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The Importance of 1099s

Last week, we talked about penalties associated with undeclared income. Undeclared income is a big problem for the IRS. The IRS estimates that $450 billion is undeclared annually. They claim that over the past thirty years undeclared income has ranged from 16 to 20 percent of total tax liability. Some estimates state that 80% of the underreporting of income comes from taxpayers who either underreport sales or overstate expenses in their businesses. Because of this underreporting problem the IRS has increased enforcement and the penalties on tax information reporting.

So, What Does this Mean to Your Business???
I know you are thinking "I report all of my income properly so I shouldn't be concerned with the IRS"? Well the answer is you should be worried. As a business owner, you are required to send 1099's to certain vendors. There are 17 different types of 1099's. Many of the small businesses we see, fail to adequately prepare and send out 1099's.

The most common 1099 for small business is Form 1099-MISC, which is used to report miscellaneous income payments to nonemployees (contractors). If your business spends $600 or more for services from a business during a tax year, you must report the amount on a 1099-MISC. All types of businesses are eligible to receive a 1099. S-Corps, LLCs, LLPs, sole proprietors, etc should receive a 1099 from your business.

Some small businesses will also need to issue: 1099-C (Cancellation of Debt), 1099-DIV (Dividends and Distributions), 1099-INT (Interest Income), and 1099-S (Proceeds from Real Estate Transactions).

Form 1099 Penalties
It is very important to comply with all 1099 reporting requirements. Penalties associated with not issuing them by the due date (range from $30 to $100 per 1099 ($500,000 max per year). If you intentionally fail to issue and file 1099's, you are subject to minimum penalty of $250 per 1099 with no maximum limit on the penalty.

Also beginning in 2011, the IRS added two new questions to all federal business tax returns. One asks whether any payments were made during the year that would require Form 1099 to be filed and the other asks whether or not you filed all required Forms 1099. When you sign your tax return, you are stating that, under penalties of perjury, to the best of your knowledge your tax return is accurate and complete - and the IRS generally takes perjury charges very seriously.

A misdemeanor perjury charge could cost you up to $1k and/or one year in prison. A felony perjury charge could cost you a lot more - thousands in penalties and possibly your freedom.

How To File A 1099
Filing a 1099 is a labor intensive process. Computers only do a portion of the work. There are several informational steps you will have to go through before a 1099 can be prepared. We will go through the process on how to prepare a 1099 in next weeks newsletter.

IRS Changes Filing Deadlines for W-2 & 1099 Forms

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