Taxpayers are seen as more likely to pay taxes on income if the realization of that income has been communicated to the Internal Revenue Service (IRS). To encourage compliance with tax laws, the Internal Revenue Code (IRC) includes a number of information reporting requirements regarding payments that may result in taxable income for the payee. One such reporting requirement, contained in IRC § 6041(a), applies to certain payments made by persons in the course of a trade or business. Under IRC § 6041(a), if the total amount of payments made to a single payee over a year equals at least $600, the payer is required to file an information return with the IRS providing information identifying the payer, the payee, and the total amounts paid to that payee over the past calendar year. Section 6041 was amended twice in 2010: once by § 9006 of the Patient Protection and Affordable Care Act (PPACA) and a second time by § 2101 of the Small Business Jobs Act of 2010. They may, however, be subject to stronger enforcement as a result of a surviving provision of the Small Business Jobs Act that revised the penalties for failing to file an accurate 1099 with the IRS or failing to provide an accurate copy of that form to the payee. This report briefly discusses the procedures and penalties under current law applicable to the information reporting requirements under IRC § 6041, and also briefly describes recent amendments that have been repealed. Thus, if payments are made by credit card or through a third party network, the payer generally will not be required to report them on an information return. Both § 6721 (pertaining to failure to file accurate returns with the IRS) and § 6722 (pertaining to failure to provide payees with correct copies of the information returns) of the IRC have been amended by the Small Business Jobs Act to revise the amounts of the penalties. The changes to both sections are scheduled to become effective for returns required to be filed after December 31, 2010. Both amendments were subsequently repealed by the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011. Solely for purposes of § 6041(a), most landlords would have been considered to be engaged in the trade or business of renting real estate and, therefore, might have been required to file Forms 1099 to report payments made in conjunction with their rental properties.
Taxpayers are seen as more likely to report items of income on their tax returns if they know that a third party has reported it to the Internal Revenue Service (IRS); if follows, therefore, that expanding information reporting requirements under the Internal Revenue Code (IRC) can improve the collection of federal tax revenue. However, as those requirements are expanded, those who must comply with the requirements generally will face an increased administrative burden. This tension between the desire to improve tax compliance and the concomitant burden imposed on taxpayers was recently highlighted after expansions of the reporting requirements in IRC § 6041 were met by protests that the changes imposed too great a burden, particularly on small businesses. As a result of these objections, the expansions to the information reporting requirement were repealed shortly after they were enacted.
IRC § 6041 requires payments totaling at least $600 in a single calendar year to a single recipient to be reported to the IRS. The required return is generally a Form 1099, which is prepared by the entity making the payment and identifies to whom payment was made, the amount of the payment, and the general reason for the payment. The form is filed with the IRS and a copy is provided to the payee. The form is required only when the payer is considered to be engaged in a trade or business and has made the payment in connection with that trade or business.
The scope of IRC § 6041 was expanded by both the Patient Protection and Affordable Care Act (PPACA; P.L. 111-148) and the Small Business Jobs Act of 2010 (P.L. 111-240). Section 9006 of PPACA would have made payments to corporations and payments for goods or other property subject to reporting. Section 2101 of the Small Business Jobs Act would have made most landlords subject to the reporting requirements of IRC § 6041. The expansions made by both bills were subsequently repealed by the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (P.L. 112-9).
The Small Business Jobs Act also increased the penalties for failure to file an information return (IRC § 6721) and the penalties for failing to provide a copy of the information return to the payee (IRC § 6722). These changes have not been repealed and will apply to any information returns required to be filed after December 31, 2010.