Tax demand buried in health care law has parties at odds

WASHINGTON -- Talk about a paperwork nightmare: Tucked into the new health care law is a demand that nearly 40 million U.S. businesses file tax forms for every vendor that sells them more than $600 in goods.

House Democrats now want to repeal it. Republicans, too. But nothing is that simple in an election year.

The House on Friday rejected a bill that would have repealed the filing requirement. Democrats and Republicans disagreed on how to make up the lost revenue.

The goal of the provision was to prevent vendors from underreporting their income to the Internal Revenue Service.

The government must think those vendors are omitting a lot because the filing requirement is estimated to bring in $19 billion over the next decade.

Businesses already must file Form 1099s with the IRS when they purchase more than $600 in services from a vendor in a year. The new provision would extend the requirement to the purchase of goods, starting in 2012.

The requirement would hit about 38 million businesses, charities and tax-exempt organizations, many of them small businesses already swamped by government paperwork, according to a recent report by the National Taxpayer Advocate.

It would also create an avalanche of paperwork that could strain the IRS itself, wrote the advocate, an independent watchdog within the IRS.

Businesses that repeatedly make small purchases from the same vendor would have to keep good records in case the total exceeded $600 in a year. Companies would also have to get vendors' tax identification numbers to include in the filings.

"Tax paperwork and compliance are already major expenses for small businesses," a coalition of 80 business groups wrote in a recent letter to lawmakers. "This new and expanded requirement means that almost every business-to-business transaction is potentially reportable to the IRS."

Lawmakers have heard the complaints.

"This 1099 reporting was a well-intentioned provision to try to catch people who were cheating on their taxes," said Rep. Scott Murphy, D-N.Y. "But it has some unintended consequences in my opinion that will create a lot of extra work and hassle for our small businesses."

However, repealing the requirement would come with a cost: the $19 billion in lost revenue over the next decade. Making up for that is where Democrats and Republicans part ways.

Republicans want to repeal the filing requirement and pay for it by changing other parts of the new health care law, a strategy that Democratic leaders won't support.

Democrats want to repeal the filing requirement and pay for it by raising taxes on multinational corporations and limiting taxpayers' ability to use special trusts to avoid gifts taxes. Republicans won't support that.

House Republicans tried to do it their way by amending an unrelated tax bill late Thursday. House Democratic leaders responded by shelving the bill.

House Democrats introduced a new bill Friday to repeal the filing requirement. It was rejected after Democratic leaders brought it up under a procedure that requires a two-thirds majority for approval. The vote was 241-154, with nearly all Democrats voting in favor of the bill and nearly all Republicans opposed.

Reps. James Clyburn, D-S.C., and Mike McIntyre, D-N.C., voted along party lines. Rep. Henry Brown, R-S.C., did not vote.

"Frankly, this is a missed opportunity," said Rep. Dave Camp of Michigan, the top Republican on the tax-writing House Ways and Means Committee, who voted against the bill. "It is a missed opportunity to fix a fundamental flaw in the health care law and a missed opportunity to truly help American employers and the jobs they provide."

House Speaker Nancy Pelosi blamed Republicans for blocking the bill.

"Today, House Democrats voted to help small businesses," the California Democrat said. "And we paid for this legislation by closing tax loopholes that promote corporations shipping jobs overseas."