Tax

The IRS continues to increase its scrutiny of Form 1099 reporting by individuals and businesses. The IRS uses 1099s submitted to them to be sure Form 1099 recipients report the income on their income tax returns. Failure to comply with 1099 filing requirements may result in substantial penalties. Because of the Small Business Jobs Act of 2010, certain 1099-related penalties are more than double what they were in previous years. 

Two penalty types may apply to 1099 filings:

• Failure to file 1099s with the IRS
• Failure to provide copies of 1099s to payment recipients

The penalties increase the longer the 1099 filing failure continues or the longer it takes to correct 1099s filed incorrectly. Penalties range from $30 to $100 per form, with a maximum penalty of $1.5 million. However, if the rules are intentionally disregarded, penalties increase to $250 per 1099 with no maximum penalty. The two penalty types are not mutually exclusive—if you fail to file 1099s with both the IRS and the recipient, the penalties will be double the standard penalty rates.

The IRS added two new questions on its individual and business tax forms to increase awareness of the 1099 filing requirements and add another opportunity to identify taxpayers that should be filing 1099s but are not. The 2011 individual tax forms reporting business income, rental income and farm income (Schedules C, E and F, respectively) have two additional questions:

1. “Did you make any payments in 2011 that would require you to file Form(s) 1099?”
2. “If ‘Yes,’ did you or will you file all required Forms 1099?”

Similar questions also have been added to corporate and partnership returns.

Given the increased IRS focus on taxpayers’ information reporting obligations, it is important to know when a Form 1099 filing is required. As with most tax law, the answer varies. All entities engaged in a trade or business are required to file 1099s if certain thresholds are met. Payments made for services, non-employee compensation, rent, real estate sales and prizes of $600 or more require the filing of a 1099. Payments of interest, dividends or royalties of $10 or more also require a 1099. 

This list is not all-inclusive, and there are exceptions. For example, if income taxes are withheld on a payment, often referred to as backup withholding, a 1099 must be filed even if the amount paid to the recipient is below the filing threshold. In addition, payments to foreign persons can have much more stringent filing requirements than payments to U.S. persons.

Typically, you do not need to file 1099s to corporations, except in certain circumstances. The most common situations requiring 1099 reporting to corporations are medical and health care payments, withheld federal or foreign income tax, cancellation of debt, acquisition of secured property and payments to attorneys.

The 1099 filing requirement applies to all entity types, including sole proprietorships, partnerships and corporations. An entity is considered engaged in a trade or business if the activity operates for gain or profit. However, not-for-profit organizations also are required to file 1099s. 

On April 5, 2011, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 repealed the highly controversial law requiring rental real estate income recipients to file 1099s. Therefore, entities whose sole activity is rental real estate do not have to file 1099s. 

In order for a 1099 to be considered timely filed, certain information must be reported, and different types of 1099s may be needed depending on the types of income reported. For example, interest payments are reported on Form 1099-INT, while rental payments are reported in the rent section of Form 1099-MISC. However, each type of 1099 submitted to the IRS must include the following information:

• Your name, address and taxpayer identification number (TIN)
• Recipient’s name, address and TIN
• Amount of payments for the year

The due date for furnishing most types of 1099s for 2011 payments is January 31, 2012. If you think your trade or business activities may require you to file a 1099, you will need to act quickly to avoid potential penalties. For more information or assistance with your Form 1099 filing obligations, contact your BKD advisor.