Tax paperwork rule in health care law likely won't survive

The Democratic-controlled Senate and the president are unlikely to go along with Republican plans to dismantle the federal health care law -- with one possible exception.

It's likely that a provision that requires businesses to report certain financial transactions to the IRS could be one of the first to go, and with it, $19 billion in funding for the health care overhaul.

Tom Schwieters, who has run a small automation and engineering firm in Eden Prairie for about 10 years, employs four full-time workers, including himself and his wife. He has no full-time bookkeeper and is worried that he may need one if the new rule goes into effect in 2012.

"It used to be pretty simple to do my books," he said. "I'm just concerned what the costs are going to be."

Under a provision in the health care law, Schwieters and anyone who operates a business, even a side business, will have to file special paperwork with the IRS. They'll have to file so-called 1099 forms for all goods and services they buy totaling $600 or more.

The new law would require Schwieters to file individual 1099s with nearly 300 vendors from whom he buys everything from gasoline to paper.

"It is a big deal for us," he said. "Every hour away that you take away from me focusing on my business, whether it's doing marketing, whether it's doing engineering, whether it's doing client development is an hour lost that we don't get back."

Schwieters said he already reports his business spending information to the IRS by deducting it as business expenses.

FORM HELPS FEDS CATCH TAX CHEATS

But requiring businesses to file the 1099s makes it easier for the federal government to track such transactions -- and catch tax evaders. The Joint Committee on Taxation estimates this increased vigilance would recoup $19 billion over 9 years.

Eric Toder co-director of the Urban Institute -Brookings Institute Tax Policy Center, said people are more likely to report income when they know a third party is also reporting that transaction to the IRS.

But Toder said Congress needs to strike a balance.

"There's always a trade-off when you do these things," Toder said. "If you have more information, you're going to have better compliance, but you're also putting more burdens on people and in this case more burdens on small businesses that have to report this."

The non-partisan Government Accountability Office said businesses will face additional costs to file the 1099s, but its hard to pin down the full cost. Voices from different sides of the political aisle have opposed it -- including President Barack Obama. Right after the November elections, Obama called it "too burdensome" on small businesses.

Minnesota Republican Rep. John Kline said right before Congress went into session the requirement had to go.

"It provides a perverse incentive to a business to say, 'Well, I'm just going to start doing business with fewer vendors.' Well, that's not what you're trying to do if you're trying to grow the economy and create jobs," he said.

While the repeal of this small part of the health care law is likely to sail through the House, the question is whether it would also pass the Democratically-controlled U.S. Senate.

Minnesota Democrat Sen. Amy Klobuchar said it would. She and fellow Democrats Ben Nelson of Nebraska and Maria Cantwell of Washington wrote to the Republican Speaker of the House John Boehner recently.

The three senators said they're "confident the Senate can quickly act" to strike down the 1099 provision.

There's no word yet on how Congress would make up the $19 billion for the health care overhaul.

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