IRS Escalates Enforcement of Form 1099 Compliance

Over the past few years, the IRS has taken an aggressive step to ratchet up its ability to enforce business compliance with annual Form 1099 income reporting regulations.  The 1099 form is a major part to the IRS’ Information Reporting Program which tracks payments made by businesses to other taxpayers.

Entities Required to File Form 1099:

Businesses, as well as nonprofit organizations and governmental units, are required to file Form 1099 to report certain types of payments made in the course of carrying out their mission.

Form 1099-MISC is required in the following situations:

  • Payments totaling $600 or more in any given year for service performed by people that are not treated as its employees
  • Payments for medical and health care payments
  • Prizes and awards
  • Proceeds paid to attorneys
  • Payments of $10 or more for royalties must also be reported on Form 1099-MISC.

Payments for which a Form 1099-MISC is not required:

  • Payments to a corporation that is treated as C or S Corporation
  • Payments for merchandise, telegrams, telephone, freight, storage and similar items
  • Payments of rent to real estate agents
  • Wages paid to employees
  • Business travel allowance paid to employees

Back-up Withholding and Form 1099:

In order to issue Forms 1099, businesses must obtain the Taxpayer Identification Number (TIN) or SSN from their service providers. The TIN (or SSN) number must match their name. If they do not match, the IRS will send you a letter identifying the inaccurate 1099 and may assess penalties. Businesses should obtain Form W-9 from all vendors, whether incorporated or not, as reporting requirements are expected to change in the future. The Form W-9 should be retained on file for at least three years after you cease doing business with that vendor. If the vendor/contractor does not provide a W-9 then the business has the option to take out “backup withholding” at the rate of 28% for any payments made to the vendor.

The Penalties:

If you fail to provide Form 1099s and cannot show reasonable cause for the failure, you may be subject to a penalty. The penalty applies if you fail to provide the statement by the deadline, fail to include all information required to be shown on the statement, or include incorrect information on the statement. The penalty is:

  • $30 per information return for returns filed correctly within 30 days after the due date (by March 30 if the due date is February 28), with a maximum penalty $250,000 a year ($75,000 for certain small businesses)
  • $60 per information return for returns filed more than 30 days after the due date but by August 1, with a maximum penalty $500,000 a year ($200,000 for certain small businesses)
  • And, $100 per information return for returns filed after August 1 or not filed at all, with a maximum penalty $1,500,000 a year ($500,000 for small businesses)
  • If company intentionally disregards the requirement to provide a correct payee statement, it is subject to minimum penalty of $250 per statement, with no maximum.

If you have any questions or concerns, please contact Becky DaVee, CPA, partner.  We would be more than happy to assist you with the process to help ensure accurate record keeping and year-end reporting.