This article discusses the challenges faced by companies in complying with the Internal Revenue Service (IRS) 1099 filing regulations. The author highlights the consequences of non-compliance, including significant penalties and backup withholding assessments. The article provides an example of how a company can be penalized for just a few errors in 1099 filings, resulting in a final assessment of $50,730. The article also mentions the IRS’s new focus on 1099 audits, making it imperative for companies to ensure they get a W-9 form from every vendor that is correct and complete and are certain of what payments are reportable and why. Finally, the article provides information on the penalties assessed by the IRS for non-compliance with 1099 filing regulations.
Understand the IRS’s new focus on Form 1099 audits
Materiality works in a lot of areas, however, when it comes to 1099s it is not advised. The IRS is no longer playing around in this area. Several years ago, the IRS issued a memorandum that updated their employment audit procedures to include a review of information returns. The memorandum states that IRS examiners must now “address whether the appropriate information returns were filed for any reportable payments (e.g. Form 1099-MISC…)” during an employment audit. This significant increase in 1099 enforcement came from the Treasury Inspector General’s report titled “Due to the Lack of Enforcement, Taxpayers Are Avoiding Billions of Dollars in Backup Withholding.”
If you are audited, it doesn’t take much for penalties and backup withholding assessments to add up. An example is the best way to highlight this. Let’s assume you added 200 vendors during the year and issued 50 1099 forms at year-end. You were able to get all but ten W-9s from your vendors by January 31st. However, you didn’t realize that you misclassified five vendors as corporations and forgot that legal settlements paid to an attorney often have to be reported to both the claimant and the attorney. There were just a few errors, however, they resulted in substantial penalties.
The final assessment of $50,730 came from just ten vendor payments, with the majority of the exposure related to backup withholding. Also, consider that the example does not include any interest assessments. Clearly, it is imperative to get a W-9 form from every vendor that is correct and complete. Secondly, it is important to be absolutely certain what payments are reportable and why.
Know the penalties assessed by the IRS
1099 filing penalties
Penalties can be significant and numerous for companies that don’t comply with IRS information reporting regulations.
Penalty amount – The amount of the penalty for not correctly filing a 1099 form is based on when you file the correct return.
The penalties are as follows for returns submitted late to the IRS:
- $50 per information return you correctly file within 30 days after the due date; maximum penalty of $556,500
- $110 per information return you correctly file more than 30 days after the due date but by August 1; maximum penalty of $1,669,500
- $270 per information return if you file after August 1 or you do not file required information returns; maximum penalty of $3,339,000
- $550 or more per information return if any failure to file a correct information return is due to intentional disregard; there is no maximum penalty
In addition, the same penalties above are assessed at the same amounts on a failure to provide a correct 1099 statement to the vendor or independent contractor. The penalty for not filing a correct information return with the IRS is separate from the penalty for not providing a 1099 statement to your vendor.
You may be subject to a penalty:
- If you fail to file timely
- If you fail to include all information required to be shown on a return
- If you include incorrect information on a return
- If you file on paper when you were required to file electronically
- If you report an incorrect TIN
- If you fail to report a TIN
- If you fail to file paper forms that are machine readable.
Backup withholding penalties
Although penalties can be significant, it is the backup withholding assessment that holds the greatest exposure. Backup withholding is an IRS requirement for companies to withhold 24% of a payment to a U.S. vendor in certain circumstances and remit the amount to the IRS. Companies are required to make an initial request for the TIN number (done with a W-9 form) when the first payment is made to the vendor.
If the vendor does not provide a W-9 form when you initially ask for it, you must begin backup withholding. If you don’t begin backup withholding when required, you could be responsible for the entire amount that was not withheld. So, if a company pays a vendor $100,000 during a calendar year and does not withhold the required 24%, it could be required to pay the $24,000 in backup withholding itself to the IRS.
Implement a plan to reduce your risk of penalties today
There are several ways to limit your exposure to Form W-9 penalties.
Get a W-9 form before every vendor payment
Due to the potential risk of 24% backup withholding being assessed on the ENTIRE amount paid to a vendor, it is imperative that you obtain a W-9 form from every vendor. Make sure you have an air-tight process in place to ensure you receive a W-9 form prior to the first payment to your vendor. You should also have a way to track the W-9s requested and follow up to ensure receipt. Avoid looking to catch up on missing W-9s at year-end. At that point, you will find vendors that are no longer in business, don’t have good contact information, or won’t give you a W-9 to avoid being issued a 1099 form.
The exposure from even one missing W-9 form is too great. In the example above two payments of only $90,000 were assessed $21,600 in backup withholding due to missing W-9s. If the payments had totaled $500,000, a 24% backup withholding assessment would be $120,000. Backup withholding costs can be significant and would be an expense to the company as payment to the vendor had already been made.
It is also important to ensure that the W-9 forms you receive are complete and correct. W-9s that are missing the TIN number, name, or signature can be subject to the 24% backup withholding as well. Mismatches between the name and the TIN number can also result in “B” notices from the IRS. These notices create additional work and increase exposure to additional penalties.
Ensure a solid understanding of 1099 regulations
Make sure you have a solid understanding of the IRS regulations for 1099 forms. For each reportable payment that is not reported to the IRS and the vendor, the penalty would be $540 if not caught before August 1st.
File electronically when required
If you are required to file 250 or more information returns during the year, you must file electronically. The 250-or-more requirement applies separately to each type of form. However, be aware that the IRS is looking at changing this rule.
File timely
Make sure you follow the IRS guidelines by filing Form 1096 with the IRS and sending Form 1099 to your vendors timely.
Use W9manager to streamline your entire process
W9manager was built to help you complete most of your 1099 work before the season even starts.
- Request electronic W-9s from vendors with automated reminders
- Give anyone in your organization access to request W-9s and receive them back centrally
- Track all outstanding W-9s that you haven’t receivedReceive W-9s that are done right, as vendors and independent contractors use our step-by-step process to create W-9sKnow what vendor payments are reportable on a 1099-MISC using our guided process
- Stop sending paper 1099s when vendors opt-in for electronic reporting
In conclusion
the article emphasizes the challenges faced by companies in complying with IRS 1099 filing regulations, the consequences of non-compliance, and the IRS’s new focus on 1099 audits. The penalties assessed by the IRS for non-compliance with 1099 filing regulations are also discussed, and the article provides information on how penalties can be significant and numerous for companies that don’t comply with IRS information reporting regulations. The article recommends implementing a plan to reduce the risk of penalties, including obtaining a W-9 form from every vendor before making payments and ensuring complete compliance with all 1099 filing regulations. Overall, it is crucial for companies to understand the importance of complying with 1099 filing regulations to avoid penalties and backup withholding assessments.
FAQ
What are the IRS 1099 filing regulations?
Companies must comply with these regulations to avoid significant penalties and backup withholding assessments.
What is the consequence of non-compliance with 1099 filings?
Significant penalties and backup withholding assessments can be assessed, resulting in substantial costs.
What is the IRS’s focus on 1099 audits?
The IRS has increased its focus on these audits, making it crucial for companies to comply with 1099 filing regulations.
Why is materiality not advised when it comes to 1099s?
Materiality is not advised because the IRS has increased its enforcement of 1099 filings.
How can errors in 1099 filings result in substantial penalties?
Even a few errors in 1099 filings can lead to substantial penalties and backup withholding assessments.
What is the penalty for not correctly filing a 1099 form?
The penalty amount for not correctly filing a 1099 form varies depending on when the correct return is filed, with a maximum penalty of $3,339,000.
When may a company be subject to a penalty for not complying with 1099 filing regulations?
A company may be subject to a penalty if it fails to file timely, fails to include all required information, includes incorrect information, files on paper when required to file electronically reports an incorrect TIN, or fails to report a TIN.
What is backup withholding?
Backup withholding is when a company withholds 24% of a payment to a U.S. vendor in certain circumstances and remits the amount to the IRS.
What is the penalty for not withholding backup taxes?
If a company does not withhold backup taxes when required, it could be responsible for the entire amount that was not withheld.
How can companies limit their exposure to penalties for non-compliance with 1099 filing regulations?
Companies can limit their exposure by obtaining a W-9 form before every vendor payment and implementing an air-tight process to ensure compliance.