When a taxpayer signs their income tax return, they sign the following statement:
“Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.”
Note the first four words of this statement, “Under penalty of perjury.” Most taxpayers pay little attention to this phrase and do not realize that they have taken an oath stating that their return (and all attachments to it) is correct. By signing your return, you are making an oath. Signing this statement while knowing something on the form is incorrect, is a crime called perjury.
According to Merriam-Webster, perjury is “the voluntary violation of an oath or vow either by swearing to what is untrue or by omission to do what has been promised under oath.”
Perjury is a crime, a crime that often forms the foundation of another tax crime called Tax Fraud. Tax fraud is willfully preparing a materially false tax return to evade tax.
The good news is this – perjury is seldom prosecuted for nonmaterial omissions. The bad news: Perjury is super-handy when assessing a penalty called the Intentional Disregard Penalty (discussed below).
Small Business and Tax Fraud
The IRS believes that the majority of tax evasion in the United States can be traced to a single source. This source is small business owners who intentionally fail to report earned income. Why do so many owners under-report income? It’s easy! It’s also so widespread that the IRS lacks the resources to audit small businesses into meaningful compliance. Although evasion runs rampant, the amount of fraud per enterprise is relatively low. This fact makes mass-auditing less than cost-effective.
Lacking an effective method to attack this fraud directly, the IRS decided on another approach. It would shift focus to the fraudsters’ customers - businesses that fail to file Form 1099-NEC and Form 1099-MISC.
Form 1099-NEC and 1099-MISC are vital compliance tools. They tell the IRS when a business receives income that should appear on its tax return. The data backing the decision to focus on 1099s is compelling - when companies file Form 1099-NEC and 1099-MISC, taxes get paid. When they ignore the rules and don’t submit them, tax evasion occurs.
Enforcement Solution: The Treasury Department and Congress have wrestled with increasing Form 1099 compliance for years. Their most recent attempt contains two prongs:
1) Force owners to attest to their 1099-MISC reporting requirements under penalty of perjury, and
2) Drastically increasing the penalties for failing to file the required forms.
Measure One - 1099 Perjury Questions
In 2011, the IRS added two seemingly-innocent questions to all business tax returns. These questions are:
The taxpayer is then required to check the box “yes” or “no” to each question as a declaration made under penalty of perjury.
Significance of Form 1099 Questions: To answer question number one, Did your business make any payments that would require filing form(s) 1099? the signor must understand Form 1099 reporting rules. If the owner marks “yes,” IRS computers will expect to find 1099s the taxpayer filed. If, however, the owner marks “no” and the return has deductions that indicate a reporting requirement, the taxpayer has opened themselves up to IRS scrutiny.
When answering question two, If yes, did your business file, or will it file form(s) 1099? the owner is informing the IRS whether or not they followed the rules. Answering “no” tells the IRS that the business owner:
In other words, answering “no” tells the IRS that the signor deserves a penalty.
Measure Two – Increased Penalties
The penalty for not filing required 1099 forms have doubled TWICE in recent years. The first was with The Small Business Jobs Act of 2010, which increased the fine for not submitting a 1099 form from $50 to $100. If the IRS believed the failure was due to intentionally disregarding 1099 reporting rules, the penalty increased from $100 to $250.
Then, in 2015, these penalties more-than-doubled again as a revenue generator (yes, a revenue generator) in the Trade Preference Extension Act. The penalty for not filing forms 1099 increased to $250 for each return, and the Intentional Disregard penalty increased to $500.
These penalties are also tied to inflation – meaning that, as you read this, they have likely risen again.
Unseen Business Killer: Want to know a fact many owners and their accountants don’t realize until it’s too late? The penalties listed above 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 Form 1099-NEC or 1099-MISC. For many business owners, failing to file more than a handful of 1099s can force their doors to close forever.
The Intentional Disregard Penalty Trap
Remember the perjury questions mentioned earlier? When an owner affirmatively states that they were required to file any 1099s but fails to do so, they have intentionally disregarded the rules. The same thing happens if they swear they didn’t make any payments that require 1099s, but such payments occurred - intentional disregard. The result in either case: A potential penalty of over $1,000 per 1099!
The Take-Away – Learn the Rules
Quite frankly, the stakes could not be higher. Not filing Forms 1099-NEC or 1099-MISC can destroy your business. Protect your livelihood and family by learning the 1099 reporting rules. Check out our Form 1099-NEC and Form 1099-MISC Training Course. It’s also critical that any independent contractors you send Form 1099-NEC are not common-law employees. Our Employee vs. Independent Contractor Training Course is the perfect companion to our 1099 class. It will help you avoid employee misclassification and minimize the damage if it happens.
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.
This course package is thorough and will give you a solid handle on how to optimize your business expenses to minimize your taxes and keep appropriate records to handle any IRS challenges. Only want to dive into a particular topic? Jump to that video and scan forward to where your issue is addressed. Or watch the whole series to learn it all!- Josh, Charles Town, WV, Real Estate Agent Tax-Cut Library, Agent Edition Course
Your video class on this issue (HOA taxes) has given me the confidence to go forward.- Desmond, Frederick, MD, 1120-H Basics Course
I haven’t practiced in the accounting field in quite some time and wanted a refresher. The Overnight Account course 1099-Misc Basics was very helpful! It was simple to follow along and understand each section. I would highly recommend this course! Staff were quick to answer my question as well. I love that I can review the modules again, if needed, at any time. I will definitely be using them again for more classes.- Tammy, Anchorage, AK, 1099-MISC Basics (Training Edition) Course
The course was excruciatingly detailed, which I appreciate. I definitely recommend this course to anyone who even thinks they may need it.- Greg, Brookfield, IL, 1099-MISC Basics Course
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