Sea of Paper...Continued

Many smaller businesses may issue 2 – 5 1099s per year. Most smaller businesses don’t issue any 1099s. These businesses aren’t in the habit of collecting and don’t have the data management systems in place to keep track of the information that they are going need in order to comply with the new 1099 reporting requirement for 2013. The immediate impact of this law is that businesses that previously didn’t issue any 1099s will go from issuing zero to issuing dozens or more every year.


I’ve heard several people say that the Service won’t have the capacity to audit/keep track of this and so it won’t be a big issue. I disagree vehemently.

First, whether or not the Service has the capacity to track this is irrelevant. It (until it is changed) will be the law and everybody will need to be in compliance. That it might not be discovered that you are out of compliance is not a good reason to purposefully ignore the law. The penalty for being out of compliance will likely be very steep. So, being caught will likely create an immediate hardship for the business.

Second, the service has more information on a given business or individual than most are aware of. In fact, should the service choose / be allowed to it has enough information to calculate many individual tax liabilities without receiving a tax return. The only thing preventing it from having this much available information for business returns is the expense reporting. Well guess what? That information gap is being closed with this new reporting requirement.

Imagine a system where the Service compares the expenses reported on 1099s by a business to the amount of expenses reported on the business’s tax return and starts a detailed examination of any business that falls outside of standard reporting tolerances as established by the Service. They already do that for many individual reporting items and the Service is continually increasing the capacity of its systems. So this is not at all out of the realm of possibility.

Will you, your business, or your clients be prepared?