By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, July 7, 2010; 7:04 PM
The new federal health-care law may pose compliance challenges for taxpayers and the Internal Revenue Service, an IRS ombudsman reported Wednesday.
The agency, which will be responsible for administering major aspects of health insurance finance, is neither structured nor funded to effectively oversee social programs, the National Taxpayer Advocate Service said in a news release.
In addition, a tax reporting requirement in the health-care law "may impose significant burdens on businesses, charities, and government agencies," the advocate service reported.
Those burdens "may turn out to be disproportionate as compared with any resulting improvement in tax compliance," the head of the advocate service, Nina E. Olson, said in the release.
The advocate service is an independent organization within the IRS that helps taxpayers solve problems with the agency and recommends reforms.
Though the IRS's main mission is to collect taxes, it has been given a key role administering health insurance premium subsidies, tax credits for small businesses, assessments on employers and the mandate that beginning in 2014 everyone obtain insurance.
"I have no doubt the IRS is capable of administering social programs, including health care," Olson said. "But Congress must provide sufficient funding and the IRS itself must recognize that the skills and training required to administer social benefit programs are very different from the skills and training that employees of an enforcement agency typically possess."
The tension between enforcement and social service missions could affect the IRS's ability to administer health-care credits and penalties "in a fair and compassionate way," Olson said.
The comments accompanied Olson's routine mid-year report to Congress.
Beginning in 2012, the health-care legislation enacted in March will require all businesses and tax-exempt organizations to issue an IRS form called a 1099 to vendors from whom they buy goods totaling $600 or more annually -- and to file a copy to the IRS. The requirement is intended to reduce the under-reporting of business income, but it will demand thorough record-keeping on the part of buyers.
"For example, if a self-employed individual makes numerous small purchases from an office supply store during a calendar year that total at least $600, the individual must issue a Form 1099 to the vendor and the IRS showing the exact amount of total purchases," the IRS release said.
By reducing the under-reporting of business income,
Previously, such disclosures were required for the purchase of services but not goods.
The Taxpayer Advocate Service estimated the new requirement will affect 40 million businesses and other entities. Those include about 26 million sole proprietorships, not counting farms.
The IRS "will face challenges making productive use of this new volume of information," the mid-year report said. "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."
The requirement could bury the IRS in tens of millions of paper filings that it will have to pay employees to process or discard, Olson said through a spokesman.
The requirement, which was intended to help pay for the health-care legislation, is projected to raise $13.7 billion over 10 years, according to Olson's report. That does not include the IRS's administrative costs.
Under an IRS proposal, many purchases made with credit or debit cards would be exempt from the requirement because the IRS obtains information about them through other channels, the IRS has said.
The agency is trying to do what it can to minimize the burden on businesses and is seeking public comment on how it might do so, spokesman Terry L. Lemons said.