The IRS continues to increase its scrutiny of Form 1099 reporting by individuals and businesses. The IRS uses 1099’s submitted to them to be sure Form 1099 recipients report the income on their income tax returns. Failure to comply with 1099 filing requirements may result in substantial penalties. In other words, if you are going to write it off as an expense they want to see someone else claiming it as income.
Certain 1099-related penalties are more than double what they were in previous years. The penalties increase the longer the 1099 filing failure continues or the longer it takes to correct 1099’s filed incorrectly. Penalties range from $30 to $100 per form, with a maximum penalty of $1.5 million. However, if the rules are intentionally disregarded, penalties increase to $250 per 1099 with no maximum penalty. Starting in 2011, IRS added two new questions on its individual and business tax forms to increase awareness of the 1099 filing requirements and add another opportunity to identify taxpayers that should be filing 1099s’ but are not. The individual tax forms reporting business income, rental income and farm income (*Schedule C, E, and F) have two additional questions:
“Did you make any payments that would require you to file Form(s) 1099?”
“If “yes,” did you or will you file all required Forms 1099?”
Similar questions have been added to corporate and partnership returns.
Given the increased IRS focus on taxpayers’ information reporting obligations, it is important to know when a Form 1099 is required.
Who must file Form 1099-MISC?
- All entities engaged in Trade or business (sole proprietors, LLC’s, partnerships and corporations)
- Landlords engaging in the business of renting properties
- Nonprofit organizations, federal, state or local government agencies
- Trusts of qualified pension or profit-sharing plans of employers
When is Form 1099-MISC Required?
Businesses will need to fill out a Form 1099-MISC for each person, vendor, and subcontractor, Independent contractors and others in the following circumstances:
- $600 or more per year is paid for rents, services (including parts and materials), prizes and awards, medical and health care payments, crop insurance proceeds, cash payments to fisherman, proceeds paid to attorneys, and other types of payments not covered my another information reporting document. You are not required to issue a 1099-MISC for goods purchased.
- Reporting such payments is required if the recipient of the payment is not a corporation. Payments made to corporations may be reported using Form 1099-MISC, but is not required.
- Payments of rent to real estate agents do not have to be reported. But the real estate agent must use Form 1099-MISC to report the rent paid over to the property owner.
1099-MISC Requirements for Landlords
Prior to 2011 owners of rental real estate were generally not considered to be engaged in trade or business and were therefore exempt from the 1099 reporting requirements. Landlords engaging in the business of renting property are still required to issue 1099’s for vendors paid $600 or more. A person engaging in a trade or business is defined as a person who is involved in the activity continuously and regularly and whose main motive in engaging in the activity is for income or profit. Thus, these filing requirements will not apply to the owner of property who turns over management duties to an outside source, as he is not regularly and continuously involved in the activity.
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