Friday, January 21, 2011

It seems that Will Rogers was right when he said, "When Congress makes a joke, it is a law. When they make a law, it is a joke."

My CPA passed this along to me in an email.

At first I thought it was a joke, but no it is a tax law that was buried in the Healthcare Reform law that past last year and starts affecting businesses large and small in 1012 and rental property holders this year... here is the example of buying a laptop computer that originally read as "Apple iPad" when it was sent to me:

NOTE: It seems to have originated with That $1.7 billion a year would supposedly help offset provisions in the bill that increase IRS collection costs. But tax preparers and small business groups only see more paper jams, despite the president’s executive order to cut the red tape for small business. 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," Nina Olson of IRS Taxpayer Advocate Service [TAS], the federal overseer at the IRS who protects taxpayers, said in a June report:

Under the new 1099 Tax Reporting of the Heathcare Reform Law, someone sells your small business a laptop for $600. Today, you don’t have to issue a 1099 to that person because the IRS realizes not only that these transactions count in the millions, but often mistakes are made about the correct amount to report on the form.

The seller often makes mistakes deducting from that $600 his cost of goods to sell that laptop -- prorating payments to a distributor, office overhead, gas costs to go pick it up. You see how crazy this can get.

Next, the small businesses will have to collect from the laptop seller his Social Security or Tax ID to complete the 1099 form. What if a vendor fails to furnish a correct Tax ID? The small business is required by law to calculate and then impose back-up withholding at the rate of 28% of the purchase price.

It gets worse. In that event, under the law, “the small business must prepare and file Form 945, Annual Return of Withheld Federal Income Tax, and make federal tax deposits at an authorized institution on a prescribed schedule,” to comply with the 1099 law, Olson says.

If the small business doesn’t do that? It gets slapped with a penalty.

So say you paid just $200 for the $600 laptop. Say you get in a fight with your laptop seller because he won’t give you his Social Security number due to privacy concerns, or he simply gives you the wrong Social Security number. Then you’ll have to start filing federal forms to do backup withholding for $168. Wouldn’t that make you feel like you shouldn’t pay the full purchase price?
“Failure to withhold an amount generally results in liability for that amount,” TAS Olson says, who acknowledges that “back-up withholding may be impracticable, because a business already may have paid the full price at the point of sale before learning that the Tax ID was incorrect.”
TAS Olson also notes this TIN fight could hurt the economy, especially in this scenario. “A vendor may simply refuse to sell goods to any purchaser that refuses to pay the full purchase price,” Olson says. “Such an outcome could significantly impair the normal course of commerce. No business should have to choose between compliance with back-up withholding and losing access to vendors on the one hand, and noncompliance while keeping vendor access on the other hand.”
There’s more. “Small businesses may have to acquire new software or pay for additional accounting services, incurring additional costs,” in order to transmit these forms, Olson says.
What if your vendors are not computerized to track customer purchases, what if they are not up to speed? Wouldn’t you be inclined to drop them? Wouldn’t that in turn put other small businesses out of work?
And get this -- if a small business makes individual purchases of $600 or more from at least 250 vendors during a calendar year, it must also by law file forms 1099 electronically to the IRS. That’s even more costly, because the small business would have “to pay a per-report fee charged by an e-file service provider,” TAS Olson says.
And what happens if you want to return the item? Aren’t there millions more returns of items at the level of $600?
“The goods market is subject to a high rate of returned items that result in refunds to the purchaser,” TAS Olson notes.
Say your small business wants to return the laptop. But you both already filed 1099 forms for the purchase. You have to file more federal forms showing the transaction was undone.
And what if someone erroneously pumps out a 1099 form that says you sold them a laptop, when you didn’t, and the IRS matches that form to find out you did not report income on your tax return?
The IRS then issues a so-called “CP 2000 “notice of underreported income. That’s basically an IRS form letter explaining to you that the 1099 income information in IRS files does not match entries on your tax return and advises you to respond. At this point, you’re stuck, you’ll “have to prove a negative,” TAS Olson says.
And that means more bureaucracy. “Consequently, the IRS would have to develop a process for verifying and using information reports to establish an accurate amount of gross proceeds,” Olson says.
There’s more nuisances, beyond the new 1099 form. Take health-reform’s insurance mandate, which says if you do not have insurance, you’ll have to pay a fine to the government.

The TAS noted that the “IRS will need to determine a taxpayer's compliance with the individual [insurance purchasing] mandate and assess a penalty if coverage is inadequate.”

But the fine isn’t based on just your personal net income. “This determination is based on a concept of 'household income.' This may differ from the income reported on the taxpayer's return, because it is a composite of all of the income reported by members of a taxpayer's household -- information that may not be readily accessible to the IRS,” TAS Olson says.

That means more bureaucracy.

The IRS will need more training in privacy requirements, in order to avoid a drop in tax compliance, TAS Olson said, as taxpayers may feel they need to protect their confidential household income information for everyone who lives under the same roof.

No comments: