The information reporting requirements under Code Sec. 6041 have been modified and expanded twice in 2010, by both the Patient Protection and Affordable Care Act (Affordable Care Act, P.L. 111-148 ) and the Small Business Jobs Act of 2010 (Small Business Act, P.L. 111-240 ). The most controversial changes were made by §9006 of the Affordable Care Act, which eliminates the exemption for payments to corporations and expands the types of payments that will trigger the reporting requirement to include payments for goods or other property. Although expanding information reporting requirements can potentially improve the collection of tax revenue because it makes taxpayers more likely to report items of income on their own returns, these changes have been criticized for imposing too great a burden, especially on small businesses. As a result, there have been numerous attempts to repeal §9006. In two recent reports, the Congressional Research Service (CRS) examines the amendments, objections to the amendments, economic analysis, and proposed legislation that may affect Code Sec. 6041 . Background. Code Sec. 6041 generally requires that payments totaling at least $600 in a single calendar year to a single recipient be reported to IRS. The $600 reporting threshold has not changed since at least '54 and is not currently slated to be increased. The required returns are generally Form 1099s, which are prepared by the entity making the payment and show to whom payment was made, the amount of the payment, and the general reason for the payment. The form is filed with IRS and a copy is provided to the payee. The form is required only when the payer is considered to be engaged in a trade or business and has made the payment in connection with that trade or business. Form 1099s are due by February 28 of the year following the calendar year in which payments were made (March 31 if filed electronically), and copies of information returns must be provided to payees no later than January 31 of the year following the calendar year in which the payments were made. New reporting requirements. For payments made in 2011, §2101 of the Small Business Act renders landlords, who had not previously been considered in a trade or business, subject to the information reporting requirements. Rental income recipients making payments of $600 or more to a service provider in the course of earning rental income must provide an information return to the service provider and IRS. There are three exceptions to this rule: taxpayers who receive substantially all of their rental income from renting their principal residence on a temporary basis; taxpayers receiving “rental income of not more than the minimal amount”; and taxpayers for whom complying with these requirements would cause a hardship. The Small Business Act also increased the penalties under Code Sec. 6721 and Code Sec. 6722 for failure to file an information return and provide a copy of the information return to the payee, respectively, for any information returns required to be filed after Dec. 31, 2010. Beginning with payments made in 2012, Sec. 9006 of the Affordable Care Act changes the reporting requirements in two ways. It adds Code Sec. 6041(h) , which provides that payments to corporations will no longer be exempt from reporting, and it expands the types of payments that will trigger the reporting requirement. Until 2012, the type of payment that most commonly triggers the reporting requirement is payment for services. Beginning in 2012, Code Sec. 6041 will also require reporting of payments for goods or other property as well as gross proceeds. The changes imposed by the Affordable Care and Small Business Acts may also be affected by Reg. § 1.6041-1(a)(1)(iv) and Reg. § 1.6041-1(a)(1)(v) , promulgated in August of 2010. These regs implement Code provisions that require reporting of credit card and third party network transactions. For payments made after Dec. 31, 2010, there is a regulatory exception to the Code Sec. 6041 requirements to file an information return with IRS and provide a copy to the payee. Reg. § 1.6041-1(a)(1)(iv) states that any transaction that is subject to reporting under Code Sec. 6050W , without regard to the third-party network de minimus threshold, will not be reported under Code Sec. 6041 . Thus, a payor generally isn't required to report payments made by credit card or through a third-party network. The CRS reports state that the purpose of the §9006 amendments appears to be to reduce the tax gap, because the existence of an information return generally encourages the voluntary reporting of taxable income and may also facilitate the enforcement and collection of taxes on income that is not voluntarily reported. CRS says there is limited information available on compliance with existing information reporting requirements, but it is suspected that a good deal of noncompliance occurs among small businesses. IRS data indicates that the largest contributor to the individual tax gap is underreporting by single-owner businesses, which also contributes to the employment tax gap. For instance, in 2001, only 1.2% of wages, salaries, and tips (which are subject to substantial reporting and withholding requirements) were underreported. However, in the same year, 57.1% of nonfarm sole proprietor income, which is subject to little or no information reporting, was underreported. Economic analysis. The Joint Committee on Taxation has estimated that the new information reporting requirements from §9006 will generate $17.1 billion in increased revenue over a 10-year period. This averages approximately $1.7 billion per year, which would reduce the estimated tax gap ($356 billion in 2010) by .5%. Most of the reduction in the tax gap that is expected to result from the expanded requirements is attributable to what the CRS calls the “cost-benefit structure of tax evasion.” In deciding whether to evade taxes, businesses are thought to weigh the potential benefit of evasion against the potential consequences. The new reporting requirements are expected to increase businesses' actual or perceived probability of being audited, therefore increasing the risk of attempted tax evasion. However, the relatively small revenue estimates suggest that the probability of an actual audit as a result of the new requirements is relatively small. Responses to the new reporting requirements. Proponents of the expanded Form 1099 reporting requirements argue that they are a means through which tax revenue can be generated without raising taxes, whereas opponents have expressed concern about the potential financial and administrative burdens that businesses may experience. Specifically, opponents argue that the increased revenue doesn't justify the compliance costs and contend that, due to the accounting methods used by some businesses, the information received won't even assist IRS in identifying noncompliant taxpayers. However, the CRS notes that most small businesses already have extensive recordkeeping requirements for inventory and payroll, and that the cost of meeting the new requirements is small and will also decrease over time. For instance, although businesses may incur costs in obtaining the taxpayer identification number (TIN) of each taxpayer for which a Form 1099 must be filed, this cost won't be repeated for vendors that are used again in subsequent years. Also, the CRS described IRS's attempts to mitigate the burden on businesses and avoid duplicative reporting, included the regulatory exemption for transactions conducted via credit or debt card (discussed above). In response to IRS's request for comments in Notice 2010-51, 2010-29 IRB 83 (see Weekly Alert ¶ 9 07/08/10 ), IRS received within a week responses from “scores of taxpayers and certified public accountants” calling for the repeal of the changes enacted by §9006. Concerns included the potential need to hire additional employees to meet the new requirements and the costs of obtaining and compiling such information. IRS also received a number of suggestions of ways to modify the new requirements, including by increasing the threshold from $600. Since 2004, the National Taxpayer Advocate (NTA) has recommended including corporate service providers in the 1099 reporting requirements to address the tax gap and the cash economy, but has not recommended extending the requirements to include vendors. This year, in the NTA's Fiscal Year 2011 Objectives Report, the NTA expressed concern that the burden of the increased reporting requirements might be disproportionate to any resulting improvement in tax compliance. Efforts to repeal the new reporting requirements. There have been a number of recent proposals to repeal §9006. On Jan. 12, 2011, H.R. 4, the Small Business Paperwork Mandate Elimination Act of 2011, was introduced to repeal §9006 “and the amendments made thereby.” The bill includes no provision for either spending cuts or alternative revenue sources to offset the cost of repealing §9006. There were also several proposals to repeal or modify §9006 in the 111th Congress. The CRS report noted that there appeared to be bipartisan support for repeal in the House, but there was disagreement over how to pay for repeal. On February 2, the Senate by a vote of 81-17 waived a point of order and adopted Senate Amendment 9 (SA 9) offered by Senator Debbie Stabenow (D-MI) to S. 223, the FAA Air Transportation Modernization and Safety Improvement Act. The amendment would repeal the expanded form 1099 information reporting requirements included in the Affordable Care Act. Also on February 2, an amendment by Senator Mitch McConnell (R-KY) to waive a Point of Order against his amendment to the FAA bill to repeal the Obama health care reform law was not agreed to by a vote of 47-51, thereby eliminating the chance of McConnell's bringing up for a vote his repeal amendment. § 6721 Failure to file correct information returns. ________________________________________ (a) WG&L Treatises Imposition of penalty. Caution: Code Sec. 6721(a)(1), following, is effective with respect to information returns required to be filed before 1/1/2011. See below for Code Sec. 6721(a)(1), effective with respect to information returns required to be filed on or after 1/1/2011. (1) In general. In the case of a failure described in paragraph (2) by any person with respect to an information return, such person shall pay a penalty of $50 for each return with respect to which such a failure occurs, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $250,000. Caution: Code Sec. 6721(a)(1), following, is effective with respect to information returns required to be filed on or after 1/1/2011. See above for Code Sec. 6721(a)(1), effective with respect to information returns required to be filed before 1/1/2011. (1) New Law Analysis In general. In the case of a failure described in paragraph (2) by any person with respect to an information return, such person shall pay a penalty of $100 for each return with respect to which such a failure occurs, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $1,500,000. (2) Failures subject to penalty. For purposes of paragraph (1) , the failures described in this paragraph are— (A) any failure to file an information return with the Secretary on or before the required filing date, and (B) any failure to include all of the information required to be shown on the return or the inclusion of incorrect information. Caution: Code Sec. 6721(b), following, is effective with respect to information returns required to be filed before 1/1/2011. See below for Code Sec. 6721(b), effective with respect to information returns required to be filed on or after 1/1/2011. (b) Reduction where correction in specified period. (1) Correction within 30 days. If any failure described in subsection (a)(2) is corrected on or before the day 30 days after the required filing date— (A) the penalty imposed by subsection (a) shall be $15 in lieu of $50, and (B) the total amount imposed on the person for all such failures during any calendar year which are so corrected shall not exceed $75,000. (2) Failures corrected on or before August 1. If any failure described in subsection (a)(2) is corrected after the 30th day referred to in paragraph (1) but on or before August 1 of the calendar year in which the required filing date occurs— (A) the penalty imposed by subsection (a) shall be $30 in lieu of $50, and (B) the total amount imposed on the person for all such failures during the calendar year which are so corrected shall not exceed $150,000. Caution: Code Sec. 6721(b), following, is effective with respect to information returns required to be filed on or after 1/1/2011. See above for Code Sec. 6721(b), effective with respect to information returns required to be filed before 1/1/2011. (b) WG&L Treatises Reduction where correction in specified period. (1) Correction within 30 days. If any failure described in subsection (a)(2) is corrected on or before the day 30 days after the required filing date— (A) New Law Analysis the penalty imposed by subsection (a) shall be $30 in lieu of $100, and (B) New Law Analysis the total amount imposed on the person for all such failures during any calendar year which are so corrected shall not exceed $250,000. (2) Failures corrected on or before August 1. If any failure described in subsection (a)(2) is corrected after the 30th day referred to in paragraph (1) but on or before August 1 of the calendar year in which the required filing date occurs— (A) New Law Analysis the penalty imposed by subsection (a) shall be $60 in lieu of $100, and (B) New Law Analysis the total amount imposed on the person for all such failures during the calendar year which are so corrected shall not exceed $500,000. (c) Exception for de minimis failures to include all required information. (1) In general. If— (A) an information return is filed with the Secretary, (B) there is a failure described in subsection (a)(2)(B) (determined after the application of section 6724(a) ) with respect to such return, and (C) such failure is corrected on or before August 1 of the calendar year in which the required filing date occurs, for purposes of this section , such return shall be treated as having been filed with all of the correct required information. (2) Limitation. The number of information returns to which paragraph (1) applies for any calendar year shall not exceed the greater of— (A) 10, or (B) one-half of 1 percent of the total number of information returns required to be filed by the person during the calendar year. (d) WG&L Treatises Lower limitations for persons with gross receipts of not more than $5,000,000. Caution: Code Sec. 6721(d)(1), following, is effective with respect to information returns required to be filed before 1/1/2011. See below for Code Sec. 6721(d)(1), effective with respect to information returns required to be filed on or after 1/1/2011. (1) In general. If any person meets the gross receipts test of paragraph (2) with respect to any calendar year, with respect to failures during such taxable year— (A) subsection (a)(1) shall be applied by substituting “$100,000” for “$250,000”, (B) subsection (b)(1)(B) shall be applied by substituting “$25,000” for “$75,000”, and (C) subsection (b)(2)(B) shall be applied by substituting “$50,000” for “$150,000”. Caution: Code Sec. 6721(d)(1), following, is effective with respect to information returns required to be filed on or after 1/1/2011. See above for Code Sec. 6721(d)(1), effective with respect to information returns required to be filed before 1/1/2011. (1) In general. If any person meets the gross receipts test of paragraph (2) with respect to any calendar year, with respect to failures during such calendar year— (A) New Law Analysis subsection (a)(1) shall be applied by substituting “$500,000” for “$1,500,000”, (B) New Law Analysis subsection (b)(1)(B) shall be applied by substituting “$75,000” for “$250,000”, and (C) New Law Analysis subsection (b)(2)(B) shall be applied by substituting “$200,000” for “$500,000”. (2) Gross receipts test. (A) In general. A person meets the gross receipts test of this paragraph for any calendar year if the average annual gross receipts of such person for the most recent 3 taxable years ending before such calendar year do not exceed $5,000,000. (B) Certain rules made applicable. For purposes of subparagraph (A) , the rules of paragraphs (2) and (3) of section 448(c) shall apply. (e) WG&L Treatises Penalty in case of intentional disregard. If 1 or more failures described in subsection (a)(2) are due to intentional disregard of the filing requirement (or the correct information reporting requirement), then, with respect to each such failure— (1) subsections (b) , (c) , and (d) shall not apply, Caution: Code Sec. 6721(e)(2), following, is effective with respect to information returns required to be filed before 1/1/2011. See below for Code Sec. 6721(e)(2), effective with respect to information returns required to be filed on or after 1/1/2011. (2) the penalty imposed under subsection (a) shall be $100, or, if greater— (A) in the case of a return other than a return required under section 6045(a) , 6041A(b) , 6050H , 6050I, 6050J , 6050K , or 6050L , 10 percent of the aggregate amount of the items required to be reported correctly, (B) in the case of a return required to be filed by section 6045(a) , 6050K , or 6050L , 5 percent of the aggregate amount of the items required to be reported correctly, (C) in the case of a return required to be filed under section 6050I(a) with respect to any transaction (or related transactions), the greater of— (i) $25,000, or (ii) the amount of cash (within the meaning of section 6050I(d) ) received in such transaction (or related transactions) to the extent the amount of such cash does not exceed $100,000, or (D) in the case of a return required to be filed under section 6050V , 10 percent of the value of the benefit of any contract with respect to which information is required to be included on the return, and Caution: Code Sec. 6721(e)(2), following, is effective with respect to information returns required to be filed on or after 1/1/2011. See above for Code Sec. 6721(e)(2), effective with respect to information returns required to be filed before 1/1/2011. (2) New Law Analysis the penalty imposed under subsection (a) shall be $250, or, if greater— (A) in the case of a return other than a return required under section 6045(a) , 6041A(b) , 6050H , 6050I, 6050J , 6050K , or 6050L , 10 percent of the aggregate amount of the items required to be reported correctly, (B) in the case of a return required to be filed by section 6045(a) , 6050K , or 6050L , 5 percent of the aggregate amount of the items required to be reported correctly, (C) WG&L Treatises in the case of a return required to be filed under section 6050I(a) with respect to any transaction (or related transactions), the greater of— (i) $25,000, or (ii) the amount of cash (within the meaning of section 6050I(d) ) received in such transaction (or related transactions) to the extent the amount of such cash does not exceed $100,000, or (D) New Law Analysis in the case of a return required to be filed under section 6050V , 10 percent of the value of the benefit of any contract with respect to which information is required to be included on the return, and (3) in the case of any penalty determined under paragraph (2) — Caution: Code Sec. 6721(e)(3)(A), following, is effective with respect to information returns required to be filed before 1/1/2011. See below for Code Sec. 6721(e)(3)(A), effective with respect to information returns required to be filed on or after 1/1/2011. (A) the $250,000 limitation under subsection (a) shall not apply, and Caution: Code Sec. 6721(e)(3)(A), following, is effective with respect to information returns required to be filed on or after 1/1/2011. See above for Code Sec. 6721(e)(3)(A), effective with respect to information returns required to be filed before 1/1/2011. (A) the $1,500,000 limitation under subsection (a) shall not apply, and (B) such penalty shall not be taken into account in applying such limitation (or any similar limitation undersubsection (b) ) to penalties not determined under paragraph (2) . Caution: Code Sec. 6721(f), following, is effective with respect to information returns required to be filed on or after 1/1/2011. (f) Adjustment for inflation. (1) New Law Analysis In general. For each fifth calendar year beginning after 2012, each of the dollar amounts under subsections (a) , (b) , (d) (other than paragraph (2)(A) thereof), and (e) shall be increased by such dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) determined by substituting “calendar year 2011” for “calendar year 1992” in subparagraph (B) thereof. (2) New Law Analysis Rounding. If any amount adjusted under paragraph (1) — (A) is not less than $75,000 and is not a multiple of $500, such amount shall be rounded to the next lowest multiple of $500, and (B) is not described in subparagraph (A) and is not a multiple of $10, such amount shall be rounded to the next lowest multiple of $10.