The IRS 1099 form could be the single most important – and annoying – piece of paper you’ll have to deal with this year. Any money you paid out in 2011 (anything $600 and above) for rent or for compensation for non-employees requires that you provide the recipient with a 1099-MISC form, and that you report all of your 1099-MISC forms issued to the IRS.
For the most part you’ll need to issue 1099-MISC forms to smaller businesses or individuals who provided you with goods and services. Typical examples are professional fees paid to an independent contractor or partnership, such as an attorney or accountant; money paid to independent businesspeople such as cleaners, plumbers, painters or website designers; and rent paid to a landlord.
For the 2011 tax year the IRS has inserted two new questions on business tax returns (Forms 1120, 1120S, 1065 and 1040 Schedule C). The IRS wants to know – very specifically – if your business made any payments in 2011 that would require you to file one or more 1099-MISC forms; and, if you did make a qualifying payment, have you or will you file the required forms?
It might seem strange to have the IRS asking such a direct question about a requirement that is already in their regulations. But the federal government is cracking down on underreporting of income by small businesses, and the 1099-MISC form is one of their best weapons in the battle against tax cheats. Essentially, the IRS has recruited you to help them try to catch people who are not reporting all of their income.
You must answer these two new questions honestly, since a tax return is signed under penalty of perjury. And it is extremely likely that you will have to answer “yes” to the question about making payments that require a 1099-MISC to be issued. Almost every business in America has dealings with small, independent businesses that fall into the 1099-MISC category.
If you answer “yes” to the first question, you’d better be prepared to answer “yes” to the question about issuing 1099 forms as well. If you made the payments you must file the forms and submit a report (Form 1096) summarizing your 1099 payments. Otherwise you can expect a letter from the IRS, and possibly a penalty.
For the 2011 tax year the penalties for failure to file information returns such as 1099s are as follows:
- $30 per information return if you correctly file within 30 days past the due date (by March 30 if the due date is February 28)
- $60 per information return if you correctly file more than 30 days after the due date but by August 1
- $100 per information return if you file after August 1 or you do not file required information returns
- If any failure to file a correct information return is due to intentional disregard of the filing or correct information requirements, the penalty is at least $250 per information return
- Failure to furnish correct payee statements has been increased to $100 per return, although the penalty is reduced to $30 per return for failures corrected within 30 days after the due date and reduced to $60 per return for failures corrected on or before August 1
(By the way, all of this could have been worse. A proposed new tax regulation would have required businesses to issue a Form 1099 to ALL companies they did business with in 2011, including corporations and LLCs. Imagine having to comb through your financial records to find all of that data in time to file your taxes? Luckily, cooler head prevailed and the proposal was killed off.)
The laws for filing Form 1099 are complicated and such filings are coming under increased IRS scrutiny. We urge you to consult with your tax accountant about this issue or contact Mark Kashgegian at 781.407.0300 or mkashgegian@gggcpas.com.