A small section on one page of the recently enacted 2,000-plus-page health care bill revises Section 6041 of the Internal Revenue Code to extend Form 1099 reporting to the IRS. This mandate would be effective beginning in 2012 and may require new systems and many hours of work to your accounting staff.

Form 1099 is the IRS reporting form for payments other than wages. Currently, the 1099-MISC form is used primarily to report payments for services provided by independent contractors. Payments to corporations are generally not required to be reported on the 1099-MISC, nor are payments for goods.

The new law would change that, making it mandatory to report certain payments by a business to any individual or business entity - including corporations - if total payments to those entities exceed $600 in a year. The new legislation will now require payments for “property” and “gross proceeds” to be reported, in addition to the previously required services.

These terms have not yet been specifically defined, but many commentators have taken them to mean that purchases of tangible goods, as well as services, will need to be reported. This could make common purchases like office supplies, meals and fuel subject to reporting.

The IRS has yet to release guidance on how this will be accomplished, but barring a complete redesign in reporting methods, initial estimates range from hundreds of millions to perhaps billions of additional 1099 forms filed each year. There currently does not appear to be any exceptions for size: It is possible that if you buy $600 of office supplies from Staples or Costco, you would need to issue them a 1099 as well as to a local one-man operation who mows the lawn.

While, presumably, any good business is documenting the recipient of all payments they make, this law would add the tasks of obtaining addresses and taxpayer identification numbers for all payees and vendors. All businesses will need to be able to total up purchases by vendor every year and also be able to match up 1099s that they receive with their own cash receipts. This could cause quite an administrative burden for small businesses, especially those that do not already have dedicated in-house accounting staff. A 2007 GAO (Government Accountability Office) report found that a typical small business spends between three and five hours per year filing 1099s. One small business advocacy group estimated that small businesses average 10 filings a year of 1099 forms. The new law would potentially increase that number by dozens or even hundreds.

The measure first appeared in the Senate Finance Committee’s version of the health bill in fall 2009 and was possibly inspired by the same 2007 GAO report mentioned above, which studied the “tax gap” caused by under-reporting of income and estimated that enhanced 1099 reporting could provide up to $345 billion annually in new federal tax revenues.

Until the IRS issues guidance, it is impossible to say exactly what effect this will have on the average business. It actually eliminates some uncertainty over which transactions need a 1099. If it’s more than $600, it’s in. But the paperwork burden could be overwhelming. It is also questionable whether the IRS has the capacity to handle the new deluge of documents without spending considerable amounts to hire new people and upgrade computer systems.

Final regulations will likely not appear until next year. However, we have been guiding our clients at Wright Griffin Davis to be aware and be prepared of this almost-hidden provision, as it will affect every business in the country.

Dave Smith is a CPA and MBA with Wright, Griffin, Davis and Co.