1099s are often viewed as hassle, with the taxpayer loathing to receive them and the business loathing to send them out. However, the IRS does like 1099s and is making more of a concentrated effort to keep track of the process. According to Investopedia, in 2015 the IRS “sent 3.7 million CPA2000 notices to taxpayers saying that, based on those matches they owed more money.” This essentially means the income and/or payment information the IRS has on file does not match the information reported on your tax return, and due to this more money is owed. The IRS is paying attention.
Much of the information circulating on this topic is directed to those receiving the 1099, but it can be just as complicated for those sending 1099s. There is no shortage of penalties imposed on filers, if rules are not followed.
Top 1099 Mistakes to Avoid:
- Incomplete 1099s. You may think you are covering your bases, but in reality fines for sending incomplete 1099s range from $175-$200 per 1099. It is better to send nothing than to send a 1099 that is partially complete.
Rule of Thumb:
- Do not send an incomplete 1099. However, if the vendor refuses to provide the information, after you have asked for the information, then you should file. Otherwise, hold the 1099 until you have received the information from the payee.
- Make sure that all 1099s include the payee’s Taxpayer Identification Number (“TIN”). You can gather this information by asking them to complete a Form W-9.
- Not sending a 1099 to all payees. You have to send all payees a 1099 if the payments meet the filing threshold, unless they are a corporation.
Rule of Thumb:- If you pay more than $600 to any of your vendors and they are a non-corporate entity (except for rents paid for storage) you should issue them a completed 1099.
- If you are unsure what kind of entity the vendor is, simply ask for a completed Form W-9. The form includes entity information.
The IRS is cracking down on the 1099 process. According to the IRS’s website they “may provide administrative relief from a penalty that would otherwise be applicable under its First Time Penalty Abatement policy.” I have seen this relief applied to some of my clients’ situations, but it is not a risk you want to take. If you have any questions on when to send a 1099 please ask your tax advisor, and make sure that you thoroughly understand the instructions for Forms 1099.
