1099 More Ways to Have Tax Troubles

While most of my conversations about taxes at this point have to do with getting information about the return itself, an article in the Wall Street Journal reminded me of a change to returns this year that has big implications.  As indicated in this blog before, the IRS is falling ever deeper in love with third party reporting, and they are getting more serious about making sure it gets done.  The Service did back off on some of the more heinous aspects of making business owners reconcile the reporting they are getting from credit card companies (otherwise known as form 1099K).  Still, the reporting will be used to audit small businesses that accept payments via credit and debit cards.  What also hasn’t gone away is that if you pay for services with a credit card, and then have to issue a 1099, you need to subtract out what you put on the credit card.  Your vendor is already getting that income reported from the merchant bank that processed the transaction. Giving the IRS opportunity to double count income isn’t the best way to build business relationships.

This brings me to the matter of the 1099 Miscellaneous.

 

If you file taxes using a Schedule C, Schedule E, Form 1065 or Form 1120S there’s a question you have to answer for the first time this year asking if you did business with anyone who should have received a form 1099.  That would be anyone who you paid $600 or more to provide a service and they’re not incorporated.  Answer this question incorrectly, and if you get audited, you will face penalties, even though the form 1099 that you send has nothing to do with your gross income.  So your tax liability could be correct to the penny and you could still be in trouble with the IRS.  (Just when you thought you understood how bad this tax season was going to be!)  And the bad news doesn’t stop there.  Let me quote from the article.

In 2010 Congress stiffened the penalties on taxpayers who neglect to provide 1099 forms. The higher penalties took effect in 2011, and now the penalty for nonfiling is $100 per violation—$200, in most cases, because two forms are due, one to the IRS and one to the provider. The penalty for "intentional failure to file" is $250.

It’s a hassle to file these forms, as I know from personal experience filling them out.  However, this is a way for the government to raise more revenue without raising taxes.  That’s another way of saying it is a sure recipe for increased government action.