Two new changes in the tax laws for 2011 could create a lot of trouble for taxpayers including income from small businesses and partnerships. If you are filing business income on your individual tax return this year, these laws may affect you. Both of the new regulations involve the forms known as 1099s.

Commonly given to freelancers and small-time retailers, these forms allow companies or wholesale sellers to share information on payments rendered to individuals throughout the year. If a company sends you a 1099, that means that they have reported income that they have paid you during 2011.

Citibank Paypal and other debit card firms are now required to also file 1099-K forms for money paid to other businesses, while only the paying companies were required to do so in the past. This will help the Internal Revenue Service catch millions of dollars worth of income that has gone unreported in the past. Both the IRS and the taxpayer will receive a copy.

The IRS estimates that fraud and simple mistakes leave over $120 billion uncollected each year. Adding 1099-K requirements to payment processors will help catch millions of the $385 billion in total taxes that go unpaid. If even 10% of this money was collected, the IRS could help fund programs that are currently being cut.

While this new protocol does help catch businesses cheating the system, it causes a number of complications as well. Many businesses are accidentally under-reporting their income and will see a big jump in their tax bill when including the new 1099-K forms. For example, many restaurants have declared their debit- and credit-card payments, but have not paid taxes on cash income for many years.

The National Federation of Independent Businesses did push the IRS to drop the requirement to require businesses to track all 1099-K receipts for their tax returns. If this was required, businesses that allow cash withdrawals would be responsible for proving that the total was not paid to the company. This would create hours of extra work for small businesses and lead to over-reported income levels.

While businesses will get away with not attaching 1099-K forms to their returns for now, they will still need to report any income listed on these forms. The IRS will know that they earned it, and failing to report it could trigger an audit.

Another issue for small businesses comes from the addition of two questions on Schedule C, Form 1120S, Form 1065 and Schedule E. These forms are for S corporations, partnerships, sole proprietorships and landlords. The tax payer is asked if they made payments that would trigger the use of a 1099 form. Under current tax code, these forms must be given to any non-employee being paid over $600. If the person reports that they did meet those requirements, they are also asked if they properly issued those forms.

Congress increased the penalties for failing to provide 1099 forms in 2010 to $100 per form. Most businesses would receive a $200 penalty because two copies are required for each contractor. Failing to file 1099 forms for dozens of workers could leave your business with a big penalty to pay. If a taxpayer lies on the form to avoid the penalty and is caught in an audit, the information will be used to increase the fines. The IRS is trying to show small businesses the importance of reporting the payments they made to freelancers and contractors. When combined with other serious tax evasion issues, answering the wrong way on your tax return could cost you quite a bit.