For every business tax return that we prepare, Forms 1120, 1120S, 1065 and Schedules C,E and F that are included with Form 1040, the following question is asked by the Internal Revenue Service.
- Did you make any payments that would require a form 1099 to be issued to any individual. If you answer Yes to that question, then you must answer the second question.
- If a form 1099 was required to be issued, did you issue that form 1099. We must answer these two questions on every return that we prepare.
In December, we send out a Year-End letter to all of our clients reminding them of this responsibility and if the clients want us to prepare those forms for them, we would be happy to do that, and to provide us with the information needed to prepare those forms. We need the name of the recipient, the address and social security number and the amount paid to the recipient. The requirements for filing these various 1099 forms are as follows:
- Form 1099 Dividends – for dividends paid in the amount of $10 or more
- Form 1099 Interest – for interest paid in the amount of $10 or more
- Form 1099 Miscellaneous – for rents or services rendered and paid in the amount of $600 or more
There are numerous other forms 1099, but these are the most common forms that we see in our practice. The forms 1099 are due to the recipients by January 31 and to the Internal Revenue Service by February 28 of the following year. The due date for filing forms 1099 and W-2s that are filed electronically is March 31. We do file these forms electronically if we prepare them. There is a three tiered penalty system in place for Information returns that are filed late or not filed.
- If the returns are not filed by the due date, the penalty is $30 per return if filed within 30 days after the due date.
- If the returns are filed 30 days after the due date but before August 1, the penalty is $60 per return.
- If the returns are not filed by August 1, the penalty is $100 per return.
We recently had a client’s tax return audited by the Internal Revenue Service in our office that makes the filing of these information returns a more serious matter. The taxpayer did not attempt to ascertain the social security number of the individual that they paid in excess of $600 annually for rent. As a consequence of this inaction, no form 1099 Miscellaneous was issued to this recipient by the taxpayer. The Internal Revenue Service attempted to bill the client for the tax that should have been paid by the taxpayer, because the client did not attempt to get the social security number of the recipient. On what grounds did the Internal Revenue Service have the right to ascertain the tax from our client? They exercised the Back-Up withholding rules and regulations for not issuing forms 1099 and for not attempting to get the social security number of this recipient. We were able to prove to the IRS that the recipient did indeed pay the tax on the rental income by having the taxpayer complete Form 4669. This form states to the Internal Revenue Service that the tax was paid on the income received. We prevailed on this issue, but the recipient was not required to complete this Form 4669, and we could have had a real problem in this case. Our advice to all of our clients that pay individuals, Limited Liability Companies, Partnerships or other non corporate entities for services or rents, is that they must have a completed Form W-9 in the file, before payment is made to any entity. The information contained on the Form W-9 is the information that is needed to complete the Form 1099.
If you have any questions or comments on this article, please call our office. Just remember that we will be asking you if you prepared the forms 1099 for every tax return that we prepare.
John M. Manning