New Form 1099 Rules 'Horrendous' For U.S. Gold Dealers; U.S. Congress Considers Repeal

17 August 2010, 1:12 p.m. EST
By Allen Sykora
Of Kitco News

(Kitco News) -- A movement is afoot in the U.S. Congress to revise or repeal a portion of the health-care act, passed earlier in the year, that critics say has costly implications for bullion and coin dealers and also raises privacy concerns.   

The provision has nothing to do with health care, but instead with government efforts to pay for new programs. Specifically, entities must file a Form 1099 with the Internal Revenue Service whenever they make transactions paying out $600 a year to another party. Dealers who now submit a limited number of 1099 forms say they may have to file thousands each year under the new act, significantly driving up their accounting costs.  

"The impact on my industry will be horrendous,” said Bill Haynes, president of CMI Gold & Silver Inc. in Phoenix.  The new rules in Section 9006 of the Patient Protection and Affordable Care Act are aimed at all businesses, not just the gold dealers.

However, gold may be among the sectors most heavily impacted since the $600 threshold is less than half of the current price for an ounce of the metal, meaning a substantial percentage of transactions will require increased paperwork. The rules do not create a new tax, but establish a paperwork trail to force those who should be paying taxes to do so, if they aren't already. The new regulations go into effect at the start of 2012.  

"I feel confident...that we will repeal this before it becomes effective, if in fact, the people affected - the business community -keep the pressure on,” said Rep. Dan Lungren, (R-Calif.), who introduced a bill in the House of Representatives to repeal the new Form 1099 rules.  Lungren said,  however,  he is less confident that a repeal will occur before the end of this year, with the hang-up likely to be the type of compromise or concessions other lawmakers want.

Gold Dealers Cite 'Massive' Paperwork Burden

 In the meantime, some describe the new rules as a dark cloud hovering over the gold community.

"We would have to be issuing massive quantities of 1099s, which of course will increase our cost of doing business,” said Haynes, whose business employs 12 people.  

Haynes said he currently files a limited number of Form 1099s each year for services, such as for his accountant, lawyer, advertising firm and those who might sell his company 25 or more Krugerrand or Maple Leaf coins at a time. But with the new rules, he said, the 1099 filings “would go from less than 100 into the thousands.”  

Patrick A. Heller, owner of Liberty Coin Service in Lansing, Mich., figured his firm will have to distribute some 13,000 to 15,000 Form 1099s a year. "But it's more onerous than that because if somebody comes in on Jan. 2 and sells us $10 worth of stuff, we don't know if by the end of December they will have sold more that equals $600 or more,” he said. So the company will compile the paperwork for virtually every single customer, even if they ultimately do not get a Form 1099. His company of 18 employees would probably have to add two more people to take care of the increased paperwork, Heller said. Meanwhile, he said, he has heard of some veteran coin dealers who  may decide to retire early rather than deal with the extra paperwork.

 The rules will also impact private citizens who are looking to sell their gold to dealers. For dealers to cover their increased costs, "we'll pretty much be forced to pay a lower price to the customer,” Heller said.  

Meanwhile, sellers will receive 1099 forms listing income they must report, even if they actually have no profit. Some might not have old receipts showing what they originally paid for jewelry or a coin, or an item might have originally been a gift for which they had no receipt to begin with.  

Furthermore, Haynes and Heller cited privacy concerns, since dealers will have to collect Social Security numbers and addresses from anybody who sells them coins or old jewelry.  

"I think the identify-theft risk is going to be even scarier than the paperwork burden,” Heller said.  

He said that the Journal of Accountancy estimated more than 30 million U.S. businesses will have to file the 1099 forms. Suppose each averages 100 new 1099 forms.  

"That's 3 billion pieces of confidential tax information,” Heller said. ”With all of these businesses accumulating all of this information, you're bound to have a huge increase of identify theft.”  

There's potential for thieves steal data, or even for crooks to pose as dealers to obtain Social Security numbers, names and addresses.  

"If the records and information falls into the wrong hands, the bad guys could assume that if John Jones has sold 20 ounces of gold...he has other gold in his home,” Haynes said. And, he said, the crooks would have the address of the individual.  

In fact, some legislative aides said citizens, who worried about privacy, have been among the most frequent callers to the lawmakers.   

Meanwhile, some in the industry might choose not to follow the new rules, said Michael Kramer, president of Manfra, Tordella & Brookes, Inc. This, in turn, means less business for honest dealers who do follow the regulations.  

"It's certainly not going to help business. Let's put it that way,” Kramer said.

Effort Made To Repeal Or Change New Rules

A repeal or reduction of the new Form 1099 rules will be among the first issues to be reviewed by the Senate when lawmakers return from summer recess in mid-September, congressional staffers said.  Lobbyists said the key may be what steps that lawmakers ultimately take to capture any potentially lost tax revenue. The Congressional Budget Office estimates the new Section 9006 provisions  would generate some $17 billion.  

Sen. Mike Johanns (R-Neb.), has proposed full repeal of the new rules. He has an amendment, with eight co-sponsors that includes one Democrat, to the Small Business Lending Act. A vote on his amendment by the full Senate is expected in mid-September.  

A competing amendment from Sen. Bill Nelson (D-Florida) would not eliminate all new reporting requirements but would raise the threshold. It would exempt businesses with fewer than 25 employees and raise the threshold from $600 to $5,000.  

A Senate Democratic aide said the party's alternative “was introduced as an important first step to demonstrate that Senate Democrats understand the concerns of small businesses and intend to address those concerns.  If these changes are not enough, further changes to this reporting policy will be made.”  

 To offset any lost revenue, the Republican amendment seeks a savings by making changes in health-care programs themselves, while the Democrats propose repealing tax deductions for large oil and gas companies.  

Johanns also has stand-alone legislation, the Small Business Paperwork Mandate Elimination Act, with 22 co-sponsors. Lungren has a companion bill in the House of Representatives.  

Lungren's bill has 165 co-sponsors, including several Democrats. Shortly before Congress broke for recess, Democrats attached this to another bill, which Republicans in turn opposed because of other unrelated tax changes sought by the Democrats.  

Nevertheless, the maneuvering showed both parties seem to favor a repeal or scaling back of the Form 1099 requirements, said Bill Rys, tax counsel for the National Federation of Independent Business.  

"On the House side, we have almost every member on record as in favor of supporting the repeal in one form or the other,” Rys said.

 In fact, said Lungren, some Democrats argued on the House floor in favor of the very changes he proposes. "So we're in a much better position today than we were three weeks ago...,” he said.  

Meanwhile, the Treasury Department and Internal Revenue Service are soliciting public comments on how to draft rules to minimize the reporting burden and to avoid duplicative reporting.

Form 1099 Rules Lost In Debate Prior To Health-Care Passage    

The Form 1099 reporting provisions were buried deep in a lengthy bill, thus garnered little attention prior to passage, when the focus was on the health-care itself, Rys said.  

In fact, Lungren said, the section spelling out the new rules was only 170 words out of a law that has some 340,000 words.  

"This is an example of what happens when you have a 2,300-page bill that virtually no one has a chance to digest before we vote on it,” he said. ”This section received not one minute of discussion on the floor of the House of Representatives.”  

But as proprietors became aware of the new rules, opposition grew, Rys said.


By Allen Sykora of Kitco News;

Editor’s Note: Meet the Kitco News Team at the upcoming Kitco Metals eConference September 12-13, 2010. A not-to-be missed event featuring Ron Paul, Marc Faber and other industry heavyweights. The eConference is free with Pre- Registration