A Cautionary Tale of Form 1099 Penalties: It Could Happen to You!

Leta Collie, CPA
Sr. Manager – Technical Tax Services

The names (but not the numbers) have been changed to protect the innocent . . .

Once upon a time, there was a small business called Suzy’s Cafe. During the year, Suzy paid many different people who provided services to her business. Among them was the window washing man who made the Café’s windows sparkle; the landscaping service that mowed the back lot; and that nice attorney down the street who made sure all the t’s were crossed and all the i’s dotted.

Running a diner is hard work, and Suzy didn’t have much spare time. She knew she needed to send a Form 1099-MISC to each of her service providers  and send copies of the completed forms to the IRS by January 31, but she was missing tax ID numbers for some of them so it took a while to gather all of that information. Even with good intentions, it was the middle of April before she got around to submitting her forms to the IRS.

Imagine her surprise when a few months later, Suzy received a penalty notice from the IRS. They said she owed them $7,200!! Not only did the IRS assess a penalty to Suzy for each delinquent form, they also included penalties because the names and tax ID numbers on her filed forms didn’t match up with the IRS’ records. Poor Suzy!

Luckily, Suzy uses a great accounting firm, so she turned to them in her time of distress. They assisted her in filing corrected forms, and interceded on her behalf with the IRS. In the end, after much discussion, the IRS waived Suzy’s penalties, and she breathed a sigh of relief.

In retrospect, what could Suzy have done to prevent this issue from occurring in the first place? Well, when she first started paying each new vendor during the year, she should have required that they provide her with a Form W-9 so that her files would already have the correct business name and tax ID number. That way she wouldn’t have had a crisis at the end of the year when she tried to gather all that information.

Then, if she knew she wouldn’t have time at the end of the year to get her Form 1099’s filed timely, she could have had her accounting firm file for her and maybe even provide her with bill paying services so that she could focus on her core business. Even so, the ultimate responsibility for providing correct information about her service providers rests on Suzy’s shoulders.

Our Technical Tax Team at Mize Houser sees a lot of penalty notices from the IRS, and they can add up to a lot of money. The IRS assesses penalties starting at $30 per return for late filing within 30 days of the due date, with increasing penalty amounts for returns filed later than 30 days or those which contain incorrect information.

If you’re a business owner, be sure you’re providing required 1099’s to any unincorporated parties to whom you paid more than $600 during the year:

  • Independent contractors
  • For prizes and awards
  • Rent (even between related parties, if not incorporated)
  • To physicians, physicians’ corporation or other supplier of health or medical services (corporations also need a 1099-MISC for medical services)
  • Gross proceeds of $600 or more paid to an attorney
  • Interest on a business debt to someone (excluding interest on an obligation issued by an individual)
  • Dividends, even to a company shareholder

Except for certain exceptions (like medical services), you are not required to file Forms 1099 if payments were made to another business that is incorporated, or if the sum of all payments to the person or unincorporated business throughout the tax year is less than $600. If you have fewer than 250 information returns, you can file on paper as long as you follow the IRS requirements; otherwise you need to file electronically. More information is available on the IRS website by clicking here.

*This post was updated to reflect the accelerated 1099 filing deadline for 2016 forms.