Sunday, July 31, 2011

The one that got away

I was shocked. One of my newsletters (Sovereign Digest from the Sovereign Society) answered a question one of their subscribers asked about privacy when it comes to the purchase of gold coins from dealers: "Do they report the purchase to the federal government?" asked the subscriber.

"There is considerable confusion about U.S. reporting requirements for precious-metals sales and purchases," wrote the expert respondent.
This issue was highlighted last year when the Obama Health Care law imposed an onerous requirement that all sales exceeding $600 – not just sales of gold – be reported to the IRS on Form 1099. Fortunately, that little ray of misguided sunshine was extinguished in a rare Congressional act of reason.

The Health Care law required all sales exceeding $600 be reported to the IRS on Form 1099? --What's that all about? I never heard of that!

I decided to do some research. I looked up purchase $600 report on Google. I thought I'd find something on the issue.

Not much. Just one article titled $600 Sale? Get Ready for Tax Form. --Strange: It's from June 2010 and originally appeared in a numismatic (coin collecting) magazine. And it didn't seem to clarify much of anything.
Passage by Congress of the national health care legislation has had an unintended consequence to the nation’s coin collectors, vest-pocket dealers who buy and sell coins, and larger dealers who are frequent buyers of coins that collectors periodically liquidate as they trade up their collections for better coins, or simply sell to take a small profit or loss.

What has happened is that effective Jan. 1, 2012, the whole system of giving and receiving Internal Revenue Service 1099 forms will be turned on its head and all persons (including corporations) who are in business will now have to give 1099 tax reporting forms for coins and other goods that they sell as well as buy.
A little bit later in the same article:
Form 1099 is used to report independent contractor income, income from dividends, income from other things – and is one of the reasons why children receive tax bills for work or labor or services performed.

Section 9006 of the Patient Protection and Affordable Care Act (Public Law 111-148 . . .) turns 1099 forms into reporting forms not only for independent contractor’s income – what they have long been used for – but also to show sales, gains and losses on purchases and sales of goods as part of a trade or business.

The section reads (in relevant part) “SEC. 9006. EXPANSION OF INFORMATION REPORTING REQUIREMENTS. (a) IN GENERAL. – Section 6041 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsections:
"(h) APPLICATION TO CORPORATIONS. – . . . for purposes of this section the term ‘person’ includes any corporation that is not an organization exempt from tax under section 501(a). . . ."

Subsection (a) of section 6041 of the Internal Revenue Code of 1986 is amended –

(1) by inserting ‘‘amounts in consideration for property,’’ after ‘‘wages,’’
(2) by inserting ‘‘gross proceeds,’’ after ‘‘emoluments, or other’’, and
(3) by inserting ‘‘gross proceeds,’’ after ‘‘setting forth the amount of such.’’
??? Whoa! Now, wait a minute!

We have a lady come and help clean our house every week. We pay her more than $600 a year for her services. And, as a result, we have been told, we have to give her a 1099 for her services. We have been doing that for years. And we are not a company. That's a private transaction. And we have had to issue 1099s.

By any chance, was this new rule supposed to force us to issue 1099s to anyone from whom we purchased $600 or more worth of goods in a year? And what about that susection (h) where it says, "‘person’ includes any corporation that is not an organization exempt from tax under section 501(a)"? Any corporation that is not exempt from tax under section 501(a) means any for-profit corporation! So . . . ???!!!??? Does that really mean what I think it says?!?!

The article mentions a bill introduced by Rep. Dan Lungren (H.R. 5141) that is (or was) intended to repeal that particular section of the Health Care bill. So I thought I would look that up.

I found little bits and snatches that confirmed the worst of what I could possibly imagine. And it is truly unimaginable.

Forget small businesses only having to report; we ourselves would be required to turn in 1099s to all vendors from whom we make "purchases totaling $600 or more during a calendar year."

I read comments by others and sense my interpretation is not too far off:
I don't see the sense in filing 1099's to companies I do business with such as, Costco, American Airlines, Marriott and Comcast. These are large corporations that I would trust would not be hiding income. If the IRS believes this to be so, why don't they audit these companies instead of overloading us with forms? I don't see how the IRS will make more money. I do see how they will cost everyone more dealing with these forms. As for my reaction, I will try to limit my purchases from any company to be less than $600 a year to avoid this or only use one provider to avoid multiple forms. Could this also be an incentive for some companies to buy from foreign companies?

--Mary Taylor, June 20, 2010

I sure do not want to fill out a 1099 form to Walmart and all the other stores that we shop at. We would definitely have to keep track of receipts and try to find out all the tax payer ids for all the businesses we shop at all year. What a nightmare. What if I can't remember who I bought $600.00 worth of stuff from? . . .

I'm an American customer. If this bill to stop 1099's does not pass, does that mean that we will have to send a 1099 form for our electric bill, gas, water, house, food and clothing, etc.? All these things add up in a year's time to way over $600.00.

--Diane P, July 19, 2010

Sadly, the bill to repeal, I found, "is no longer current." And, apparently, never passed. So then what?

Well, there was S. 3578, The Small Business Paperwork Mandate Elimination Act. But that never passed and that went defunct, too. And S. 3946, The Small Business Paperwork Relief Act. Same result. Nothing happened. And then, finally, I read an article dated April 5, 2011 and titled, Senate Votes to Repeal 1099 Information Reporting Requirement--and there was an "Update": "On April 14, 2011, President Obama signed this measure into law." And as double reassurance, there was Small biz applauds 1099 repeal. The article concludes:
Nancy Ploeger, president of the Manhattan Chamber of Commerce, said some members wondered why the provision was inserted into the health care bill at all.

“The fact that it was buried in the health care bill was bizarre enough, and then it was yet another burden on the backs of business owners, more paperwork,” she said.

“Also, what is the point of it?” she asked. “You issue a 1099 to an outside contractor, which is understood because the government wants to keep track of the income of outside contractors. But any major corporation you're making purchases from already has a reporting requirement.”
I am unable to answer the last question. But the earlier one, about why it was in the health care bill?

Check out what CNN discovered when it pursued the story in May of 2010:
The idea seems to be that using 1099 forms to capture unreported income will generate more government revenue and help offset the cost of the health bill.

A Democratic aide for the Senate Finance Committee, which authored the changes, defended the move.

"Information reporting improves tax compliance without raising taxes on small businesses," the aide said. "Health care reform includes more than $35 billion in tax cuts for small businesses ... indicating that during these tough economic times, Congress is delivering the tax breaks small businesses need to thrive."

The new rules could drastically alter the tax-reporting landscape by spotlighting payments that previously went unreported. Freelancers and other independent operators typically write off stacks of business expenses; having to issue tax paperwork documenting each of them could cut down on fraudulent deductions.

More significantly, the 1099 trail would expose payments to small operators that might now be going unreported. If you buy a computer for your business from a major chain retailer, the seller almost certainly documents the revenue. But if you buy it from Tim's Computer Shack down the street, Tim might not report and pay taxes on his income from the sale.

The IRS estimates that the federal government loses more than $300 billion each year in tax revenue on income that goes unreported. Using 1099s to document millions of transactions that now go untracked is one way to begin to close the gap.
Wow! The (minimum) 5 minutes you would have to spend each year filling out a 1099 for each of the people and corporations from whom you purchase $600 or more worth of goods in a year, not to mention the postage required to send these forms to all the companies with whom you deal--and to send the reports to the IRS: this is less onerous than an additional tax?

I guess there is one last thing going on here that niggled at the back of my mind: "What about privacy? --And what about privacy when, in another two or three years, when the government-sponsored monetary inflation begins to show up in more dramatic price increases--the purchases you make today that cost, say, $50, suddenly become denominated as $600?"

The government isn't going to suddenly come back and say, "Oh, let's alter the threshold of reporting requirements as specified in Section 6041 of the Internal Revenue Code of 1986."

I'm glad that section "got away."

But I am upset
  1. That Congress would have passed such legislation in the first place. And,
  2. That such legislation would have been on the books for so long--almost a full year!--with so few Americans even being aware of its existence.
Are we really aware of what "our" legislators are proposing in our behalf?
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