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It is becoming apparent that the IRS is doing a better job than in the past using technology to analyze tax returns. As a result, they seem to have better access to taxpayer information and are better able to scrutinize the data often resulting in enhanced tax compliance. As such, the IRS is identifying “tax issues” that may have never been previously detected. This is turn results in what appears to be a greater number of non-compliance notices mailed to taxpayer’s than in the past.

With the recent passage of the Patient Protection and Affordable Care Act (the “Act”), the IRS will have easy access to even greater amounts of information. Most taxpayers understand that the Act was aimed at making healthcare coverage easier to obtain and more affordable for Americans. Many taxpayers, however, do not understand that the Act also included many new and potentially burdensome tax provisions.
 
One such provision, Section 9006 of the Act could have far reaching effects on many businesses. This little known provision will both increase the information reporting requirements for businesses and provide the IRS with new information never before reported.
 
Beginning January 1, 2012, virtually ALL payments made by a business to any single vendor during any calendar year will have to be reported at year end to the IRS on Form 1099. Vendors include almost anyone paid by the company during the year other than employees whose compensation is already reported on Form W-2.
 
Currently, only certain transactions are reported using Form 1099. Under the existing rules, only interest, dividends, sale of securities, payments to individuals and payments to unincorporated businesses are reported using Form 1099. Under the new rules, virtually all payments (exceeding $600 per year) will need to be reported on Form 1099.
 
This new regulation will (1) create implementation challenges for businesses and (2) arm the IRS with additional information about taxpayers.
 
Implementation of these new rules will require planning as businesses will need to correctly identify, characterize and report transactions that may have never been tracked before. In order to properly prepare 1099’s, businesses will most likely need to obtain the federal identification number, address and potentially other information from all vendors.
 
The final regulations have not yet been published by the IRS, but it is expected that the reporting requirements could be challenging to implement for both small and large businesses. Now is a good time for businesses to start planning for this significant change. Ignoring the requirements could lead to expensive penalties for failure to file which could amount to $50 or more for each un-filed 1099.
 
Filing of the 1099’s will provide the IRS with extensive information about payments to vendors. Presumably, the IRS will use this data to calculate the total amount paid to each vendor. Having this data will arm the IRS with information to determine whether businesses are underreporting income. The IRS computers will simply sum the total of all 1099’s reported for each business and then compare that amount to how much income the business reported on the income tax return during the year. Underreported amounts will potentially be uncovered by the IRS. This will more than likely result in strengthened revenue compliance by the IRS generating more IRS inquiry notices and/or taxpayer audits.
 
Although this is not the most significant change to the tax rules in recent years, adhering to the requirements will take some effort and this change certainly will provide the IRS with powerful data to help ensure tax compliance. Businesses should begin planning for these new reporting requirements sooner rather than later.