Gathering taxes to reduce the deficit

Lost in the hubbub of health-care legislation was an underlying government need: gather lost taxes, reduce the deficit. Part of the problem is that so much goes under-reported and untraceable.

No, I’m not talking about that cash payment you received for something trivial, I’m talking about payments made from one corporation to another that somehow get misreported, payments made for property transactions and, importantly, payments made for “gross proceeds� that often get whittled down to profits (the bulk of the gross payment having been accounted as something else).

So, slipped into that 1,000-page health-care bill were new accounting rules from the IRS that are going to make money much more traceable. Initially intended for corporations and the people or companies they pay, in the end it is expected these rules will be extended to everyone. Why? Because there is a huge example of this sort of traceable accounting in Europe, which does plug loopholes and allows the IRS there to keep a watchful eye on every penny.

Yes, big brother is watching already in Europe, where it is called Value Added Tax (VAT). They can trace every payment, every user, in every transaction. Here is how it works there:

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1. Anything you buy has a tax added to the price; let us say lead for pencils. If you then sell the item (it does not matter if it is the same or was a component in something you made and sold, like a pencil), you charge the next guy VAT on the price you charge him. This goes for consulting services, doctor’s bills, everything. The difference between the VAT you paid and the VAT you charged is paid, monthly, to the taxman.

2. The next guy paid you VAT on that pencil, and when he sells it (let us say as a box of pencils with erasers), he collects VAT and, you guessed it, he pays the taxman the difference. If the end user is a company, they still get to reclaim the VAT when they sell, for example, their services (in this case design work, drawings made with the pencil).

3. This string of small tax payments continues until it reaches the end user, the private person, who never gets to reclaim anything, just pays the VAT. End of chain. If you add it up, it is double-taxation at its best.

The estimate is that as much as 4 percent of the profit of larger companies goes to paperwork tracing VAT. Wasted money? Yes, but in the absence of a flat tax, the IRS there wants to trace everything they can.

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Now, with the IRS’s new rules (due to roll out in 2012, not long from now), corporations will be required to provide the following:

1. If a corporation pays another corporation more than $600 a year they must report the total amount and the taxpayer identification number (TIN) on a 1099 form being worked on now. So, if your company pays a gas station company more than $600 a year, be prepared to submit one form for that gas station. And the restaurant company, the airline, the oil company and American Express … it is a long list. To do this you need the entities’ TIN.

2. If your company pays anyone, any company, any charity more than $600 a year for “things� (meaning property, material items) it must report the transaction on the new 1099 form. You bought a second-hand truck? You bought a lawn tractor? Your company spent more than $600 at a local hardware store for “stuff?� Fill in the form. Get every private and corporate TIN, each time you buy anything, just in case.

3. Now, here is a nasty one … the IRS wants you to file a 1099 for “gross proceeds� payments over $600. This could cover payments made to the privately owned restaurant, the guy who ploughs your parking lot, the computer geek (in India?) for de-virusing your computers, the private mechanic garage who services your delivery vans. You need to get their TINs as well.

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The avalanche of paperwork will result in two big changes to all our lives. First, you will be giving tons of people your Social Security number or corporate ID. You will have to, sorry. ID theft will, no doubt, be on the rise.

Second, the cost of doing all this new paperwork will raise prices at every level. Think about that pencil manufacturer … he now has to do all this paperwork. Who do you think will be paying, in the end? Oh, and if you fail to do this accounting? The IRS has the right to withhold tax from you for the other guy’s possible taxes.

So you can expect some of the big box stores to want to discuss all this with the IRS — do they need to collect a TIN when you are buying a car? A generator? The weekly shopping of office supplies? Paying school and property tax?

Peter Riva, formerly of Amenia Union, lives in New Mexico.