Over the past week, ATR has been breaking open the Obama budget to examine all the new tax hikes (on international income, small business, and more to come).  Today, we wanted to take a quick look at the "tax gap" and "tax compliance" tax hikes in the budget.

People often make the mistake of skimming over tax compliance measures, but that would be a big mistake.  Over the 10-year budget window, the Obama budget projects that these compliance "reforms" will raise $13.8 billion to close the so-called "tax gap," $7.4 billion to "improve compliance by businesses," $4.4 billion to "strengthen tax administration," $36 million in increased penalties, and $23.7 billion in backdoor death tax hikes.  You can view the scores here (Table S-8).  Add these together, and you get a $49.4 billion total tax hike.  That's more than double the amount raised by taxing carried interest as ordinary income, so this is a lot of money.

There are a couple of dozen individual proposals, so we'll focus on just the most damaging ones for small business owners and those who work for small businesses:

• Corporate Information Reporting ($9.2 billion).  Under current law, small business owners and others need to issue "1099-MISC" statements to individuals and partnerships to whom they pay at least $600 for goods and services.  This expands that to also include corporations.  This could dramatically-increase the number of these forms that are issued, which will increase headaches for small business owners every January.
• Landlord Information Reporting ($3.1 billion).  This further expands the above reporting requirement to owners of rental properties.  Those to whom rent is paid would need to receive a 1099-MISC.
• Independent Contractor Discrimination ($7.3 billion).  This would permit the IRS to more easily re-classify independent contractors (who only need to receive a 1099-MISC in January) as employees (which requires hiring a payroll company, quarterly filing and tax payments, and a W-2 in January).  The real reason behind this is to make it easier to unionize people who are currently not employees.
• Economic Substance Doctrine ($4.2 billion).  This would give the IRS the power to determine that a transaction used to lower a tax bill "lacks economic substance."  This is an arbitrary standard, and would subject every small business decision to the whims of an IRS auditor

Posted by Ryan Ellis on Friday, February 5, 2010 11:21 AM EST

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