If you’ve been following the news regarding tax law for small businesses in the past year, you’ve surely heard of the $450 billion tax gap between taxes owed and taxes paid. Since the beginning of 2012, the IRS has upped its vigilance in monitoring 1099 compliance. The 1099 form is required if you’ve paid someone who is not your employee, such as an independent contractor, $600 or more throughout the year for their services (for more information about classifying employees and the 1099 see this previous post). The biggest part of the tax gap, $179 billion came from 2006, was due to businesses misreporting income and self-employment taxes, according to the Government Accountability Office. It is unclear how much of that discrepancy was unintentional or not.
With this increase in attentiveness on the part of the IRS, there has been a corresponding increase in the volume of notices and audits, a trend that will undoubtedly continue in the coming years. This is important for small businesses because incorrectly filing 1099 forms can lead to severe penalties. Knowing the rules and complying with them can save your small business huge headaches and fines when tax season comes around. If a business states on a tax return that it made payments that would require filing a 1099 form but failed to file one, they have intentionally disregarded the law. If they state they were not required to file a 1099 form but were later shown that they should have, they have also intentionally disregarded the law. These falsifications can result in fines up to $100 per return or 10 percent of the total amount that should have been reported.
With plenty of time before the 2013 tax deadline, it is important to make sure your small business is staying on top of sending out the requisite 1099 forms to those whose services you’ve utilized. Working with a qualified tax professional can ensure you are complying with the IRS regulations, and can prevent you from having to dole out unnecessary penalties.