Coalition for Fairness in Tax Compliance (CFTC) Tax Gap Proposals EXPANDED INFORMATION REPORTING: Requiring information reporting on payments to corporations PROPOSAL: A business would be required to file an information return for payments aggregating to $600 or more in a calendar year to a corporation. The proposal would be effective for payments made to corporations on or after January 1, 2008.1 BACKGROUND: Currently, service recipients are only required to send 1099-MISC to noncorporation service providers. Businesses tend to receive services from an average of 5 service providers (phone, computer, cleaning, postal arrangements, and advertisements). For each non-corporation service provider, the service recipient is required to issue two 1099-MISC forms – one to the IRS and one to the service provider. If this legislation goes into effect and corporations are no longer exempt from information reporting, the small business will have to issue 2 more 1099-MISC forms for every service other provider that is classified as a corporation. Table A depicts an example of a side-by-side of the paperwork burden of the current law vs. the new proposal. TABLE A Current Law Proposal (1099-MISC (1099-MISC Requirement) Requirement) 0 2 0 2 2 2
Service Providers Phone Service (Corporation) Computer Service (Corporation) Cleaning Service (NonCorporation) Postal Service (Corporation) Advertisements (Corporation) Total Service Providers: 4 Corporations 1 NonCorporations
0 0
2 2
2 Total Forms are Required
10 Total Forms are Required
This proposal substantially increases compliance burdens on honest small-businesses. Increased paperwork and administrative burden for every additional 1099-MISC form prepared. Increased costs incurred for mailing any additional 1099-MISC forms and for hiring outside help to ensure that the business complies with the law. Seeks to capture non-compliant corporations, but places the burden on the wrong taxpayer (the compliant smallbusiness). The IRS does not have the matching capabilities to handle the massive volume of paperwork resulting from this proposal. Many corporations file taxes on a fiscal year that is different than the calendar year in which 1099-MISC forms are filed which could result in substantial errors in IRS attempts to accurately match information. There is no current data to back this proposal as a strong solution to closing the tax gap. Current data is not available to portray an accurate picture of underreporting of corporations. The 2001 National Research Program data from the IRS only focused on the individual taxpayer. The data for corporations is much older. Data does not prove whether the business-to-business transactions are the problem. Data does not prove if underreporting is more prominent in payments over or under $600. Data does not breakdown the underreporting of income by cash or credit card transactions. Without better data to craft targeted solutions to close the tax gap, we should be very careful to avoid enacting proposals that would unduly harm and burden compliant taxpayers.
1
General Explanations of the Administration’s Fiscal Year 2008 Revenue Proposals: Department of the Treasury, February 2007, (pg. 63).