All businesses, nonprofits, and government agencies must file Form 1099-MISC when they make payments that require it.
A few years ago these 1099's were little more than an afterthought for most taxpayers, particularly small businesses owners too busy for more bureaucratic red tape. And why shouldn't 1099's have been a mere afterthought? The penalties for not filing them 1099's were very small and seldom enforced. But, be on alert - those days are over.
Small Business Enforcement: Over the past few years Congress and the U.S. Treasury have taken aggressive steps to ratchet up enforcement of Form 1099 compliance by small business owners. Why? Their studies reveal two important facts about 1099's and small business. First: When 1099's are not filed income is under-reported (or not reported at all) by those who should have received them, and Second: Small businesses are the least likely of all taxpayers to file their 1099's when required to do so.
Tax Gap Conclusion: The Treasury's conclusion is both obvious and financially stunning. The single largest contributor to the nation's tax gap (tax revenue lost each year due to unreported income) are small business owners. Small businesses account for approximately 40% of the entire tax gap. This equates to over $150 Billion of tax revenue lost each and every year. Why? Simply because small business owners fail to file their 1099's, particularly Form 1099-MISC.
Enforcement Ramp Up: Congress and the Treasury Department has been struggling for decades to reduce the small business tax gap with little measurable result. Recently and seemingly out of sheer frustration (and the growing belief that such noncompliance borders on criminal conduct), the IRS added 1099 perjury questions to all business returns while Congress hiked the financial consequences of noncompliance. These perjury questions were added in 2011. These questions basically require owners to make two statements under oath: 1) That they understand the 1099 compliance rules and 2) Whether or not they decided to follow these rules.
In the most recent enforcement action (2015), Congress doubled penalties for businesses who fail to file forms 1099 - the second major increase in five years. The penalty for not filing many information returns, including Form 1099-MISC, increased to $250 per form ($260 at the time of my writing due to inflation). The Intentional Disregard penalty increased to $500 per form (now $530). Owners should take heed that the 1099 perjury questions make it extremely easy to levy the $530 intentional disregard penalty.
Double Whammy: Owners should also be extremely cognizant of the fact that these penalties can be applied separately to 1) Not filing the forms with the IRS, and 2) Failing to provide a copy to the recipient. This effectively doubles the penalty for each 1099, making the potential penalty for not filing a single 1099-MISC over one thousand dollars!
Noncompliance is Risky Business: The days of brushing off 1099's as a non-consequential afterthought should be over for your business. Most owners are required to file at least a few 1099-MISC's. Those who operate in the real estate or construction industry are generally required to file many more. The gamble taken by not filing required 1099-MISC can literally put you out of business. For example, a small business who fails to file a mere seven 1099-MISC for a three year period (miss them one year the IRS know you probably missed them in previous years) and your small business is facing a potential $21,000 penalty plus interest!
Take Away - Protect Yourself: Business owners who want to avoid these costly penalties should learn the rules. Do not rely on an outsourced bookkeeper or tax professional to handle this for you. Outsourced bookkeepers seldom have the information they need to file your 1099's and tax season starts too late to meet the filing deadlines. You need to know the rules! To help you understand these rules, OvernightAccountant has created an inexpensive course on Form 1099-MISC Basics for small business owners.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
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