Small businesses are up in arms about a provision in the health reform law that will require them to submit a 1099 form to every vendor that they buy goods from, if their total annual purchase from that vendor comes to $600 or more (as I noted here). They’re worried that compliance will mean a heavy addition to their already crushing load of paperwork.

Republicans in Congress agree, and have proposed repealing the provision. But any such move would only perpetuate massive tax evasion by vendors, according to a report released today by the Center on Budget and Policy Priorities.

Under the reporting rules that applied before the health reform bill passed, companies were generally required to submit 1099s only to service providers — not to providers of goods and property — and they didn’t have to submit them to corporations, notes CBPP. As a result, many vendors are able to significantly underreport their income. Repealing the provision entirely “would leave in place a clearly inadequate reporting regime that has failed to prevent widespread tax avoidance.”

The report cites IRS data showing that sole proprietors, for example, underreport their income by “a stunning 57 percent, which means that, as a group, they pay taxes on less than half of their income. As a result, other taxpayers have to pay higher taxes to make up for the lost revenue, and businesses that do not underreport are at a serious competitive disadvantage compared to businesses that do.”

Maybe so, but whether the new rules are an efficient solution to the underreporting problem is very much open to doubt. In a report published in late June, the IRS’s own National Taxpayer Advocate, Nina E. Olsen, expressed concern that the additional reporting burden “may turn out to be disproportionate as compared with any resulting improvement in tax compliance.” ###