Businesses that do not issue Form 1099 as required have been in for some nasty surprises from the IRS lately. There are several variations of Form 1099, but the primary one for business services is the 1099-MISC. Beginning January 1, 2016, penalties for failure to file this information return have risen to $250 per recipient, with the maximum penalty capped at $3 million. In cases where the IRS believes there is intentional disregard of the law, the penalty increases to $500 per instance.
In addition, there are cases where IRS agents have disallowed any expense beyond $599 when required 1099s are not issued.
Recap of Requirement
The appropriate form 1099 must be issued to any non-employee, unincorporated entity paid $600 or more during the tax year.
Filing deadlines fall within the first quarter of the year following that during which the expense was incurred:
- Last day of February (paper filing)
- Last day of March (electronic filing)
Note that the requirement only applies to expenses related to business or trade; individuals are not required to issue 1099s.
Window for Correction
There is some relief for taxpayers who recognize an error and make an effort to correct it.
- Within 30 days: the penalty is $50 per instance (maximum $500,000)
- After 30 days but before August 1: the penalty is $100 per instance (maximum $1.5 million)
What to Do
For next year’s filing (covering tax year 2016), make sure that vendors are tagged in your bookkeeping software. You can issue the 1099s yourself, have your bookkeeper do so or provide us with the appropriate information before the filing deadline. If you have any additional questions or concerns about whether your business is in compliance, contact your AKM CPA to review your information.