Regulations that take effect in 2012, will require any taxpayer with business income to issue 1099 forms to all vendors from whom they purchase more than $600 in goods and services from during that year. It is estimated that more than 40 million taxpayers will fall under those new requirements; that figure includes close to 26 million individuals who operate sole proprietorships. With that regulation looming, the IRS is kicking into high gear coming up with ways to implement the new laws into rules for the taxpayers.

It’s estimated that the average small business owner currently averages 10 filings a year of 1099 forms. The new rules would push that average to more than 200 filings per year for a typical small business.

Nina Olson of the National Taxpayer Advocate’s office wrote,  “The new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate as compared with any resulting improvement in tax compliance.”  The National Taxpayer Advocate’s office operates independently within the IRS

The idea behind the new rule is to reduce the “tax gap” between what individuals and businesses owe and what they actually pay. It’s estimated that the federal government misses out on estimated $300 billion each year from tax underpayment. Under the expanded reporting requirements, is an attempt to create a paper trail of 1099s to shine the light on exposing business-to-business payments.  The cost of that paper trail, however, could overwhelm freelancers, sole proprietors and small businesses that have to navigate and implement procedures to comply with the new rules.  The Joint Committee on Taxation — a nonpartisan Congressional committee that analyzes pending tax legislation — estimated that it would bring in only about $2 billion a year in new tax revenue.

IRS Commissioner Douglas Shulman announced a major exception to the new rules: The IRS plans to exempt transactions made through credit and debit cards. A separate reporting requirement kicks in next year that will cover card transactions and help the IRS spot unreported payments made through those channels.  Shulman said. “Whenever a business uses a credit or debit card, there will be no new burden under the new law.”

SMC Business Council President  Tom Henschke estimates that exempting credit-card transactions would affect less than 10% of his members’ reporting requirements.

“Most of the small businesses out there that do small business [purchasing] don’t do it by credit card,” he said. “One of the reasons is the transaction cost is very high — 2% to 3%.”

Henschke foresees another unintended consequence of the new reporting provisions: that in order to cut down on tax forms to be filed, businesses will trim the number of vendors they do business with. That will most certainly lead to some small businesses closing their doors.

“Small businesses that lack the capacity to track customer purchases may lose customers, leaving the economy with more large national vendors and less local competition,” the National Taxpayer Advocate’s office wrote.

If you think you as a small proprietor, or your small business, will fall under the regulations posed by these new laws, go to BASC Expertise at http://www.myarizonaaccountant.com/ or call (480) 355-1398.

Information courtesy of www.cnnmoney.com.