Buried in the Democrats’ trillion dollar health care bill is another small business nightmare. Through an expanded tax filing requirement, Democrats slapped 40 million businesses, charities and other entities with burdensome new paperwork and increased compliance costs. The new rule, set to take effect in 2012, will require small businesses to file a 1099 tax form for every business to which they make total payments in excess of $600 for all goods and services during the tax year. This could result not only in increased costs for small businesses, but the number of tax forms that American employers will have to file could quintuple.

Let’s say you are a small business owner: Buy a computer from Apple?  File a form. Paper from Staples? Another form. Groceries from a local supplier?  Keep filing. The list goes on and on for millions of job providers.

In a recent report, the Internal Revenue Services’ own National Taxpayer Advocate highlighted several problems with this requirement.

• “The Office of the Taxpayer Advocate is concerned that 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." P. 9
• "[B]usinesses will have to produce and transmit information reports, including many not previously required. For this purpose, small businesses may have to acquire new software or pay for additional accounting services, incurring additional costs.” P. 11
• “In our view, it is highly likely that the IRS will improperly assess penalties that it must abate later, after great expenditure of taxpayer and IRS time and effort.”  P. 12-13
• “As a consequence, 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.” P. 13

This should come as no surprise to those who heard from the National Federation of Independent Business (NFIB) that this provision will have a “direct negative impact on small businesses.” NFIB cited two important facts about how much this provision will cost employers: 

• According to an NFIB Small Business Survey, at $74 an hour, tax paperwork is the most expensive paperwork burden placed on small businesses by the federal government.
• Small businesses often lack an in-house finance department to track this kind of reporting and that is why complying with the tax code is already 66 percent more expensive for a small business than a large business.

Even some Democrats are taking notice of this onerous provision; in a letter to IRS Commissioner Shulman, Senators Mark Begich (D-AK), Ben Nelson (D-NE), Jeanne Shaheen (D-NH) and Evan Bayh (D-IN) cautioned that the provision “may place a hardship on small businesses by creating an extra paperwork burden.”

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