Small businesses are rallying to fight the 1099 rule this week, an obscure provision in the new federal health care law that requires filing a 1099 form for every purchase above $600 starting in 2012.

The law is a major expansion of current reporting requirements designed to recover taxes on unreported income and help cover the cost of the health care plan. Small businesses say it will cost them significant time and money. The measure would create "a tremendous paperwork compliance burden," says the National Federation of Independent Business trade group.

On Tuesday, two efforts to repeal the provision hit Congress. One, sponsored by Republican Senator Mike Johanns of Nebraska, would eliminate the 1099 requirement for businesses. The other, sponsored by Senator Bill Nelson, a Florida Democrat, would modify it, exempting businesses with fewer than 25 workers, raising the reporting threshold to purchases above $5,000, and exclude purchases made with a credit card. The White House supports the Nelson amendment, which would be paid for by imposing a new tax on oil companies. Johanns' amendment would be paid for by removing money from a fund created by the health care overhaul designed to promote prevention and wellness.

"The administration believes that the burden created on businesses by the new information reporting requirement on purchases of goods that exceed $600, as included in Section 6041 of the Internal Revenue Code as modified by Section 9006 of the Affordable Care Act, is too great," Treasury Secretary Timothy Geithner and Human Services Secretary Kathleen Sebelius wrote in a letter to Senate Majority Leader Harry Reid, a Democrat from Nevada, and Minority Leader Mitch McConnell of Kentucky on Monday. 

Johanns said of the Nelson amendment: "This alternative 1099 amendment picks winners and losers instead of fixing the 1099 problem and will actually discourage hiring. If you are a business owner with 25 employees, why would you hire more if your reward is a mountain of new tax paperwork? This approach simply defies logic at a time when our country continues to struggle with high unemployment." The Small Business and Entrepreneurship Council advocacy group is asking members to contact their senators to urge them to support the Johanns amendment. (For details, click here.)

"The extent of this new paperwork requirement on business owners is astounding, as businesses estimate that they will have to file hundreds and sometimes thousands of new 1099s per year," the SBE Council said in a letter last week to senators. "The IRS National Taxpayer Advocate Nina Olson stated that the administrative costs of small businesses are so high that it 'may turn out to be disproportionate as compared with any resulting improvement in tax compliance.' The Johanns amendment is the only solution that fully protects small-business owners from this costly new burden."

The U.S. Chamber of Commerce last week sent protest letters about the 1099 rule to Congress signed by some 3,000 business owners. Both the Johanns and Nelson amendments currently are expected to fail.