1099 rules that you need to know to avoid penalties and taxes

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm jeff@jbrookswa.com 602-292-2009 Please consult with your professional tax CPA regarding your specific circumstances!

IRS is getting tougher on failure to file 1099s. ALWAYS get the W-9s BEFORE independent contractor begins work.

IRS auditors ALWAYS want to make sure that all of the 1099s have been issued to independent contractors. I recommend that reconciliation between the expenses deductions on your business return to the 1099s issued be performed. For instance, let us say you have contract labor of on your income statement of $28,000 but the total of the 1099s for those non-corporation paid contract labor is only $9,000. Let us use $1,000 of amounts paid under $600 that do not require a 1099. The IRS will disallow $18,000 of deductions!
New questions regarding the filing of Forms 1099 have popped up on 2012 tax forms and are giving practitioners heartburn. The 2012 Forms 1120 and 1120S, and Schedule C of Form 1040, all contain the following new questions: Did you make any payments in 2012 that would require you to file Form(s) 1099? And If Yes,’ did you or will you file all required Forms 1099? The new questions coincide with an increase in the penalties, effective in 2012, for failing to file correct information returns and payee statements.
For example, how is a contractor, who sporadically picks up day laborers during the year to perform occasional work, going to answer the new questions? If any of these day laborers are picked up several times during the year, the amounts paid to that worker will most likely exceed $600 so that the contractor is responsible for issuing a Form 1099-MISC to that individual. How will the contractor prove that he didn’t pay more than $600? Basically, without proper records, a taxpayer can’t prove he paid anything to anyone. If the taxpayer doesn’t issue a Form 1099 or provide support for payments under $600, the IRS will disallow the deduction.
A person that fails to file a correct information return by the due date and cannot show reasonable cause may be subject to a penalty. The penalty applies if the person fails to file timely, fails to include all information required to be shown on a return, or includes incorrect information on a return. The penalty also applies if a person files on paper when required to file electronically, reports an incorrect taxpayer identification number (TIN) or fails to report a TIN, or fails to file paper forms that are machine readable. The amount of the penalty is based on when the correct information return is filed. For returns required to be filed on or after January 1, 2012, the penalty is:
(1) $30 per information return for returns filed correctly within 30 days after the due date (by March 30 if the due date is February 28), with a maximum penalty of $250,000 a year ($75,000 for certain small businesses);
(2) $60 per information return for returns filed more than 30 days after the due date but by August 1, with a maximum penalty of $500,000 a year ($200,000 for certain small businesses); and
(3) $100 per information return for returns filed after August 1 or not filed at all, with a maximum penalty of $1,500,000 a year ($500,000 for certain small businesses).
Persons who are required to file information returns electronically but who fail to do so (without an approved waiver) are treated as having failed to file the return, and are therefore subject to a penalty of up to $100 per return unless the person shows reasonable cause for the failure. However, they can file up to 250 returns on paper; those returns will not be subject to a penalty for failure to file electronically. The penalty applies separately to original returns and corrected returns.
The penalty for failure to include the correct information on a return does not apply to a de minimis number of information returns with such failures if the failures are corrected by August 1 of the calendar year in which the due date occurs. The number of returns to which this exception applies cannot be more than the greater of 10 returns or 0.5 percent of the total number of information returns required to be filed for the year.
The penalty for a failure to include the correct information on a return does not apply to inconsequential errors or omissions. If a failure to file a correct information return is due to an intentional disregard of one of the requirements (i.e., it is a knowing or willing failure), the penalty is the greater of $250 per return or the statutory percentage of the aggregate dollar amount of the items required to be reported (the statutory percentage depends on the type of information return at issue).

Call 602-292-2009 today for more information on the new 1099 rules

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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Address: 4647 N 32nd Street, Suite B245
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Phone: 602-292-2009
Email: jeff@jbrookswa.com