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On 1099s, It’s Not So Simple

New York Times columnist David Brooks ridicules the Affordable Care Act provision tightening businesses’ reporting requirements to the IRS on payments for goods and services:  “If you’re a freelancer and you buy a laptop from an Apple store, you have to file a 1099.”  Brooks sees that as an “expensive interference in business life.”

But he fails to point out the reason behind the new rule:  sole proprietors report less than half of their income to the government, the IRS estimates.  That’s a pretty expensive “interference” in the lives of all those working Americans and businesses who report all of their income — and who have to pay higher taxes because others engage in massive under-reporting.

The best way to encourage people to comply with the nation’s tax laws is to create a paper trail, such as the W-2 forms that employers send the IRS regarding their workers.  Obviously, however, that imposes a burden on those who have to collect the information.  Policymakers need to strike a balance between encouraging tax compliance and not requiring excessive paperwork.

The IRS, the Treasury Department under both President George W. Bush and President Obama, and the Government Accountability Office all concluded that the prior rules on the filing of 1099s didn’t do enough to discourage under-reporting.  The Affordable Care Act responded by expanding the reporting requirement.  Congress’s Joint Tax Committee estimates that the provision would raise $17.1 billion over the next ten years without any increase in tax rates.

Some critics have raised legitimate concerns about the provision and sensible modifications have been proposed.  These should be the subject of full, reasoned debate and possible compromise.

Chuck Marr
Vice President for Federal Tax Policy