Another Pelosi Easter egg in ObamaCare: IRS mandate on business

Remember this?

Cato’s Chris Edwards has found another of Nancy Pelosi’s surprises in ObamaCare, and this one’s a doozy. We have already noted the strange assignment of health-insurance approval to the IRS, an agency with no expertise in the field whatsoever. Now it appears that the IRS will have to hire a lot more people to track an avalanche of paperwork, too:

Most people know about the individual mandate in the new health care bill, but the bill contained another mandate that could be far more costly.

A few wording changes to the tax code’s section 6041 regarding 1099 reporting were slipped into the 2000-page health legislation. The changes will force millions of businesses to issue hundreds of millions, perhaps billions, of additional IRS Form 1099s every year. It appears to be a costly, anti-business nightmare.

Under current law, businesses are required to issue 1099s in a limited set of situations, such as when paying outside consultants. The health care bill includes a vast expansion in this information reporting requirement in an attempt to raise revenue for an increasingly rapacious Congress.

This comes from claims routinely made by Congress that businesses dodge their tax liabilities through fraud. Even if one accepts that premise, the cost of collection to both the IRS and the economy eventually meets a point of diminishing returns, if you’ll pardon the pun. Where does that point lie? I’d guess well above the threshold set by the new law, emphasis mine:

The 2010 Health Care Act adds “amounts in consideration for property” (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(1)) and “gross proceeds” (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(2)) to the pre-2010 Health Care Act categories of payments for which an information return to IRS will be required if the $600 aggregate payment threshold is met in a tax year for any one payee. Thus, Congress says that for payments made after 2011, the term “payments” includes gross proceeds paid in consideration for property or services.

That means any time a business pays any one entity $600 or more in a year, they will have to create a 1099 to file with the IRS. That means that the businesses have to get all of the tax information for every vendor, provide separate accounting for every payee, and then send the forms to both the IRS and the payees at the end of every year — as the payees do the same with their vendors, and so on. Edwards puts the scope in context:

For the $14 trillion U.S. economy, that’s a hell of a lot of 1099s. When a business buys a $1,000 used car, it will have to gather information on the seller and mail 1099s to the seller and the IRS. When a small shop owner pays her rent, she will have to send a 1099 to the landlord and IRS. Recipients of the vast flood of these forms will have to match them with existing accounting records. There will be huge numbers of errors and mismatches, which will probably generate many costly battles with the IRS. …

Private transactions are the core of a market economy, and the source of America’s growth and prosperity. Now the federal government is imposing a vast new web of red tape on perhaps billions of these growth-generating private exchanges.

And they did it as part of a health-care bill.  Instead of directing capital towards growth-stimulating efforts, Nancy Pelosi and the Democrats just buried the private sector in an avalanche of compliance costs.

Update: Attorney and HA reader Meric1837 sends this clarifying note:

What you didn’t explicitly say in it is the big change is that businesses have to file 1099s with other businesses. Before you didn’t have to file with corporate entities. I had to read the CATO story to get that out of it, but that’s the killer. The line about “And for the first time, 1099s are to be sent to corporations” should be quoted, highlighted, and made clear. Not everyone in the comments seem to understand that because 1099s are required for a wide range of transactions but it’s the change to inter-corporation transactions that will cause the explosion in compliance costs. It’s pretty technical, but for small businesses, technicality matters.

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