On March 23, 2010, President Barack Obama signed the healthcare legislation into law. Now that the law is done, we are left waiting for the final IRS regulations to define how we are going to comply. For our purposes, the changes we are most interested in surround the expansion of the information reporting program to include corporations and all goods and services.

 How it will affect you

The first and most obvious change is the elimination of the corporate exemption on 1099-MISC reporting. In essence, all businesses (excluding not-for-profit entities), will be required to supply 1099s for all goods and services purchased from a vendor. This change will result in a tremendous increase in the volume and complexity of information reporting that Accounts Payable departments have to take on.

 All of this new reporting to an entire community of recipients, who have never been subject to reporting previously, is going to produce a substantial increase in B-Notices (bad name/TIN combinations). The new legislation includes doubling the penalty for inaccurate/incomplete reporting from $50 to $100 and the annual cap on penalties was increased six-fold to $1.5 million per year.

CORRECTION: The increase in penalties mentioned was not signed into law as part of the Patient Protection & Affordable Care Act (H.R. 3590), but rather was included in the Small Business and Infrastructure Jobs Tax Act (H.R. 4849), which was approved by the House of Representatives on March 24^th.  This legislation is still pending approval by the Senate and White House.  We will be monitoring its progress to becoming law as well.

H.R. 4849 proposes increased penalties for failure to comply with information reporting requirements as follows:

• Increases the first-tier penalty from $15 to $30 and increases the calendar-year maximum from $75,000 to $250,000;
• Increases the second-tier penalty from $30 to $60 and increases the calendar-year maximum from $150,000 to $500,000;
• Increases the third-tier penalty to $100 from $50, and increases the calendar-year maximum $250,000 to $1.5 million;
• For small business tax filers, the calendar year maximum penalty would be increased from $25,000 to $75,000 for the first-tier; from $50,000 to $200,000, for the second tier; and from $100,000 to $500,000 for the third tier.

 The third change that the healthcare legislation is likely to drive is Healthcare Insurance verification reporting.  Similar to the Massachusetts 1099HC, which validates that a Massachusetts resident has valid healthcare insurance, the new legislation is likely to require that all US citizens are verified as having adequate health insurance – this is likely to be a significant new 1099 burden. The provisions and details on how this will be implemented have not been published, but we will be keeping an eye out for any news on what this means for Healthcare insurers and will be updating you as details arise.

 Compliance rules are changing

Because of changes under the new law, accounts payable departments now have a huge incentive to verify the accuracy or validity of tax identification information for their vendors, because if they don’t, they risk substantial future fines and penalties. In addition, this change makes all vendors subject to backup withholding, meaning that if there is no tax ID Number (TIN) on file for a vendor, your business will likely be required to withhold 28 percent of each payment until you collect a valid TIN.

 The new compliance and reporting requirements go into effect on January 1, 2012, giving businesses only 18 months to get their environments into compliance.

 While the law applies to payments made after December 31, 2011, to prepare to file accurately, companies need to update their process to include all vendors within their W-9 procedures, solicit W-9s for corporate vendors and prepare their internal teams for a more complex 1099 year-end printing, mailing, and filing process. To avoid the new penalties, companies should start making the appropriate system updates to accommodate these changes now.

 Are you ready?

All of these changes are coming faster than was expected. The final regulations regarding backup withholding on payments starting in December are not yet out, but there is a very real risk of finding ourselves out of compliance a mere 8 months from now. We recommend that all Accounts Payable departments immediately start to cleanse their vendor master and collect valid business names and TINs (EIN/SSN) for every vendor in the database. The process to validate, mail correction letters to those vendors where your information is invalid, process changes and then re-validate will easily consume many months for A/P departments on top of their normal job requirements. Convey offers a suite of TIN cleanup services as do others. You really need to get started now.

 Want more information?

Please visit www.convey.comfor educational Webinars and white papers. Also, be sure to sign-up to receive 1099news.com updates by clicking on “Follow by email” on the top right corner of the screen. Also, feel free to post any questions or comments to this blog post.

^{Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party.}