FedUpUSA

Archive for the ‘IRS’ Category

Here’s something the government could do right now, it would have little or no cost, and it would be a major contributor to capital formation among small businesses.

Permit all cash-accounting businesses — which are those that (1) elect it, and (2) meet IRS requirements (the most-important of which is the gross receipts test — under $5m in annual gross) to immediately expense all cash-funded capital goods purchases on a permanent basis.

There was an “immediate expense” provisions in the Obama “recovery” act, but temporary moves like this simply pull forward purchases from one time period to another.

As envisioned I would prevent the use of debt to finance these deductible expenses; a better change would be to prohibit the deductibility of interest entirely (thereby removing the preference for debt over equity) but in the short term that’s going to be much harder to get through Congress than the above would be.

Detractors of this change will claim that it will decrease tax revenue from small businesses.  They’re wrong. If I take the deduction against top-line in the year of acquisition I have no depreciation deduction to take in the following years and am thus exposed to taxation on the full value of everything made with that or as a consequence of the capital good in the future.  This change would also simplify tax accounting for small business.

In this world of technology there are many items that businesses acquire that have useful service lifetimes far shorter than the IRS mandates for depreciated property.  When I ran MCSNet we used to run into this all the time — modem banks, for example, or desktop computers on customer agent desks, had service lifetimes that were typically two years or so in actual use (due to obsolescence) and were worth effectively nothing after that two years but IRS depreciation schedules mandated much longer claimed “service lifetimes.”  This effectively caused us to pay taxes unjustly on forward use that never materialized, as we were unable to match the duration of the item’s useful lifetime to its expensing on the balance sheet.

This becomes less of a problem as a business moves to accrual accounting for a whole host of reasons, but for cash-accounting small businesses it is a major issue.  Since accrual accounting records income and expenses when they’re incurred (as opposed to when they’re received) this mismatch tends to have less of an impact on those firms.

This change would lead small businesses to use retained earnings for capital expenditures to grow the company.  It would likely expand government revenue since the capital purchase would be made for the purpose of growing the business and that higher income in future years would not have the deduction of depreciation available to offset it.  This would in turn tend to create a virtuous cycle where growth would again be reinvested into capital goods to further expand.

Restricting this change to cash-based businesses would fuel the engine of our economy — small business and entrepreneurship.  Being a permanent change it would be one that small businesspeople and those thinking of starting a small business could count on into the future and thus write their business plans around; stability is critical when it comes to tax policy and its impact on business in general.

Let’s make a change that will actually make a difference.  While I advocate for much more serious change to the tax system in America this is one that is modest, targeted at the engine of job growth and yet inflicts no direct reduction on Treasury revenue.

The Internal Revenue Service allowed undocumented workers to collect $4.2 billion in refundable tax credits last year, a new audit says, almost quadruple the sum five years ago.

Although undocumented workers are not eligible for federal benefits, the report released Thursday by the Treasury Inspector General for Tax Administration concludes that federal law is ambiguous on whether these workers qualify for a tax break based on earned income called the additional child tax credit.

Taxpayers can claim this credit to reduce what they owe in taxes, often getting refunds from the government. The vagueness of federal law may have contributed to the $4.2 billion in credits, the report said.

The IRS said it lacks the authority to disallow the claims.

Wage earners who do not have Social Security numbers and are not authorized to work in the United States can use what the IRS calls individual taxpayer identification numbers. Often these result in fraudulent claims on tax returns, auditors found.

Their data showed that 72 percent of returns filed with taxpayer identification numbers claimed the child tax credit.

The audit recommended that the IRS seek clarification on the law and check the immigration status of filers with taxpayer indentificaion numbers.

IRS officials, in response to a draft of the report, agreed to consult with the Treasury Department on the law. But they said they have no legal authority to demand that filers prove their legal status when the tax agency processes returns.

Changes to tax law are partly to blame for the explosion in refunds for additional child tax credits in recent years, auditors found. Before 2001, filers needed to have three or more children to qualify — and to owe more Social Security taxes than earned income credits.

But those requirements have been eliminated and the allowable refund for each child doubled. The American Recovery and Reinvestment Act of 2009 also made the refund easier to get, auditors found.

Lisa Rein for Washington Post Blog

Let’s talk taxes.

Everyone says we need fundamental tax reform.

Ok.

I prefer The Fair Tax, but recognize that many others do not.

But what if we don’t want to do The Fair Tax?

Let’s look at a clean, progressive and simple tax instead.

We’ll use two basic metrics – the first is that the median household income is approximately $50,000.  The second is that the gross PCE (personal consumption expenditures) is, as of the present time, approximately $10,656 billion (that is, $10.7 trillion) and residential investment (that is, personal spend on residences) is approximately $330 billion, for a total of $11 trillion (out of our $15 trillion GDP.)

Therefore, let’s presume the following:

• Three tax brackets: 10%, 20% and 30%.
• NO deductions of any sort, and no “zero” bracket.  Everyone pays from dollar one.
• NO other federal income taxes.  That is, payroll taxes are subsumed in these rates.  We quit pretending that FICA and Medicare are some sort of “lockbox” when in fact we know damn well they’re not.  FUTA and other “parasitic” federal taxes on employers and persons are also eliminated.
• Long-term capital gains are only personal and at-risk investments held for three years, excluding carried interest or other “combined-risk management activities”.  These qualified capital gains are taxed at 50% of your marginal rate and accreates after ordinary income.  In other words, if your cash income puts you into the 30% bracket, all of your long-term capital gains are taxed at 15%.  All other income is taxed as ordinary income including carried interest.

Now let’s look at the BEA’s personal income tables.  They disclose that we have $8.23 trillion in employee salaries, $1.60 trillion in supplements (that is, the current payroll taxes), $1.11 trillion in proprietor’s income, $397 billion in rental income and $2.345 trillion in transfer receipts (payments from government social insuance payments – all of which are taxable since we exempt nothing.)

This totals $13.68 trillion in money and transfer receipts.  The remainder ($1.8 trillion) is receipts on assets – that is, capital gains.  I’ll presume that half of that would qualify for long-term treatment (which is probably way, way too high – today – but won’t be in the future with these changes.)

Unfortunately Census and the BEA only has quintiles through 2009.  It is what it is, but we’ll use what we can get.

We count 121 million approximate household units according to Census.  Unfortunately Census only accounts for money income – they claim (as of 2009) $7.596 trillion in total!  That’s crap, so let’s fix it – we’ll bump all categories by 64% (to account for the difference as of 2009 BEA GDP tables), since we’re taxing all income with no deductions of any sort (including Social Security and similar transfer payments.)

We will break the tax percentages as follows:

• First and second quintile (through $35,598) are taxed at the first rate (10%)
• Third and fourth quintile (through $93,784) are taxed at the second rate (20%)
• The top quintile pays 30%.

All are marginal rates and quintile breakpoints will be adjusted annually.

Note that since all other federal payroll and similar taxes are eliminated those in the first two quintiles pay less than what they pay today in payroll taxes alone, but there are no refundable credits.  That is, everyone pays something, most-specifically for those social programs everyone thinks they’re “entitled” to.  In addition, the progressive nature of the tax code is retained and for most people through the bottom three quintiles they will pay less.  The exception is those who are getting a “free ride” from refundable credits – they will pay something, but only to the extent that their “free ride” ends, and in fact their burden will not exceed that which would be paid only in payroll taxes alone.

So the first bracket earns $238 billion and the second $657 billion, for a combined $895 billion (adjusted $1,467 billion).  They will pay $147 billion in income tax.

The second bracket earns $2,887 billion (adjusted $4,735 billion).  There are 48,376 such households; on the first $1.722 trillion they will pay $172 billion in income tax, and on the remainder ($3,013 billion) they will pay $603 billion, for a total of $775 billion.

The third bracket makes a lot of money.  There are 24,196 such households.  They earn on average $157,631, for a total $3,808 billion (adjusted $6,244 billion).  On the first $861 billion they will pay $86 billion in tax, on the next $58,186 in income (or $1.41 trillion) they will pay $282 billion in tax and on the remainder ($3,973 trillion) they will pay $1,192 billion in tax, for a total of $1,560 billion.  That’s a shitload of tax; on a per-household basis they pay four times the “middle income” people’s burden and ten times the bottom two quintile’s burden.  If this isn’t progressive enough for you then you need to replace your brain with one that actually works.

Oh yeah, this totals $2,482 billion in taxes on incomes.

If we assume that most of the $1.8 trillion in returns on assets goes to the top marginal rate, and half is accountable as long-term capital gain, then we have ($900 billion * 15%) + ($900 billion * 30%) = $135 + $300 billion, or another $435 billion.

We thus have $2.917 trillion in tax revenue.

Oh, this understates the revenue, since according to BEA the numbers are somewhat better than this today, but we’re using 2009 figures.  If you want to be entirely accurate you can add about 10-15% to those numbers, but I like being conservative and recognize that we have an economic adjustment to take – so I won’t.

There are no taxes on corporations under this flat tax and no deductions of any sort.  Your tax return fits on one sheet of paper, except for stock trades and such where you must show basis and acquisition date.  The Internal Revenue Code fits within a dozen pages of legislative-laid-out text.

The Federal budget, as of 2005, was supportable in full at this level of revenue complete with our current interest payment requirements and a a hundred billion or so of actual debt retirement.  Since the goal is to actually retire debt we will drop spending to 2003 federal spending levels, which totaled $2.160 trillion, effective this September.

As the debt is retired (it will take 20 years) we can advance spending by the amount of the interest on the retired debt.  You now fix Health Care using the formula I’ve previously put forward, and index Social Security over five years to the actuarial improvement in life from the inception date of Social Security to today.

Problem solved.

You want a monster economic recovery?

ENACT THIS WASHINGTON OR SHUT THE FUCK UP AS FAILURE TO BOTH FIX REVENUE AND SPENDING ON THIS MODEL MAKES CLEAR YOU HAVE NO INTENTION OF ACTUALLY FIXING ANYTHING.

As established readers know, we’ve been writing since mid 2010 about the widespread, possibly pervasive, failure of mortgage securitization originators to convey the notes (the borrower IOU) to securitization trusts as stipulated in the deal documents, well before the robo signing scandal broke. This abuse matters because the transaction procedures were designed carefully to satisfy certain legal requirements, among them rules contained in the 1986 Tax Reform Act regarding REMICs, or real estate mortgage investment conduits, which required that the securitization trust receive all its assets by 90 days after closing and that all assets conveyed to the trust have to be “performing”, as in not in default. Failure to comply with the rules is a prohibited act and subject to taxation at a rate of 100%, and additional penalties may apply.

Now, with the Federal government under enormous budget pressure, shouldn’t the authorities be keen to go after tax cheats? The headline of a Reuters article, “IRS weighs tax penalties on mortgage securities,” would suggest so. But don’t get your hopes up. The lesson is don’t jump to conclusions when big finance is involved.

An overview from the article:

Should the IRS find reason to take tough action, the financial impact could be enormous. REMIC investments are held by pension funds, in individual retirement plans such as 401(k)s and by state and local government entities.

As of the end of 2010, investments in REMICs totaled more than $3 trillion, according to data supplied by the Securities Industry and Financial Markets Association.

In a brief statement in response to questions from Reuters, the agency said: “The IRS is aware of questions in the market regarding REMICs and proper ownership of the underlying mortgages as set out in federal tax law, and is actively reviewing certain aspects of this issue.”

This matter was raised early last year by an attorney I know with IRS, to a senior officer, not in enforcement but familiar with REMIC rules. She immediately understood the importance and nature of the violations being alleged and was keen to proceed. Having had no follow up, the attorney rang again, and the IRS officer took the call, this time reluctantly. She indicated she was not supposed to be taking to him. She said the issue had gone to the White House, where word came back that the IRS was not going to be used as a tool of policy.

So demanding that tax law violators pay what they owe is somehow seen as an misuse of government authority? That appears to be the message.

Knowing of this background, in the blogger meeting with Treasury last August, when someone we will euphemistically call as senior official argued that the Treasury had little power over servicers, I objected, and said it depended on whether they construed of their power narrowly or broadly. I pointed out that a Pacer scrape on foreclosure filings would find thousands of violations of REMIC rules that were subject to punitive charges, and that that was an important leverage point to bring the industry to heel. (Yes, this is an example of using tax as a tool of policy, as opposed to merely enforcing the rules……that was by design). He sidestepped the reference to REMIC both in my initial question and follow up.

Steve Waldman, who was also at the session, was as skeptical of the exchange as I was. From a message last August:

Re REMICs: The reaction to your probing was very suspicious.

It’d have been one thing if he’d said they hadn’t looked into the issue. But that wasn’t how he responded. He started talking about how he’d had his staff “look for leverage”, against servicers I think, but found there was nothing there. In other words, he didn’t want to leave the issue open. He wanted to neutralize it.

One possibility is that the truth is face value, but I doubt it. After all, we’d just had staffers describe using the government’s leverage in creative ways to protect taxpayers or serve other public purposes as “extra legal”. Yet here was [the senior official] apparently on a fishing expedition for leverage, no doubt desperate to persuade servicers to facililitate mods to help homeowners. Yeah. Right.

If I’m not misunderstanding you, your core point is that the paperwork on many boomtown mortgages is invalid, and therefore various sorts of transactions, from foreclosures to bundling into REMICs, cannot be legally done, at least not without a lot of expensive research and recertification. In other words, your line of thinking would put a question mark beneath the value of a whole lot of bank assets. That would obviously not be in the national interest according to Treasury. So of course they’ve already looked onto the story and there’s nothing to it.

As Waldman indicates, there is a blindingly obvious reason why the IRS inquiry is a coverup. If the IRS were to find any of the questionable practices to be violations, they’d lead to widespread and large assessments against mortgage investors. That in turn would spawn the mother of all litigations by investors against the originators and trustees. That would blow up the mortgage industrial complex and put us back in a financial crisis. That is the last thing the officialdom wants to happen.

Now in fact there are ways the IRS can make this problem go away. The article quotes Jim Peaslee, who is one of the top experts on REMICS and was i one of the major influences on the original REMIC regulation. Note how he avoids discussing whether there might be violations; his point is the IRS will take a “see no evil” stance:

James Peaslee, a partner at law firm Cleary Gottlieb who is an expert on taxation of securitized investments, said that even if the IRS finds wrongdoing, it might be loath to act because of the wide financial damage the penalties would cause. He notes that the REMIC investors, who he called “innocent parties,” would have to pay rather than the banks that were responsible for any wrongdoing in transferring mortgage ownership.

I had a few above-my-pay grade e-mail discussions with one of Peaslee’s colleagues, another REMIC expert, last year, and the issues are vastly more complex than mere mortals would appreciate. For instance (and this is one of the simple examples), arguably, if the securitization vehicle wasn’t really created with the assets it claimed, so arguably, at least technically speaking, it was disqualified from the outset. However, legal structures and issues don’t map cleanly on to tax issues. We’ve argued that if the notes were not properly conveyed to the trusts (assuming they are New York trusts, which is the governing law in the vast majority of cases) then the trusts will have a big problem with foreclosing, since New York trusts don’t have any discretion and there is no mechanism for getting the notes into the trust other than shortly after it was formed.

But that particular concern isn’t germane from a tax perspective. State law doesn’t determine characterization of an entity for federal tax purposes. So, for example, even if a taxpayer said he a partnership and planned to set up a state law LLC as the partnership vehicle but failed to take all the legal steps, but did have a contract with a partner, and both has acted according to the partnership tax rules and reported income them on their tax returns accordingly, it would most likely still be treated as a partnership in spite of the lack of a state law legal vehicle.

The net result, as the expert indicated, is “that the rules about REMIC (or other securitization) qualification become very bendable” which in turn gives the IRS a great deal of latitude in what it can deem to be acceptable. He felt that was a bad posture to take, since that would give the servicers considerable leeway to manipulate tax liabilities directly.

The Reuters article points out the more obvious concern: foregone revenues by letting tax violations go unpunished:

Adam Levitin, a Georgetown University Law School professor and expert on taxation, said that if the IRS fails to act, “it would be a backdoor bailout of the financial system.”

If the IRS did impose penalties, the REMICs could turn around and sue the banks for causing the problems and not living up to the terms of the agreements establishing each REMIC, thus transferring the costs to the banks. If the IRS finds wrongdoing but fails to act, the IRS would forego “potentially enormous tax revenue that would be passed on to the federal government,” Levitin said. “Given the federal budget deficit that’s not something to sniff at,” he added.

So why is the IRS looking into this issue at all? Wouldn’t one expect them to let sleeping dogs lie? I can think of reasons. First, the issue has gotten enough profile that the IRS (really Treasury) may feel it’s better to go into “put the matter behind us” mode. Second is that it isn’t just the Federal government who would be able to charge taxes against RMBS if they found they had violated the rules, but also states. It’s not hard to imagine that some states have realized that going after the RMBS could be a significant source of badly-needed income. The IRS may thus feel it needs to get in front of this potential source of that investor bugaboo “uncertainty” as well as discourage state action. Mind you, state rules necessarily track the Federal REMIC rules precisely, nor are they required to interpret them the same way, but an IRS “nothing to see here” finding would deter action by all but the most bloodyminded state treasuries).

So we have yet again another example of two tier justice in America. Do you think the IRS would cut you any slack if you had engaged in as many violations of the tax rules as mortgage originators and trusts have? But the point of having a kleptocracy is to avoid inconveniencing the people with money at all costs.

Yves Smith – Naked Capitalism

You and I live in a totally different world than the ultra-rich and the international banking elite do.  Many of them live in a world where they simply do not pay income taxes.  Today, it is estimated that a third of all the wealth in the world is held in offshore banks.  So why is so much of the wealth of the globe located in places such as Monaco, the Cayman Islands, Bermuda, the Bahamas, and the Isle of Man?  It isn’t because those are fun places to visit.  It is to avoid taxes.  The super wealthy and the international banking elite think that it is really funny that our paychecks are constantly being drained by federal taxes, state taxes and Social Security taxes while they literally pay nothing at all.  These incredibly rich elitists make a ton of money doing business in wealthy western nations and then they transfer virtually all of their profits offshore where they don’t have to contribute any of it in taxes.  It works out really great for them, but it sucks for the rest of us.

It is estimated that approximately $1.4 trillion is held in offshore banks in the Cayman Islands alone. According to an article in Forbes magazine, there is a total of approximately 15 trillion to 20 trillion dollars in offshore bank accounts, brokerage accounts and hedge fund portfolios.

A recent article in the Guardian stated that a third of all the wealth on the entire globe is held in offshore banks and that the vast majority of international banking transactions take place in these tax havens….

On a conservative estimate, a third of the world’s wealth is held offshore, with 80% of international banking transactions taking place there. More than half the capital in the world’s stock exchanges is “parked” offshore at some point.

All of the biggest banks in the world are involved in playing this game.  All of them have big branches in these various tax havens.  All of them work very hard to ensure that the tax burdens on their ultra-rich clients are as light as possible.

Nobody knows for sure how much money big governments around the globe are missing out on from all this tax avoidance, but everyone agrees the number is huge.  It is at least in the hundreds of billions of dollars every single year.

It is a shadow banking system that most Americans don’t know anything about. Most Americans don’t have the resources to be able to set up shell companies in half a dozen different countries so that they can “filter” their profits.  Most Americans don’t know a thing about complicated tax avoidance plans that tax lawyers use such as the “Double Irish” and the “Dutch Sandwich”.  Most Americans would have no idea how to eventually have most of the money that they make end up in Bermuda so that it can avoid taxes.

No, most Americans just go to work every week and have their hard earned paychecks raped by an oppressive taxation system.

To the ultra-wealthy and the international banking system we are all just a bunch of suckers.  In fact, a big portion of our taxes ends up going into their pockets to pay the interest on all of the government debt that they are holding.

When the global elite decide that they want to do some “social engineering” inside the big countries where they operate, they just set up tax-free “charitable trusts” that usually aren’t very “charity-oriented” at all.  Rather, many of these “charitable trusts” push the various radical political and social agendas that many of these elitists love to promote.

Examples of this include The Rockefeller Foundation and The Ford Foundation.  George Soros also loves to use entities like these to push his various agendas.

The wealthy know how to play the game.  For most of the rest of us, the game kicks our behinds.

So for those who are constantly screaming “tax the rich”, the cold, hard truth of the matter is that those who are truly ultra-rich know how to escape just about any oppressive tax regime you may set up.  They are light years ahead of the rest of us in knowing how to play the game.

What are you going to do?

Kick them out of the country?

Yeah, they will be really sad to spend even more time down in Bermuda or in the Cayman Islands.

Are you going to kick out any company that has any stock holders that have offshore bank accounts?

Well, you would have to kick out virtually every single major corporation in the United States.

This is just another example of how deeply flawed our system of income taxation really is.

Do you want to become a master of the tax code?

You might want to set aside some time for reading.

A lot of time.

The income tax code and its associated regulations contain well over 7 million words and are more than seven times longer than the Bible.

The IRS employs more than 90,000 people and it costs more than 11 billion dollars a year to operate.

Talk about a colossal waste of resources.

Meanwhile, the ultra-rich are just parking all of their money in Bermuda and the Caymans and are laughing at all the rest of us.

It would be hard to understate just how much influence and power all of this offshore money has.  The ultra-wealthy and the elite international bankers own many of our largest corporations, they exert influence over central banks, they control big media outlets and they “contribute money” (bribes) to political campaigns.

The elite are always two steps ahead of any new laws that get passed.  They are masters at moving money around.  They will quickly find a half dozen ways around any new law that you could possibly dream up.

Most of us never even get to meet any of these incredibly wealthy individuals.  They don’t attend the local church or go shopping down at the local shopping mall.

No, the global elite generally live in very exclusive gated estates or hang out at the most expensive private resorts.  They don’t spend a lot of time mixing with the rabble.

It turns out that life is pretty good when you have a ton of money coming in and you pay next to nothing in taxes.

So the next time you get your paycheck and you see that a half a dozen things have been taken out of it, take a few moments to think of the global elite that don’t pay any taxes at all and see how that makes you feel.

Hopefully when enough Americans get mad enough and start demanding change, the current income tax system will be scrapped for good and something much more equitable will be put in place instead.

The Economic Collapse

Stealth IRS Changes Mean Millions of New Tax Forms

By Neil deMause

NEW YORK (CNNMoney.com) — The massive expansion of requirements for businesses to file 1099 tax forms that was hidden in the 2,409-page health reform bill took many by surprise when it came to light last month. But it’s just one piece of a years-long legislative stealth campaign to create ways for the federal government to track down unreported income.

The result: A blizzard of new tax forms that the Internal Revenue Service will begin rolling out next year.

“It was actually something that we were following back under the Bush administration under the 2008 budget — we started to see these kinds of rumblings about the ‘tax gap’ and whether or not businesses were paying their fair share,” says Tom Henschke, president of the Pennsylvania-based SMC Business Councils, which was one of the first organizations to call attention to the health care amendment when it was introduced last fall. “So two administrations can claim credit for this.”

The first tax-reporting expansion was buried in a different bill, the Housing Assistance Tax Act introduced by House Speaker Nancy Pelosi and signed into law by President George W. Bush in July 2008. Best known for its first-time homebuyers’ credit, the bill also created a new addition to the family of 1099 tax forms: the 1099-K.

The 1099 is a catch-all series of IRS documents used to report non-wage income from a variety of sources like contract work, dividends, earned interest and pension distributions. The new 1099-K aims to shine a light on a currently hard-to-track payment stream: credit cards. Starting in 2011, financial firms that process credit or debit card payments will be required to send their clients, and the IRS, an annual form documenting the year’s transactions.

The rule comes with a floor to weed out the most casual retailers: The 1099-K is only required when a merchant has at least 200 payment transactions a year totaling more than $20,000. But it applies to all payment processors, including Paypal, Amazon.com, and others that service very small businesses.

The goal of the new regulations is to catch income that is going unreported to the IRS. The federal government loses an estimated $300 billion each year from the “tax gap” between what individuals and businesses owe and what they actually pay.

“Better information reporting helps the tax system work better by ensuring that everyone pays what they owe,” IRS Commissioner Doug Shulman explained last year as his agency unveiled the 1099-K. “The new law gives us an important new tool for closing the tax gap and also provides business taxpayers better documentation to compute and report their income and expenses.”

For companies that currently report all their credit card and Paypal sales to the IRS, the 1099-K requirement will have little impact. All the paperwork will be done by the bank or payment processing service, and business owners will simply receive a form at the end of the year listing their total receipts.

The 1099 changes attached to the health care reform bill are another kettle of fish. These massively expand the requirements for filing the “1099-Misc” form, which companies use for recording payments to freelance workers and other individual service providers. Until now, payments to corporations have been exempt from 1099 rules, as have payments for the purchase of goods.

Starting in 2012, that changes. All business payments or purchases that exceed $600 in a calendar year will need to be accompanied by a 1099 filing. That means obtaining the taxpayer ID number of the individual or corporation you’re making the payment to — even if it’s a giant retailer like Staples or Best Buy — at the time of the transaction, or else facing IRS penalties.

In essence, the 1099-Misc is having its role changed from a form for tracking off-payroll employment to one that must accompany virtually any sizeable business transaction.

“Just with business travel it would include hotels, rental cars,” Henschke says. “Phone service: 1099. Computer service: 1099. Whoever does your postage meter: 1099. You do a little advertising, Yellow Pages: 1099. Your landlord: 1099. You might as well just keep them in your pocket and hand them out as you go around every day.”

How did this sweeping provision end up hidden in the health reform bill? No one is willing to take credit for introducing the new legislation, which appeared in the Senate Finance Committee’s version of the health bill last fall. Committee chairs Don Baucus, D-Mont., and Chuck Grassley, R-Iowa, both referred calls to committee staffers, who wouldn’t comment on the record.

But the provision appears to be a long-in-the-works change that was just waiting for the right moment to be attached to legislation.

Back in 2007, the Senate Finance Committee asked the government’s General Accountability Office to conduct a tax-gap study. The resulting report estimated that establishing additional 1099 paper trails for income could provide up to $345 billion annually in new federal tax revenues.

Enter the health reform bill. Last fall, as the debate raged over its projected cost, Congressional supporters of the bill began a desperate search for “revenue enhancers” to bring the net cost down — and eliminating the 1099 exceptions for corporations and goods was seen as an easy way to bring in more cash without raising tax rates.

House and Senate staffers “essentially have a cupboard full of convenient revenue raisers that they can put into bills when they need it,” notes Chris Edwards, director of tax policy studies for the libertarian Cato Institute. In the case of the 1099 changes, he says, “this was sitting around, the IRS wanted it and had testified in favor of it, and they needed a revenue raiser. This was just a convenient thing.”

Still, the form the new law took was surprising — especially the requirement that businesses file 1099s when they purchase goods, which hardly anyone saw coming.

Henschke’s group had previously surveyed its members and learned that they average 10 filings a year of 1099 forms, each of which takes about half an hour to prepare. That’s in line with the GAO report, which found that a typical small business spent between three and five hours per year filing 1099s.

But SMC’s survey found that extending 1099s just to services purchased from corporations would push that number to at least 200 filings per year for a typical small business — adding an estimated $6,000 to the cost of preparing the average tax return. And that’s without even accounting for the requirement that 1099s be filed for purchases of goods, a provision that Henschke’s group didn’t see coming when it conducted its survey last year.

“These folks are doing their paperwork in the evenings and on the weekends already,” he says. “This certainly adds to the burden substantially.”

The IRS has a draft version of the 1099-K form available now for public feedback, and will begin requiring the form’s use next year. The additional 1099 requirements take effect in 2012. The agency is in the process of drafting its guidance on them.