Update: Repeal of 1099 Reporting Requirement

Posted on July 28, 2011 | No Comments
Filed under Implementation Briefs, Implementation Update, Tax Policy

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By Lara Cartwright-Smith and Elliott Hooper

Background

Section 9006 of the Affordable Care Act (ACA)^[1] would have required businesses to issue 1099 forms for transactions over $600 with other corporations, such as vendors and suppliers. This was a significant expansion of the reporting requirements and was seen by many as a huge burden on businesses, particularly small businesses.^[2] On April 14, 2011, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 was signed into law, repealing the ACA Section 9006 reporting requirements.^[3]

Changes Made by the Health Reform Law (Pub. L. 111-148, Pub. L. 111-152)

Prior to enactment of the ACA, Section 6041 of the Internal Revenue Code (IRC) required businesses to report payments to persons over $600 in connection with the trade or business. This essentially allowed the IRS to identify income received by independent contractors and other individuals and assisted those individuals in reporting income. Section 9006 of the ACA (part of the original Senate bill that was amended to become the final law) added payments to non-tax exempt corporations, who were previously exempted,^[4] and payments for goods and other property to the transactions subject to reporting.^[5]

A separate 2010 law, the Small Business Jobs Act,^[6] expanded the requirement further by requiring individuals who receive rental income to issue 1099 forms to service providers for payments of $600 or more. This requirement would apply, for example, to a homeowner who rents out a basement apartment and pays more than $600 to a plumber for a repair job in the rental unit.

Repeal of Expanded Reporting Requirement

Section 9006 was included in the ACA as a way to help finance the cost of health reform by increasing collection of taxes owed through improved reporting and accountability. The gap between taxes owed and taxes collected was acknowledged by lawmakers.^[7] but ultimately the reporting burden was considered disproportionate to the benefit of more accurate tax collection.

The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 repealed the ACA’s 1099 reporting requirements by striking the provisions of the IRC that had been added by Section 9006 and repealed the expansion to rental property by striking the sections of the IRC that had been added by the Small Business Jobs Act.

Because the reporting requirement would have increased tax revenue by approximately $21.9 billion over ten years,^[83] a provision was included in the 1099 Taxpayer Protection and Repayment Act that offsets the lost revenue by increasing the amount of advance premium tax credit payments that is subject to recapture in the case of overpayment.^[9] In order to make health insurance coverage more affordable, the ACA provides for refundable tax credits for individuals between 100% and 400% of the federal poverty level (based on the most recently filed tax return) who do not receive employer-sponsored health insurance, but the credits can be recouped if the taxpayer’s income increases.^[10] The amount that can be recouped is capped in the ACA based on the taxpayer’s income. The legislation repealing the 1099 requirement increases the amount that can be recovered in overpayments for taxpayers with incomes under 400% of the federal poverty level and removes the cap for taxpayers with incomes between 400% and 500% of the federal poverty level.

The new cap structure for recouping tax credit overpayments, effective as of the 2014 tax year, is:

If the household income (expressed as a percent of poverty line) is:	The applicable dollar amount is:
Less than 200%	$600
At least 200% but less than 300%	$1,500
At least 300% but less than 400%	$2,500

Conclusion

The ACA’s expanded 1099 reporting requirements were widely criticized and could have created more of a burden than benefit for the IRS as well as taxpayers. For this reason, members of Congress from both parties and President Obama supported their repeal. However, the increase in the amount of premium tax credits that can be recouped from lower income individuals, included in the 1099 Taxpayer Protection and Repayment Act to offset revenue losses as a result of the repeal, could discourage individuals from taking advantage of the credits to purchase individual health insurance through the Exchanges, especially those individuals with varying or unpredictable sources of income.

[1] The Patient Protection and Affordable Care Act, Pub. L. 111-148 (2009), as amended by the Health Care and Education Affordability Reconciliation Act, Pub. L. 111-152 (2010), collectively known as the Affordable Care Act (ACA). Section 9006.
[2] R. Pear, Many Push for Repeal of Tax Provision in Health Law, New York Times, Sept. 10, 2011. http://www.nytimes.com/2010/09/12/health/policy/12health.html.
[3] Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, Pub. L. No. 112-9, 125 Stat. 36 (2011).
[4] Section 9006(a).
[5] Section 9006(b).
[6] Pub. Law 111-240 (2010).
[7] Report of the House Committee on Ways and Means on H.R. 4, Feb. 22, 2011. Available at http://www.gpo.gov/fdsys/pkg/CRPT-112hrpt15/pdf/CRPT-112hrpt15.pdf.
[8] Id. at 5-6.
[9] Pub. L. 112-9, supra note 3, Section 4.
[10] See S. Rosenbaum, Implementation Brief: Tax Subsidies for Individuals and Families Who Purchase Coverage Through State Health Insurance Exchanges, Dec. 9, 2010. Available at http://www.healthreformgps.net/resources/tax-subsidies-for-individuals-and-families-who-purchase-coverage-through-state-health-insurance-exchanges/.

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