Just say no

guest commentary by David Potts

Earlier this month the National Taxpayer Advocate published her semiannual report to Congress. If you're not familiar with the Taxpayer Advocate Service, it was established to help taxpayers resolve their problems with the IRS when the taxpayer could not resolve the issue through normal channels within the IRS.

Think of the Taxpayer Advocate Service as the IRS’s customer service department. Twice each year it is required to issue a report to Congress discussing its areas of concern.

When Congress passed and President Obama signed the Patient Protection and Affordable Care Act into law this past March, it included a provision that greatly expanded a business’ reporting requirements to the IRS for payments made by the business after Dec. 31, 2011.

Saying “greatly expanded” is an understatement. The Taxpayer Advocate’s report to Congress stated that “The Office of the Taxpayer Advocate is concerned that 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."

I personally believe that statement is a misstatement. They should strike “may turn out to be disproportionate” with “will turn out to be disproportionate.” Congress and President Obama really put the screws to small businesses with this provision of the health care bill.

Currently, law requires businesses to report payments to individuals for services in excess of $600 on a form 1099 MISC each year. You don't have to send a 1099 to a corporation, a nonprofit organization, or to a governmental entity. You don't have to send a 1099 to a vendor where you purchase “goods.” Beginning with payments made in 2012 the law changes and businesses will have to report all payments totaling over $600 to everybody: individuals, corporations, nonprofit organizations, and governmental entities.

What does this mean for small businesses? If you are a small business, it means you better start upgrading your accounting system now. And if they don’t have a good bookkeeper working for you will, you better start looking for one. Why? Because for substantially everybody you pay in your business, your will have to track how much you paid them in each calendar year and report the amount paid to the IRS. You will have to make sure that you have each vendor's correct address and taxpayer identification number or social security number. The time and effort required to obtain this information will be significant for many small businesses and sole proprietors.

If you pay Wal-Mart more than $600 for cleaning supplies, you have to send them a 1099. If you turn on the lights and have to pay OG&E for that privilege, you will have to send them a 1099. If you have an antique mall booth you might be OK since you buy much of your inventory at a garage sale and pay each “vendor” less than $600. But according to the Taxpayer Advocate’s report, they estimate that this provision will affect 26 million non-farm sole proprietorships, 4 million S corporations, 2 million C corporations, 3 million partnerships, 2 million farming businesses, 1 million charities and tax-exempt organizations, and 100,000 government entities — nearly 40,000,000 businesses and organizations.

The good news is that this provision is not effective until 2012. The bad news is this isn’t much time to prepare if your accounting system is lacking, and I bet there are millions of the 26 million proprietorships who need to review their accounting system to determine whether their system is adequate.

Writing a check and putting the invoice in a folder never to be seen again isn’t going to cut it. It is time to become an activist. Write your Senators and Representatives and ask them to repeal this provision of the health care act. It really will be more trouble than you think. It will cost you more than you think. It’s time to buck up and just say no!

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.