New Questions on 2011/2 Forms Could Be a Trap for the Unwary

From the Parker Tax Library

New questions regarding the filing of Forms 1099 have popped up on 2011 tax forms and are giving practitioners heartburn.┬áStarting in 2011 Forms 1120 and 1120S, and Schedule C of Form 1040, all contain the following new questions: Did you make any payments in 2011/2 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 2011, for failing to file correct information returns and payee statements. Practitioners are concerned that their clients may not be focused enough on the ramifications of not correctly reporting Form 1099 income. And practitioners are also worried about their own liability for checking these boxes and taking a deduction for amounts that the taxpayer can’t substantiate.

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.

PRACTICE TIP: Practitioners should advise their clients to have the laborers, or any other worker they might make payments to thatwill add up to $600 or more for the year, to complete a Form W-9. To the extent anyone is paid more than $600, a Form 1099-MISC should then be issued at the end of the year. Practitioners should also document in their files that they’ve had this discussion with clients and may want to consider revising their engagement letter to reflect the documentation a client will need in order to take certain deductions on the return.

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, 2011, 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).

For this purpose, a business is a small business for any calendar year if its average annual gross receipts for the most recent three tax years (or for the period it was in existence, if shorter) ending before the calendar year do not exceed $5,000,000.

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.

For each fifth calendar year beginning after 2012, each of the dollar amounts described above is subject to indexing for inflation.

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). In addition, in the case of intentional disregard of the requirements, the $1,500,000 limitation does not apply.

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