What is a 1099?
Generally, if you made or received payment during the year as a business or a self-employed individual, you will be required to file some type of information return. Information returns are not “tax returns; they simply provide the IRS with notice of a taxable transaction.
The general idea is that by comparing 1099s and other information returns completed by payors to the tax returns of individuals or businesses that received payment, the IRS can check to make sure that taxpayers properly report their income.
The are many different forms within the 1099 series and each is used to report different types of income that you may have paid or received during the year in the course of your trade or business. For example, 1099-INT reports interest, 1099-DIV reports dividends, 1099-C reports a cancellation of debt, and 1099-MISC reports miscellaneous income. Employee salaries and wages are reported using W-2 forms and are not covered by 1099 forms.
In addition to 1099s sent to the IRS and the recipients of payments, many states, including Colorado, also require transmitting a copy of the 1099 to the state government for state income tax purposes.
Failure to file an information return or filing an incorrect information return can result in penalties from the IRS. You should consult with a tax attorney or other tax professional to ensure that you and your business comply with the requirements for completing 1099 forms or other applicable information returns.
Why am I receiving a 1099 form?
The IRS requires that businesses complete 1099 forms for different types of payments made during the prior year. Before a 1099 form is sent to the IRS, businesses must send a copy of the 1099 form to the recipient of the payment. This copy must be sent by January 31st and it covers payments from the prior year.
Businesses and self-employed individuals that are required to send out 1099 forms (“payors”) to taxpayers that received payments then have until the end of February to send a copy to the IRS. The purpose of this delay is to allow taxpayers to review the forms to ensure that they accurately reflect taxable transactions. While businesses can choose to send 1099 forms to the recipients of payments and the IRS at the same time, most businesses elect to allow taxpayers time to review the 1099 forms.
As a result, many individuals, particularly those that are self-employed or who work as independent contractors, will receive 1099 forms each January that report payments received from businesses from the previous year. Although you are not required to file the 1099s that you receive with your tax returns, you should keep a copy of them for your records.
Because 1099 forms are used by the IRS to confirm the income reported on your tax return, it is very important that you review any 1099 forms that you receive.
What do I do if I don’t receive a 1099 form?
It is not uncommon for businesses or self-employed individuals to fail to file 1099 forms. Perhaps they have misunderstood the tax rules or are unlawfully attempting to avoid IRS detection of payments made to independent contractors.
Generally, it is not necessary for taxpayers to request a 1099 form from a businesses or self-employed individual that paid them during the prior year. This is because if you are expecting a 1099 form, then you know about a payment that you received. In that situation, you should just report the income on your tax return.
If you report income on your return that doesn’t match a 1099 (that is, if you report “too much” income), this will generally not raise any suspicions from the IRS. However, the inverse will cause problems. If you fail to report income on your tax return that the payee does report on a 1099, this will raise red flags at the IRS.
Furthermore, requesting a 1099 form that you are expecting may result in the payor issuing a second 1099 for the same transaction. Even if you never received the original 1099, only the one that was issued upon request, the IRS may register both and will think that you received twice the income.
It is not your responsibility to ensure that others fill out proper 1099s but it is your responsibility to accurately report all income that you received. The IRS will not impose penalties on recipients that have properly reported their income, only the payors that failed to issue 1099s. The amount of the penalty for payors that fail to file a 1099 is determined by the date on which a correct 1099 is eventually supplied to the IRS.
Failing to report income that matches a 1099 filed by a business or self-employed individual that paid you in the previous year is one the best ways to trigger an IRS audit. The IRS uses your social security number to match 1099 forms reporting payments to you as the recipient of the payment. So even if the business that issues the 1099 has your old address, the IRS will still be able to track the transaction using your social security number. It is important to make sure that any payors have your correct address. Additionally, you can file a change of address form with the IRS to ensure that you receive all documents that the IRS sees.
What do I do if I receive an incorrect 1099 form?
As noted above, the IRS provides a delay between the deadline that businesses must issue 1099 forms and the deadline that businesses must send a copy of the 1099 to the IRS. If you notice a mistake in a 1099 that you receive, you should notify the businesses that issued the 1099 immediately both by phone and in writing. Hopefully, the payor has not yet sent the 1099 to the IRS and the problem can be resolved without much hassle.
If the 1099 has already been sent to the IRS, you should contact the payor and request that they complete a corrected 1099 form. This involves the payor completing another 1099 to report the transaction and checking a “corrected” box on the form.
If the issuer of the 1099 does not cooperate with your request, there isn’t an easy answer. It may require that you make multiple phone calls to different departments or provide copies of invoices or work orders. If neither of these options work, you can try contacting the IRS to address the problem. If the payor still refuses to cooperate, it will require you to address the incorrect 1099 on your tax return. Including an explanation or additional documentation with your tax return may be able to ensure that the IRS does not think that you received less income than you actually did. As with most disputes of this nature, it is very important to keep records of your communications with the issuer of the 1099 or the IRS.
If you continue to run in to problems addressing an incorrect 1099, legal representation may be your best option. The attorneys at Robinson & Henry can help contact the IRS or payors on your behalf. Often times, the mere threat of a lawsuit can encourage a payor to deal with an incorrect 1099 form.
What do I do about a fraudulent 1099 forms?
One of the primary purposes of 1099 forms and other information returns is to help prevent tax fraud and ensure that income is properly reported and taxed. Nevertheless, tax fraud and tax evasion are still very real problems and incorrect or fraudulent 1099s can be the “smoking gun” in a tax fraud situation.
If a payor files a fraudulent 1099 form or fails to file a 1099 form for payments made, that payor may be subject to IRS penalties. The amount of the penalty will depend on when the payor ultimately provides a correct 1099 to the taxpayer and the IRS.
If the IRS determines that a payor willfully or intentionally filed a 1099 form, the penalties become much more severe. The penalty for intentionally disregarding filing or correcting an information return is at least $250 per return with no maximum penalty. Additionally, if a payor has filed a fraudulent 1099 for payments made to you, you may be able to sue for damages.
If you believe that the 1099 forms that you have received may be connected to tax fraud, it is important to contact a tax attorney. Tax law is incredibly complex. The experienced tax attorneys at Robinson & Henry can ensure that you are not falsely connected to a tax fraud situation. They can help defend your rights in court if the issuer of a 1099 has attempted to exploit payments that were made to you
Dealing with the IRS is serious business. It is important to stay on top of your financial records and to keep tabs on all payments that you have made or received. As soon as you realize that you may have a tax problem related to 1099 forms, it is wise to seek legal advice.