The Internal Revenue Service is increasingly concerned with what it calls the "tax gap." This term is applied to the difference between the income tax that is actually paid by taxpayers and the amount of tax that should be payable under the law.
Some of the perceived cause for the tax gap is claiming of deductions and credits that aren't allowed. However, the biggest IRS concern relates to under-reported income. Measures to close the tax gap are intended to relieve the unfair burden on law-abiding taxpayers and reduce the federal budget deficit. One potential avenue is an increasing of IRS enforcement actions. Another technique is making changes to rules imposed on payers to report their payments of income made to others. New IRS reporting requirements and enforcement efforts are both opportunities for taxpayers to obtain help for those with EA certification.
Current tax law requires that businesses paying more than $600 per year to an unincorporated non-employee must report the payment total annually to the IRS on Form 1099. A provision in the Patient Protection Act of 2010 is aimed at trimming tax avoidance by those receiving non-employee compensation. The new rule-effective for payments beginning in 2012-expands 1099 reporting requirements. The details of such new tax laws are covered in EA continuing education.
The new rule requires reporting to the IRS all payments of $600 per year to any entity other than tax-exempt organizations. Therefore, payments reported for years after 2011 include amounts paid to corporations. This is a controversial provision because of the paperwork burden imposed in businesses.
For example, a small business that does not pay more than $600 per year to any individual non-employee is presently not required to file annual 1099s.
The US Congress is considering amendments that repeal or amend this 1099 requirement before it is effective. However, no alternatives have been proposed that could replace the additional tax revenue that the measure is expected to generate. A possible compromise under consideration is exempting from the rule all companies with 25 or fewer employees. Another proposal is increasing the threshold from $600-which has been the effective amount since 1954. There has been no adjustment for inflation. In 1954 the personal exemption was also $600 and it had increased to $3,650 for 2009 as a consequence of cost-of-living adjustments.
Whatever the final regulations, changes to 1099 reporting are coming. Many small businesses will call upon tax experts for help. They can locate enrolled agents by referring to members of the National Association of Enrolled Agents. Individuals having met EA certification requirements are especially qualified to provide the assistance relating to the rule changes. Annual NAEA CPE exceeds the IRS education requirements.