Tax Blog/Blawg

As we’ve discussed previously at the TaxBlawg, a minor provision of the Patient Protection and Affordable Care Act – Section 9006, which dramatically expands the requirements for reporting payments on Form 1099 – has become a hot-button issue in Congress.  Prior to the law, Form 1099 reporting was not required for payments for goods or (with some exceptions) payments to corporations.  Section 9006 expanded the Form 1099 requirement to cover such payments made to a single payee if the payments exceed an aggregate of $600 or more during a calendar year.

Over the summer, the small business lobby called foul, arguing that the expansion imposed an oppressive paperwork burden on small businesses.  Consequently, earlier this week, Senate Democrats and Republicans proposed dueling amendments to the Small Business Jobs Act of 2010 to “fix” the expanded Form 1099 reporting requirement of Section 9006.  In the eternal spirit of politics, each party’s amendment failed because neither wanted to give the other credit for being the savior of small businesses.  Despite the failure of these amendments to Section 9006, the Senate passed the bill this afternoon, foreshadowing its likely enactment in the near future.

While we at the TaxBlawg take no position about the merits of Section 9006 or the likelihood of its eventual repeal, we cannot help but scratch our heads at how the Senate has proposed to pay for the change.  As we noted in our earlier post, Congress’s new-found religion about deficit control means that the repeal of any revenue-raising measure must be offset with a reduction in spending elsewhere.  Curiously, however, to help pay for the bill, the Senate has proposed broadening the scope of Form 1099 reporting on … other small businesses.

The guilty provision is Section 2101, which would treat recipients of rental income derived from real estate as engaged in a trade or business for Form 1099 purposes, effectively extending Form 1099 reporting to almost every landlord.  To be fair, Section 2101 would exempt landlords who receive only “minimal” rental income or for whom the new reporting requirement would cause “hardship,” each as defined in future Treasury regulations.

Reasonable minds may debate the necessity of imposing Form 1099 reporting on landlords right now.  On the one hand, inability to sell underwater real estate in this economy has transformed quite a few taxpayers into novice and reluctant landlords.  On the other hand, the government does have a legitimate interest in ensuring that taxpayer’s are properly reporting income.

More importantly, though, this incongruence demonstrates that Congress’s piecemeal approach to tax legislation does not work.  Broadening the tax laws is a necessary evil when Congress needs revenue to supports its programs because, to paraphrase many court opinions, taxes are the “life blood” of government.

To raise revenue, however, Congress often seems to amend the tax laws without much thought to the unintended consequences on similarly situated taxpayers.  There is really no policy distinction to require Form 1099 reporting for novice landlords and not for other small businesses (or vice versa).  So, why would the Senate repeal a burdensome requirement for one set of small business owners only to implement it for another?

What this shows is that Congress’s haphazard revision of the tax laws leads to complexity and uneven treatment of similarly situated taxpayers, both of which lead to tax avoidance and evasion.  In this way, Congress’s repeated tinkering with Form 1099 requirements may undermine the point of information reporting, which is to narrow the tax gap.  Even taxpayers who are making good faith efforts to comply with their obligations cannot possibly be expected to keep up with constantly changing rules that seem to apply haphazardly to similarly situated individuals.

As many economists have suggested, the optimal solution will be to forego piecemeal revisions in favor of comprehensive tax reform.  Congress needs to take a big picture view of the tax law when making revisions to it, so that similarly situated taxpayers are treated similarly.  If, however, Congress decides to favor one interest group over another for political expediency, at least it should do so with an honest, and perhaps even cogent, explanation.