The Great 1099 Tsunami of 2010

More Demanding Requirements for Issuing 1099s

Generally, all persons engaged in a trade or business and making payments to individuals or partnerships for services (including parts and materials) in excess of $600 are required to file Form 1099-Miscellaneous. In order to properly complete a Form 1099, you must obtain a Form W-9 “Request for Taxpayer Identification Number and Certification” from the payee.

Under the Patient Protection and Affordable Care Act of 2010 healthcare legislation, effective for payments made beginning 2012, the exemption for payments of $600 or less made to a corporation in the course of a trade or business is eliminated. The class of payments has been expanded to include all amounts paid in consideration for property, and all other gross proceeds for both property and services. Payments to exempt or governmental organizations, international organizations and retirement plans are not affected by this new provision.

This means that if you pay more than $600 to the power company, you must issue a 1099. If you pay more than $600 for liability insurance, you must issue a 1099 to the insurance company. If you purchase parts from a vendor in excess of $600, you must issue a 1099. It will be interesting to see how employee expense reimbursements will be handled.

The IRS has indicated that there may be some relief for payments made by credit or debit cards. Some of these transactions will already be covered by reporting requirements on payment card processors, who will be required to provide an annual information report to the merchant and to the IRS stating the gross amount paid to the merchant for calendar years beginning 2011. However, the uncertainty here is that this new reporting requirement for credit card processors only applies to individual merchants who receive more than $20,000 and conduct more than 200 transactions each year from an individual merchant. Until there is clarification on this matter, you will need to plan to issue 1099s to all your vendors to whom you pay more than $600 in 2012. And even if your credit/debit card payments are exempt, then you will need to come up with a system to segregate those payments from payments by check/wire transfer.

The primary purpose of this new reporting requirement is to ensure that all businesses are reporting all revenues received. Of course the amounts reported on the 1099s may not actually tie to the taxpayer’s revenues for the year due to the taxpayer’s method of accounting. Furthermore, if you are the recipient of a 1099, you should make sure that the amounts reported tie to your records and that the issuer hasn’t made an error in the amount listed.  As a payer, if you fail to issue 1099s then your expenses may become subject to review.

There are actually several different ways you may be penalized with regards to 1099 reporting. You are subject to penalties for failure to issue 1099s. If you are required to file 250 or more information returns such as 1099s, then you must file electronically or be subject to penalties.

You may be subject to penalties if the name and Taxpayer Identification Number on the 1099 doesn’t match the IRS’s records (or if you send incomplete information) and if you don’t follow the proper procedures to correct.

You may become subject to backup withholding requirements on payments to vendors, currently 28% through December 31, 2010. For example, if you filed  a 1099 without a TIN from the vendor and you are continuing to pay the vendor, you should start backup withholdings immediately. If you receive a notice regarding incorrect name/TINs reported on the 1099 that do not match up with name/TINs with the IRS then you may be required to begin backup withholdings. The various procedures are described in IRS Publication 1281, “Backup Withholdings For Missing and Incorrect Name/TIN(s)”.

The amount of late penalties vary  based on when you file the correct information return, ranging from $15 per information return (1099) if you file correctly within 30 days to $50 per information return if you file after August 1. Incorrect information may lead to a $50 per information return penalty. Filing 1099s by paper when you were required to file electronically may lead to a $50 per information return for each 1099 issued over the 250 threshold for filing electronically. Intentional disregard for filing a 1099 may lead to a $100 per 1099 penalty. Tax legislation that is before Congress (and that has not passed as of this writing) includes provisions to double these penalties as revenue raisers.

There is also the possibility of increased identity theft as more identification  information (name, address, taxpayer identification number) becomes available to more people.

What can you do? Become proactive. If you have not already collected W-9s from your vendors then you should plan to start collecting them in 2011 to make sure all information is on file in preparation of the 2012 requirement. Have procedures in place for collecting this information from new vendors. In requesting the information, make sure that you request that the vendor complete the W-9 showing the name and TIN as shown with the IRS in order to minimize mistakes. If there is a question as to name shown on a W-9, get clarification now. Be prepared to submit your information electronically. Do not ignore any notices received from the IRS regarding incorrect Name/TINs. Make sure that the information that you provide to your customers on your own business is correct so that your customers will not be required to start back-up withholdings on payments to you. Educate your personnel on these requirements to minimize mistakes. You may want to review with your financial institution/credit card companies any additional steps needed to safeguard your accounts.

 

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