New Form 1099 Compliance Question on 2011 Tax Return Forms

Over the years, Congress has dramatically increased the penalties for not filing Forms 1099 (or filing incorrect 1099 forms) when required.  At the same time, Congress and the IRS have increased the complexities of completing these forms.  Now, as a "coup de grace," the IRS has added a question to each of the business entity tax returns, and also to individual sole proprietor business forms (e.g. Schedules C and F), where you must respond to whether you made payments during 2011 for which Forms 1099 were required to be completed, and if so, did you file ALL of the required forms?  Since tax returns must be signed under penalties of perjury, the IRS has "gotcha" if you answer favorably but didn't fully comply.

The IRS is trying to close the "tax gap" by catching people who don't pay income tax on all of their earnings.  Using IRS computers to match income reported by payers to the tax returns of payees is an efficient way for the IRS to audit income.  However, the burdens on business have been greatly increased by forcing businesses to report the amount of money paid to other businesses and people.  I counted 30 different types of information reporting forms in the 2011 Form 1099 instructions!  There are even more information reporting forms not included in the 1099 family, such as Schedule K-1's, Form 8594 for business asset purchases, and Form 8937 for corporate distributions affecting stock basis.  Companies must install adequate software systems to keep track of the information that must be reported in order to avoid significant penalties that in some cases could put them out of business.

Forms 1099 must generally be provided to payees by January 31, 2012.  A 30-day extension may be requested by sending a letter to the IRS.

Forms 1099 must generally be provided to the IRS by February 28, 2012.  Electronic filing is required if 250 or more copies of Form 1099 must be completed.  The 250 test applies separately to each type of Form 1099.  The due date for sending electronic information to the IRS is April 2, 2012.  However, advance approval to file electronically must first be received by filing Form 4419 at least 30 days before the April 2nd due date.  An automatic 30-day extension can be received by filing Form 8809.  In addition, a one-year waiver from filing electronically can be requested on Form 8508 at least 45 days before the due date.

Refer to the IRS instructions for when Forms 1099 are required and the type of information that must be reported.  The penalties for not filing Forms 1099 with correct information when required are shown below.  The amount of the penalty varies upon the timeliness of correcting mistakes and whether your business qualifies as a small business.  A small business is one whose average annual gross receipts for the three most recent prior tax years (or period of existence if shorter) are $5 million or less.  Note that the penalties shown must be doubled because the penalties apply separately, once for not timely providing correct information to payees and again for not timely reporting correct information to the IRS.

1. $30 per 1099 if you correctly file within 30 days of the due date.  Maximum penalty is $250,000 ($75,000 for a small business).
2. $60 per 1099 if you correctly file after 30 days of the due date but by August 1st.  Maximum penalty is $500,000 ($200,000 for a small business).
3. $100 per 1099 if you correctly file after August 1st.  Maximum penalty is $1,500,000 ($500,000 for a small business).
4. Failure to file electronically when required is another $100 per 1099 above 250.
5. Intentionally disregarding the duty to file Forms 1099 when required is $250 per 1099 with no maximum penalty.

Penalties can be waived for reasonable cause, not for willful neglect.  Also, an inconsequential error or omission is not considered a failure to report correct information.  A special de minimis rule applies for corrections made by August 1st; see the instructions.