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New regulations that will take effect in 2012 require all taxpayers with business income to issue 1099 forms to all vendors from which they purchased more than $600 of goods or services that tax year.

That is an enormous number of 1099s that are not being filed now. The IRS is beginning the process of determining just how they will promulgate workable rules for taxpayers, and how they will process the flood of new paperwork.

And they are not the only ones who see the new requirement as a daunting new burden. Businesses will have to report millions of transactions that they have not had to document before.

The number of affected taxpayers is estimated to be around…

40 million, including 26 million taxpayers who run sole proprietorships.

The National Taxpayer Advocate Service, which operates independently within the IRS, said in a recent report, “The new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate as compared with any resulting improvement in tax compliance.”

The point of the new rule was to reduce the gap between what individuals and businesses owe and what is actually paid in taxes. It is estimated that there is a $300 billion annual underpayment. Orange County tax fraud attorneys wonder, though, if this estimate is accurate, and whether any underpayment is actually a result of tax fraud. In any case, the reporting requirement may or may not eliminate the gap.

Congress put the new reporting requirement into the health care reform bill last March, hoping to create a paper trail of business-to-business payments that might otherwise not be noticed.

  • Source: “IRS starts mopping up Congress’s tax-reporting mess” July 9, 2010