[StBernard] (no subject)

[Westley Annis]

This article is from Forbes Magazine. These proposals have the possibility
of killing small business.

http://tinyurl.com/nca3f3

Westley

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Taxes Under Obama
Tax Crackdown Will Cost Small Business
Dean Zerbe, 06.08.09, 3:00 PM ET


One of the seemingly less controversial aspects of the Obama
administration's tax proposals is related to tax enforcement. Who can object
to making everyone pay what they owe? Certainly, it's better than raising
taxes on law abiding folks.

The problem is that some of the administration's enforcement proposals will
add big paperwork burdens and costs for small business, at a time when many
are already struggling. That could put a damper on hiring, although arguably
the proposals will be good for one sector--the accounting firms hired to
deal with all the additional filings and requirements. (I say arguably,
because in the current economy, there's a limit to how much extra accounting
firms can charge their small-business clients, meaning they might have to
absorb some of the extra costs themselves.)

In the Obama administration's defense, many of these proposals were first
put forward by the Bush Treasury in response to pressure from Congress to
address the "tax gap." (That gap--$345 billion in 2001--is the difference
between what the Internal Revenue Service estimates it's owed, and what
taxpayers hand over voluntarily.) While these proposals didn't move last
year, I expect them to receive serious consideration with a new
administration and a Congress that is aggressively seeking new sources of
revenue. That's why consideration of the burdens they would impose is
crucial now.

These new tax paperwork burdens come on top of an already grinding load
imposed on small business. A recent IRS study estimated that small business
spends approximately $100 billion a year on tax compliance. But what's
really significant is that the tax compliance burden is far higher--as a
percentage of receipts and on a per-employee basis--for small businesses
than for large ones, because of the fixed costs of filing returns and
setting up compliance. A study sponsored by the IRS found that while large
businesses spend just 0.5% of gross receipts on tax compliance, those with
revenues of $100,000-$500,000 spend 5% of their receipts on it. Even smaller
businesses spend an even higher percentage.

Here's a rundown of what the Obama Treasury has proposed:

Businesses would have to report their payments to other corporations to the
IRS. Currently, a business that pays an individual $600 a year or more for
services must file an information return--a Form 1099--with the IRS. But
businesses don't have to file a 1099 when they pay a corporation for
services. The Obama administration proposes businesses be required,
beginning with payments made next year, to file 1099s for all payments for
services above $600 made to corporations (although not to tax-exempt
corporations).

My concern with this, and the other information reporting discussed below is
not only the burden it places on business but also what end that new burden
will serve. Tax professionals are more and more cynical about the extent to
which the IRS is actually looking at and matching the billions of
information reports it already gets. If taxpayers (or their accountants)
don't believe the IRS is looking at these reports, than issuing them won't
have much affect on those who might omit income.

When I reviewed the IRS' use of information reports--while I worked at the
Senate Finance Committee and, before that, the IRS Restructuring
Commission--it was stunning to find how many information reports sat
gathering dust in IRS closets. In addition, while in some areas the IRS does
make good use of information reports by matching them with taxpayers'
returns, often, due to staffing constraints and poor management of existing
resources, the IRS works only a small portion of the mismatches if finds.
Making use of the 1099 issued to corporations could be far more labor
intensive for the IRS than is matching 1099s issued to individuals. Congress
needs to take a sharp look at what the IRS is doing with the information it
already receives before considering new reporting burdens, particularly on
small business.

Business would have to verify Taxpayer Information Numbers (TINs) of
contractors and withhold taxes when they can't be verified. This is a
stunner. Let's go through the steps of this new proposal from Treasury,
which applies to all businesses. 1) Jane's Nursery, a small business, has to
determine whether or not a contractor--say the mulch supplier--was paid more
than $600. (Presumably Jane will not have to determine whether or not the
mulch supplier is a corporation because of the other changes in law
discussed above.) 

2) Jane next demands/receives the TIN of the mulch supplier. If Jane gets a
TIN and a name, then 3a) Jane (or more likely her accountant) contacts the
IRS to verify the contractor's TIN. 4a) The IRS discloses to Jane's
accountant whether the TIN and name match. 5a) If the TIN and name match,
Jane can make a payment for the mulch. 6a) Jane or her accountant issues a
1099 to the IRS.

Alternatively, if the small business can't get a valid TIN from the
contractor, then 3b) Jane now withholds payments at a flat-rate percentage.
4b) Jane's accountant has to establish an accounting for this withholding.
5b) Jane remits these funds to the IRS. Of course, if there is no TIN
provided, the IRS will not be able to associate the payment it receives with
the taxpayer. In addition, the mulch supplier, if he has trouble putting
aside money for his tax payments, can demand Jane set up withholding for
him.

Quite frankly, this burdensome TIN proposal must have been dreamed up by
someone whose only involvement and knowledge of small business comes from
buying their soy latte in the morning. I find it difficult to believe that
the burden on small business (not to mention the cost of the IRS to
administer) is justified by the roughly $80 million dollars per year that
Treasury optimistically claims this will raise in revenues. Congress needs
to sharpen its pencils and do its own cost-benefit analysis on this and all
the information proposals. Proposed start date for TIN verification: Jan. 1,
2010.

Penalties for lapses in information reporting would be increased. There will
almost certainly be penalties and interest payments for any errors Jane or
her accountant make in TIN verification. In fact, the new administration
proposes in the budget to significantly increase penalties for failures by
taxpayers to file an accurate information report--doubling current penalties
as well as more than tripling the maximum penalties per year.

More individual taxpayers would have to file information reports. On top of
all this TIN matching and additional information reporting, the new
administration proposes to expand who will be required to file information
reports--to include those who rent out a house, an apartment or two, or rent
their home for the summer. Currently, if you receive some rental income but
are not in the trade or business of rental real estate (say, you have a
separate day job in another industry and own just a few properties) then you
do not have to file 1099s. No more. For example, if the administration's
proposal becomes law, you, the landlord, will have to send in a 1099 to the
IRS when you pay that plumber $600 to fix the leak at the house you rent out
(and don't forget to verify the plumber's TIN or otherwise withhold!).

Local governments will have to report too. If misery loves company, small
business will be happy to know that the IRS will be authorized under the
administration's budget to require information reporting starting Jan. 1,
2010 on all non-wage payments by federal, state and local governments when
they purchase property (not real estate) or services. Why are governmental
entities not subject to the more onerous TIN verification? Who knows. As
California goes bankrupt, I presume they've budgeted for doing this
work--although it's doubtful the IRS would ever penalize a state, given its
historical reluctance to penalize a government entity for anything.

One last point on information reporting: A shadow over all this vast
expansion of information reporting is the fact that this depends on people
(many who will not be accountants) inputting all the information and data on
the 1099 correctly. There is a small circle of hell at the IRS that is
reserved for people who receive an incorrect 1099. I have been stunned to
hear stories from accountants about individuals who receive an incorrect
1099--sometimes issued maliciously (say, by a former spouse or business
partner) to get the taxpayer in trouble.

The IRS' policy on this shows how incredibly far the agency still has to go
to meet its goal of world-class service. The IRS states that it is the
individual's responsibility to get a corrected 1099--good luck accomplishing
that from an ex-spouse, angry former partner, etc.--and even an ordinary
snafu is extremely difficult to unwind. Congress should ask the IRS to show
how it is going to handle these problems befitting a world-class services
organization.

The new administration's proposals for information reporting add to an
ever-increasing burden that is being placed on small business during this
struggling economy. But if Congress does not hear from small business, it is
certainly possible they will pass. It's your choice: Write your
representatives a letter today or pay your accountant to fill out scores of
1099s tomorrow.

Dean Zerbe is national managing director of AlliantGroup and a former senior
tax counsel to Sen. Charles Grassley, R-Iowa