September 30, 2010

1099 Reporting Changes in the 2010 Small Business Jobs Act (signed into law on September 27, 2010)

There has been much discussion in the small-business community concerning the new 1099 reporting requirements, enacted by the healthcare bill, that are effective for years after December 31, 2011. While many industry groups, including the AICPA (American Institute of Certified Public Accountants), are lobbying for more relaxed law, it is considered a revenue-raiser by the government. A significant portion of that revenue will come from increased penalties for failing to file 1099s or filing them late. The 2010 Small Business Jobs Act significantly increases those penalties. Non-compliance just got real expensive; file all of them and file on time. Even if the provisions of the healthcare bill are relaxed, these penalties probably will still be with us. These provisions are effective for years beginning after December 31, 2010.

To offset a portion of the cost of the various tax breaks and incentives in the Act, Congress beefed up certain reporting requirements and penalties, to generate revenue. Expect a substantial increase in IRS audits to begin soon, and stronger enforcement of the penalties. This will be an easy exam for the IRS to administer; they probably will be able to do the exam without leaving their office. Don’t forget that we still have reasonable cause exception that may be applied to the penalties, but my guess is that the reasonable cause will require a lot more explanation and that fewer “causes” will be considered reasonable. “The dog ate the mail” may not work anymore. When filing the information returns, always get documentation that they (IRS) were received or, better yet, file them electronically. Here is what we have now:

Information reporting required for rental property expense payments. This will catch a lot of property owners by surprise. For payments made after December 31, 2010 (reporting will be for 2011 expense payments for most tax payers), the new law requires persons receiving rental income from real property to file information returns with the IRS and service providers reporting payments of $600 or more during the year for rental property expenses. The law now considers real property rental to be a trade or business subject to the 1099 reporting requirements. There are exceptions: individuals renting their principle residences (including active members of the military), taxpayers whose rental income doesn’t exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship.

Increased information return penalties. For information returns required to be filed after December 31, 2010 (these penalties will apply to your 2010 1099s filed in January 2011), the penalties in the tax code for failure to timely file information returns to the IRS will be increased. For small businesses (gross receipts of less than $5M), the penalty increases from $15 to $30; calendar year maximum will be increased from $25,000 to $75,000 for the first-tier penalty. The first tier penalty is for correct information returns filed on or before the 30 days after the due date. The second tier penalty is for filing a correct information return after the 30 days but before August 1 of the calendar year in which the required filing date occurs; the penalty increases from $30 to $60 with a maximum for small businesses increasing from $50,000 to $200,000 per calendar year. For filings after the August 1 date the penalty increases from $50 to $100 with a maximum for small business increasing $100,000 to $500,000. The minimum penalty for each failure due to intentional disregard will be increased from $100 to $250, with no limit. The penalties for failure to file information returns to payees are also increased. These penalty amounts will be indexed every five years for inflation.

Just watching television and listening to radio would have you believe that the only tax increases coming are income taxes! But we know better. The good news is that this is a voluntary tax. Do it right, and it doesn’t cost you anything, other than the administrative costs of monitoring and preparing the reporting forms. Do it wrong and you will pay a non-deductible penalty, which means you had to earn the penalty amount plus your marginal tax bracket to satisfy the liability.

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