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In my last post, I discussed the new rules requiring taxpayers with business income to issue 1099 forms to any vendor from whom they purchased over $600 of goods and services in that year. There is more to discuss on this issue, such as what it will really mean to small businesses.

The cost of this new reporting requirement could very likely swamp small companies. A survey in Pennsylvania of small businesses found that they average around ten 1099 filings per year. Under the new requirement, set to take effect in 2012, they would average over two hundred filings.

The IRS is not looking forward to processing the new paperwork any more than taxpayers are looking forward to filing it. The IRS is already showing signs that they will look for ways to prevent a flood of new filings. Orange County tax litigation attorneys are watching for ways to help their clients avoid future problems.

An exception to the new rules was announced in May:

The IRS plans to exempt transactions that are made with credit and debit cards. A separate reporting mechanism will cover these transactions beginning next year, so there will be no need to report them again.

But SMC Business Councils President, Tom Henschke, says that, “Most of the small businesses out there that do small business [purchasing] don’t do it by credit card. One of the reasons is the transaction cost is very high — 2% to 3%.”

The main beneficiaries of the exemption are likely to be the credit card companies, thinks Henschke. Small businesses will have a new incentive to pay the credit card companies’ fees.

Large vendors will also have an advantage: they have computer systems to track all transactions, whereas most sole proprietorships do not.

The IRS has some leeway in how they will implement the new requirement, but only some. They have to carry out the will of Congress.

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