporation (including for services) or payments for the purchase of goods.  However, the new provision in the Health Care law will force the IRS to remove these exceptions and require 1099 filings in these situations.

A very good overview of these upcoming challenges can be found in these five pages from a Office of Taxpayer Advocate report (the Office of Taxpayer Advocate's mission is here).  This report, the National Taxpayer Advocate's FY 2011 Objectives Report to Congress, runs through numerous issues that consumers and businesses are facing regarding existing and new tax laws. 

The five pages excerpt covers both the existing law and the steps that individuals and businesses will need to take to be ready for the new changes (the IRS has not released changes yet).  Here is a great summary of the existing situation:

"Under prior law, information reporting was required for the purchase of services but was not required for the purchase of goods. A person who made payments in the course of a trade or business to a vendor totaling $600 or more for services or determinable gains in any taxable year was required to furnish an information report to the IRS, with a copy to the vendor. This report, generally a Form 1099-MISC, Miscellaneous Income, sets forth the total amount of the payments as well as the name, address, and taxpayer identifying number (TIN) of the vendor.

Prior law generally did not require a person to report payments to purchase goods, presumably because the purchaser could not determine the amount that (less cost of goods sold) would have been income to the vendor. Under a longstanding regulatory regime, moreover, there was an exception for payments to corporations as well as to tax-exempt and government entities."

After the new regulations are written and finalized, individuals and businesses (including CUs) will have a much larger information reporting burden as the exceptions for payments to a corporation and payments for goods will be removed.  Pages 3-5 of the excerpt runs through upcoming challenges that CUs will face in meeting the new burden. Keep an eye out for more updates on this new provision.