To improve compliance, the law requires businesses to file a 1099 tax form identifying anyone to whom they pay $600 or more for goods or merchandise in a year. Businesses will also have to send copies of the form to their vendors, suppliers and contractors.
Businesses denounce the requirement, and even the national taxpayer advocate at theInternal Revenue Service, Nina E. Olson, said the reporting burden might“turn out to be disproportionate as compared with any resulting improvement in tax compliance.”
The White House is nervous about a repeal, fearing that it could set a precedent for rolling back other unpopular features of the law. Moreover, the reporting requirement is expected to lead to a significant amount of revenue— $17 billion over 10 years— to help pay for the expansion of coverage and other health initiatives. It is unclear whether Democrats and Republicans can reach agreements on repealing the provision and on finding a way to offset the loss of money.
Under the law, businesses will be required to report purchases of items like office equipment, food and bottled water, gasoline, lumber and plumbing supplies if payments to any vendor in the course of a year total at least $600. They will, in many cases, also have to report payments for things like travel and telephone and Internet service.
The annual reports must include the vendor’s address and taxpayer identification number.
The Congressional Joint Committee on Taxation and some lawmakers say the reporting requirement will induce businesses to pay more of the tax they owe— just as individuals are more likely to pay tax on dividends and interest income knowing that such information has been reported to the I.R.S. by mutual funds, banks and other corporations.
Two Republicans, Representative Dan Lungren of California and SenatorMike Johannsof Nebraska, are leading efforts to repeal the reporting requirement.
In late July, 239 House Democrats voted for repeal, but the bill did not get the two-thirds majority needed for approval under the expedited procedure used then.
The Senate is scheduled to vote on a repeal, as an amendment to a small-business jobs bill, soon after it reconvenes this week.
President Obamastrongly supports the jobs bill, which would provide loans and tax breaks to small businesses. But he has not embraced a repeal of the reporting requirement.
Most Republicans want a full repeal. In a recent speech, the House Republican leader, RepresentativeJohn A. Boehnerof Ohio, said the“1099 mandate” showed how the health care law could“wreak havoc on employers and entrepreneurs.”
Republicans also see the new requirement as an example of the intrusive role they say the I.R.S. will play in enforcing the health care law, including its requirement for most Americans to carry insurance.
Senate Democratic leaders prefer a proposal by Senator Bill Nelson, Democrat of Florida, that would reduce the scope of the reporting requirement. Under Mr. Nelson’s plan, businesses with 25 or fewer employees would be exempt from the new requirement, and the reporting threshold for larger businesses would be set at $5,000, rather than $600.
Mr. Nelson says more than 90 percent of companies would qualify for the small-business exemption under his proposal.
But Mr. Johanns said this“half-measure” was unacceptable.
Stephanie Cathcart, a spokeswoman for the National Federation of Independent Business, said many businesses would still have to keep track of their payments to each vendor to see if they exceeded the $5,000 threshold for the year.
SenatorBlanche Lincolnof Arkansas, a vulnerable Democrat running for re-election, voted for the health care law but supports Mr. Johanns’s effort to repeal the reporting requirement.
“We must not create unnecessary burdens for small businesses that serve as the backbone of Arkansas’s economy,” Mrs. Lincoln said.
To help make up for the loss of revenue, Mr. Johanns would cut spending from a new prevention and public health fund. Mr. Nelson would increase taxes on big oil companies.
In the House, RepresentativeScott Murphyof New York has led the Democratic efforts to repeal the reporting requirement.
“This 1099 reporting was a well-intentioned provision to try to catch people who were cheating on their taxes,” Mr. Murphy said.“But it has some unintended consequences and could be a huge hassle for a lot of small businesses.”
The reporting requirement was in the health care overhaul bill unveiled in mid-November by the Senate Democratic leader,Harry Reidof Nevada. But it drew little attention at the time— it was one of more than 15 revenue-raising measures in the bill— and many lawmakers were apparently unaware of it when they voted for final passage of the legislation.
Four Democratic senators who voted for the bill have sent a letter to the I.R.S. expressing concern that“the new requirements may place a hardship on small businesses.” The letter was signed byEvan Bayhof Indiana,Mark Begichof Alaska,Ben Nelsonof Nebraska andJeanne Shaheenof New Hampshire.
For years, lawmakers have complained about the gap between taxes owed and taxes paid voluntarily. Reducing this gap is a top priority for some lawmakers, but resistance to the new reporting requirement shows how difficult it is to achieve that goal.
In a report on the tax gap, the I.R.S. said that“there is a serious problem with underreporting” of income by sole proprietors, who own unincorporated businesses by themselves. The Bush administration twice urged Congress to help close the gap by expanding information-reporting requirements.
Ms. Olson, the independent taxpayer advocate, said the new reporting requirement would apply to over 38 million businesses, including 26 million sole proprietorships and 2 million farms.
“The I.R.S. will face challenges making productive use of this new volume of information reports,” Ms. Olson said.
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