When a taxpayer signs their income tax return they also 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 on 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. To sign this statement while knowing something on the return is incorrect, you may have committed a crime called perjury. I am not an attorney, so I will rely on Merriam-Webster’s definition: 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. Here’s another definition that more aligns with the IRS statute: Willfully aid or assist in the preparation or presentation of any return or other document that is false as to a material matter.
In short, perjury is a crime – a crime that often forms the foundation of another tax crime called tax fraud. Although the crime of perjury is seldom prosecuted and I am quite sure (and hopeful) that the readers of this article have never and will never intentionally and so materially falsify a tax return so that it rises to the level of tax fraud, the perjury statement you sign when you sign your tax return comes in handy when the IRS assesses another penalty, the Intentional Disregard penalty.
Unpaid Tax and Forms 1099: The IRS believes that the root of the majority of tax evasion in the United States is caused by a single source: Small business owners. Tax Evasion is the illegal practice of not paying taxes by not reporting income, reporting expenses not legally allowed, or by not paying taxes owed. The primary form of tax evasion committed by small business owners is underreporting income. Why? It's easy! It is also so widespread that the IRS lacks the resources to audit small business tax returns. The amount of underreporting per return is also relatively small, making the return-per-audit less than cost-effective. The problem is the sheer number of small business owners who underreport income.
Why is underreporting of business income so easy and widespread? Because many – way too many - small business owners, those who pay income to the under-reporters fail to file forms 1099 when required, primarily Form 1099-MISC. Form 1099-MISC tells the IRS that the recipient received income in a tax year and that income should appear on the recipient’s income tax return. Form 1099-MISC is a vital compliance tool. The math is pretty compelling - when Form 1099-MISC is filed, income is reported. When Form 1099-MISC is not filed income goes unreported.
Enforcement Solution: The Treasury Department and Congress have wrestled with this 1099-MISC problem for years. How can they increase compliance? The most recent answers lie in requiring business owners to swear that they understand the 1099-MISC rules, tell the IRS whether or not they filed all required 1099-MISC forms, and use the perjury statement to assess the Intentional Disregard Penalty when their statement is proven false.
New Enforcement Measures: In 2011 the IRS started to implement measures to increase 1099-MISC reporting by small businesses. These measures include:
Below I will discuss these measure in more detail.
Measure One - 1099 Perjury Questions: In 2011, two seemingly-innocent questions were added to all business tax returns. These questions are:
The taxpayer is then required to check the box “yes” or “no,” a response made under penalty of perjury when the taxpayer signs the return.
Why is this Significant? How a business answers these two questions helps the IRS determine if proper reporting was done. In order to answer question number one, business owners must know the rules regarding 1099-MISC reporting. If the owner marks “yes,” IRS computers will expect 1099-MISC Forms to be filed by the taxpayer. If the owner marks “no” and there are amounts entered onto lines of the return that would generally indicate a 1099 reporting requirement, the taxpayer may have opened themselves up to further IRS scrutiny.
When answering question two, the business owner is directly informing the IRS whether or not they plan to follow 1099-MISC reporting rules. Answering “no” tells the IRS that the business owner:
Measure Two – Increased Penalties: The penalties for not filing required 1099 forms have doubled TWICE in recent years. First was with The Small Business Jobs and Credit Act of 2010 which increased the penalty for not filing forms 1099 from $50 to $100 per form. If the IRS believed the failure was due to intentionally disregarding 1099 reporting rules the penalty increased from $100 to $250 per form.
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 is now $250 per form and the Intentional Disregard penalty increased to $500 per form.
Important Note: 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, effectively doubling the penalty per form.
And herein lies the perjury-trap: Remember the perjury questions mentioned earlier? If a business affirmatively states that they were required to file forms 1099 but fails to do so, they have intentionally disregarded the 1099 reporting rules. If, on the other hand, the business states that they were not required to file Form 1099 but it is later revealed that they were, the business has intentionally disregarded the 1099 reporting rules. The result in either case: A potential penalty of $1,000 per 1099!
The Take-Away – Learn the Rules: Protect your business by learning to properly file your 1099 forms. If your business has been lax in collecting payee information it may be time to implement policies that will ensure each payee’s tax identification number is collected before any vendor is paid.
Quite frankly, the stakes could not be higher. Not filing your Forms 1099 can literally destroy your business. If you or your staff need effective and inexpensive training on form 1099-MISC we invite you to check out our Form 1099-MISC Basics Course for Small Business or our training course, Form 1099-MISC Basics (Training Edition).
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
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