IRS Adds New Compliance Question to Business Tax Returns - Important Deadline February 28th
posted Feb 21, 2012 by Paul Oliveira, CPA
The IRS has added a new compliance question that will affect all business tax returns. The question, located on business tax returns including Schedules C and E on Form 1040, asks the preparer if they have issued the proper 1099 forms. Added to ensure that business and landlords issue a Form 1099 for all independent contractors that meet the requirements, the IRS is striving to eliminate a large gap of income that typically has gone unreported.
Starting this year, on every business tax return including Schedules C and E of Form 1040, the IRS has added a compliance question asking if you have issued the proper 1099 forms. Answering this question properly is important because all tax returns are signed under the penalties of perjury. This question was added to ensure that businesses and landlords issue a Form 1099 to each independent contractor and service provider, who are not incorporated, for services rendered during that year if payments were $600 or more.
It is also required for businesses to report to the IRS on Form 1096 – the number of 1099’s issued, the total amount paid, and to whom 1099’s were given. The IRS has identified a large gap of income that goes unreported each year, mostly by independent contractors. This question was designed to help the IRS ensure that all monies earned are properly reported as income by the recipient.
It is good practice for businesses to have their independent contractors and/or service providers complete a Form W-9 before these services are rendered and paid. This will allow the business owner to obtain the proper information and have everything available at year end to complete the required Forms 1099. Click on the link to retrieve a blank copy of this form and have your independent contractors fill them out.
Form 1099 is due to be sent to the independent contractor by January 31 and Form 1096 is due to the IRS by February 28. Penalties for failure to meet the deadline to file include:
- $30 penalty per form 1099 is applicable if you file no more than 30 days past due
- $60 penalty per form 1099 is applicable if you file more than 30 days after the due date but before August 1, 2012
- $100 per 1099 form if filed after August 1, 2012
In addition to the above penalties, withholding at 30% of the amount paid to the independent contractor can be assessed. The tax law states that if a service provider refuses or fails to provide their name and Taxpayer Identification Number (TIN) to the payor [your business], that business is required to withhold 30% from the payment being made to that contractor and remit it to the IRS as backup withholding. Failure to withhold results in the payor being liable to the IRS for the 30% that should have been remitted. Lastly, if you were to be audited by the IRS, the examining agent can propose disallowing the related deduction for failing to fully substantiate the payment and business purpose.
If you have questions regarding filing your Form 1099, how to answer the new question or properly recording the use of an independent contractor, please contact any member of our tax services team at Trusted Advisors call 888-KLR-8557.