Landlords Get Caught in 1099 Dragnet

In my previous blog post, “Prepare for 900% Increase in 1099 Workload,” I estimated that the expanded requirements for filing a 1099 (on everything over $600 in value) could increase tax compliance as high as the estimated increase in revenue of $17 billion.  So the economy would suffer a net loss of $34 billion ($17 billion in new tax revenue and $17 billion in higher tax compliance costs).

Now Commerce Clearing House is reporting that the 1099 dragnet is widening and up next are landlords:

Congress in 2010 expanded the information return reporting requirements contained in Code Sec. 6041. Generally, Code Sec. 6041 requires payments of $600 or more to a single recipient in the course of a trade or business to be reported by the payor to the IRS and the payee, usually on Form 1099-MISC. There are exceptions to the general reporting requirements but these exceptions begin to disappear in 2011.

One of these disappearing exceptions to the reporting requirements involves landlords. The Small Business Jobs Act of 2010 (2010 Jobs Act) (P.L. 111-240) amended the definition of trade or business to include renting real property. Before 2011, most landlords were not subject to the reporting requirements because renting real property was not considered to be a trade or business. Under the new version of Code Sec. 6041, real property rental is now considered a trade or business but only for purposes of the reporting requirements.

Of course, as with many government regulations, there will also be unintended consequences.  In this case, the 1099 requirements could make landlords vulnerable to identity theft:

Since landlords have not, until now, been “engaged in a trade or business,” the reporting requirements create a problem. According to the instructions for Form 1099, sole proprietors and others, like landlords, who are not otherwise required to have an employer identification number (EIN) should use their Social Security number (SSN) for reporting purposes. Moreover, the instructions state that the filer’s name and TIN should be consisted with the name and TIN used on the filer’s other returns. This opens up the opportunity for identity theft.

So I wonder whose going to be scooped up next in the  1099 dragnet as more of these exceptions disappear?

Taxes Matter I: Tax Planning

Following on my previous post Marginal Income Tax Rates Matter, I’ve decided to create another running series here at Wealth Alchemy called Taxes Matter.  Whenever I come across evidence that taxes do in fact affect economic behavior/performance, such as journal articles, news clips, my own research, etc., then I will post under the Taxes Matter banner.

To kick off the series I want to look at an entire industry that exists because, in fact, taxes matter–the tax planning industry.  This article showed up recently in my inbox from Commerce Clearing House (CCH) titled The Impact of Current and Proposed Tax Law Changes on Top Marginal Rates and Related Choice of Entity Considerations published in the Journal of Passthrough Entities.

Whoa, wait a minute, first I was surprised that there is actually a publication called the Journal of Passthrough Entities.  But wait, there’s more.  It costs $355 a year to subscribe to the bi-monthly journal which works out to nearly $60 an issue.

Now, the whole point of passthrough entities is to shave a few trivial percentage points off of one’s marginal tax rates by arbitraging the differences in the marginal rate between different types of business income.  So, if there wasn’t any demand for services from folks willing to change the entire structure of their business to save a few percentage points on their marginal tax rate then surely this snoozer of journal would not exist.  Yes, no?

In the end, the simple fact that a multi-billion dollar tax planning industry even exists is real, market-based proof that taxes matter.  Why do some folks choose to ignore the obvious?

For instance, I still find it ironic that Barry Ritholtz, the one who doesn’t believe folks respond to marginal income tax rates, recently had a post on his blog trashing Google for their tax-minimization strategies.  If taxes don’t matter, why would Google bother paying millions to the bozos that think this stuff up . . . hhhhmmmm?  Must be a case of double-think.

Prepare for 900% Increase in 1099 Workload

I received an email from Commerce Clearing House (CCH), a major tax information firm for tax professionals, with this shocking headline–“Prepare for 900% in 1099 Workload.” What does this mean?  According to CCH:

Today most corporations are required to perform 1099 reporting for less than 10 percent of their supplier population, according to industry estimates. That will jump to an estimated 90 percent under new tax legislation that takes effect in 2012. Legislation could make corporations do nine times as much 1099 reporting.

Under the law, businesses will be required to report purchases of items like office equipment, food and bottled water, gasoline, lumber and plumbing supplies if payments to any vendor in the course of a year aggregate to at least $600. In many cases, companies will also have to report payments for things like travel, telephone and Internet service.

And why are they doing this to businesses? Shockingly, its all about the money.

The new reporting requirement, included in the Patient Protection and Affordable Care Act, aims to close an estimated $300 billion tax gap between what individuals and businesses owe compared to what they actually pay. Congress expects the 1099 measure to raise $17 billion in taxes and fees, offsetting part of the cost of health care reform.

OK, I’m having a really hard time justifying this draconian change in the tax laws to raise a measly $17 billion.  Folks in D.C. call such amounts “Fairy Dust.”  The article does not state which type of 1099 they are referring to, but my guess is that it is the 1099-MISC.  According to this document (pdf) from the IRS’s Statistics of Income Division, there were 85,524,982 1099-MISC forms filed in 2009.  Multiply that by nine times you get 769,724,838 forms.

Now, how much do you guess it costs to fill out the form, make copies, send one to the vendor and file one for your records?  I have no idea, but lets conservatively use a nice round number of $10.  That means the costs of compliance with this draconian measure will come to $7.7 billion–nearly 50 percent of the expected revenue increase!  Assume $20 and the tax compliance costs would nearly equal the expected revenue!

If you think that’s bad, let’s hope they don’t expand the requirements for filing a 1099-B (Proceeds for Broker and Barter Exchange Transactions) which had over 800 million filings in 2009.  Do the math on that one.

But wait there’s more.  It seems there is one loophole around this draconian measure:

So far, the IRS has said only that companies who pay bills with credit or debit cards will dodge the 1099 bullet, because the reporting burden will fall on the credit card companies, Roth says. But using credit cards in an attempt to avoid additional reporting burdens is not a good solution. Many vendors or suppliers may not want to allow it because of the extra cost to them of 2 to 3 percent per transaction, and some purchases will exceed the dollar limit for company credit cards.

Say what?!  So even avoiding the cost of filing the 1099 is going to cost businesses 2 to 3 percent per transactions and, if they hold a balance, interest.  Whoever thought of this idea needs to be taken behind the woodshed . . . better yet, make them file the first couple of million 1099s as community-service.

Isn’t already bad enough that American’s are already shouldering a $1.75 trillion burden complying with federal regulations.