Last year the President signed the 1099 Repeal Act, which eliminated two burdensome provisions related to 1099 reporting that were originally enacted in two separate tax acts passed in 2010. Accordingly, we have received several questions requesting guidance on the 1099 reporting requirements.
Additionally, the 2011 income tax forms were recently released for Individuals (Form 1040 - Schedules C, E and F), Corporations (Form 1120), S-Corporations (Form 1120S) and Partnerships (Form 1065), that contain new questions and must be answered by the taxpayer regarding their compliance with the 1099 reporting requirements.
- Did you make payments in 2011 that would require you to file Form(s) 1099?
- If “yes,” did you or will you file all required Form(s) 1099?
In light of these developments, we thought it would be a good idea to revisit the 1099 reporting requirements below.
What to Report
Taxpayers should report payments of $600 or more to individuals, sole proprietorships or partnerships for rent, prizes or awards, services rendered for a trade or business by individuals, sole proprietorships, and partnerships not treated as their employees. Dividends, interest and royalties must be reported whenever a payment is $10 or more. Payments to corporations for medical services also must be reported on Form 1099-MISC.
Payment to attorneys
Attorney’s fees of $600 or more paid in the course of a trade or business are reportable in Box 7 of Form 1099-MISC. However, if a payment is made in the course of a trade or during business with an attorney relating to legal services and an attorneys fee cannot be determined, the total amount paid to the attorney (gross proceeds) must be reported in Box 14.
These rules apply (a) whether or not the legal services are provided to the payer, and (b) whether or not the attorney is the exclusive payee (e.g. the attorney’s and claimant’s names on one check). However, these rules do not apply to profits distributed by a partnership to its partners that are reportable on Schedule K-1.
The exemption from reporting for payments made to corporations does not apply to payments made for legal services.
- To Recipient: January 31, 2012 (February 15 if box 8 or 14 include payments)
- To IRS, Colorado, Kansas and Missouri: February 28, 2012 (March 31 if filing the Federal forms electronically)
The Small Business Jobs Act of 2010 increased Form 1099 reporting penalties for returns required to be filed after December 31, 2010. If you fail to file a correct information return by the due date and you cannot show reasonable cause, you will be subject to a penalty. The penalty applies if you fail to file timely, fail to include all required information, or include incorrect information on the return. The penalty also applies if you file on paper when you were required to file electronically, you report an incorrect TIN or fail to report a TIN, or if you fail to file paper forms that are machine-readable.
The amount of the penalty is based on when the correct information returns are filed. The penalties are as follows:
- $30 for each information return if the correct information is filed within 30 days after the due date (by March 29 if the due date is February 28), with a maximum penalty of $250,000 per year ($75,000 for small businesses—defined below).
- $60 for each information return if the correct information is filed more than 30 days after the due date but before August 1, with a maximum penalty of $500,000 per year ($200,000 for small businesses—defined below).
- $100 for each information return that is not filed at all or is not filed correctly by August 1, with a maximum penalty of $1,500,000 per year ($500,000 for small businesses—defined below).
You are a small business if your average annual gross receipts for the three most recent tax years (or for the period you were in existence, if shorter) ending before the calendar year in which the information returns were due are $5 million or less.
Exceptions to the Penalty
In general, the penalty will not apply to any failure if you can show it was due to reasonable cause and not to willful neglect. In addition, the penalty will not apply to a de minimis number of failures. Failures can include information returns that were filed timely, but with incomplete or incorrect information and were corrected by August 1. The penalty will not apply to the greater of 10 information returns or one-half of 1 percent of the total number of information returns that are required to be filed for the year.
Failure to Provide Statement or Providing Incorrect Payee Statement
Penalties for failing to furnish a payee statement involves tiers and caps similar to those penalties for failing to file an information return. Penalties may apply when there has been a failure to furnish a payee statement to the person prescribed by the required due date, a failure to include all of the required information on the payee statement or if incorrect information has been included on the payee statement.
A first-tier penalty will be $30, subject to a maximum of $250,000; a second-tier penalty will be $60 per statement; up to $500,000, and the third-tier penalty will be $100; up to a maximum of $1,500,000.
Limitations will apply on penalties for small businesses as well as increased penalties for intentional disregard. The penalties parallel those for failure to furnish information returns.
Penalties for Intentional Disregard
Higher penalties of $250 per document may be imposed for intentional disregard for filing, providing payee statements, and for correct information reporting requirements with no maximum penalties.
Businesses should ask vendors to complete Form W-9 prior to making payments. The W-9 will include the vendor's name, address and taxpayer identification number ("TIN"). In addition, the form requires the business to include how the business will be taxed. This information acquired prior to payment will eliminate the need for potential back-up withholding, which would be required without a proper TIN
TIN matching is an e-service available on the IRS website. This service allows authorized payers to compare 1099 payee information to IRS records prior to filing information returns to decrease reporting errors and penalties. To register for the program click here.
To order forms from the IRS call 1-800-TAX FORM or by website click here. For state and local forms, download or order forms from their respective websites or contact RubinBrown for assistance.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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