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Also see: In-Depth Article: Steep IRS Penalties Put a Premium on Timely, Accurate 1099 Reporting.

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CPA Sample Client Letter: Requirement to File Forms 1099.

(Parker Tax Publishing January 2017)

Dear [client],

The IRS has begun focusing heavily on taxpayer compliance with information reporting laws. Penalties for compliance failures have increased sharply.

Penalties for failure to file correct information returns may apply if you: (1) don't file a correct information return by the due date and a reasonable cause is not shown; (2) file on paper when you were required to file electronically; (3) fail to report a taxpayer identification number (TIN); (4) report an incorrect TIN; or (5) fail to file paper forms that are machine readable.

Penalties for failure to furnish correct payee statements may apply if: (1) you don't provide a correct payee statement by the applicable date and a reasonable cause isn't shown; (2) all required information isn't shown on the statement; or (3) incorrect information is included on the statement.

The penalty rates for failure to file correct information returns and/or to furnish correct payee statements depend on how late the correct Form 1099 is filed and can range anywhere from $50 per return to $260 per return. The per-failure penalty is $530 for a taxpayer who intentionally disregards the filing requirements for information returns and payee statements.

Generally, any person, including a corporation, partnership, individual, estate, and trust, who makes reportable transactions during the calendar year must file information returns to report those transactions to the IRS. Persons required to file information returns to the IRS must also furnish statements to the recipients of the income.

To properly report the information required on Form 1099, you need to have the provider's taxpayer identification number (TIN). You can request that the provider fill out and give you a Form W-9, Request for Taxpayer Identification Number and Certification, before work is done or payments are made. If a provider does not supply you with a taxpayer identification number, you are generally required to "backup withhold" 28 percent from any "reportable payments."

Form 1099-MISC is probably the most filed Form 1099 of the series. You must file Form 1099-MISC, Miscellaneous Income, for each person (subject to the exceptions listed below) to whom you paid during the year:

(1) at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest;

(2) at least $600 in rents, services (including parts and materials), prizes and awards, other income payments, medical and health care payments, crop insurance proceeds, cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish, or, generally, the cash paid from a notional principal contract to an individual, partnership, or estate;

(3) any fishing boat proceeds; or

(4) gross proceeds of $600 or more paid to an attorney.

In addition, Form 1099-MISC must be used to report direct sales of at least $5,000 of consumer products made to a buyer for resale anywhere other than a permanent retail establishment. Form 1099-MISC must also be filed for each person from whom you may have withheld any federal income tax under the backup withholding rules, regardless of the amount of the payment.

You must report payments on Form 1099-MISC only when the payments are made in the course of your trade or business; personal payments are not reportable. You are engaged in a trade or business if you operate for gain or profit. For this purpose, nonprofit organizations are considered to be engaged in a trade or business and are subject to these reporting requirements.

Some payments are not required to be reported on Form 1099-MISC, although they may be taxable to the recipient. Payments for which you are not required to file a Form 1099-MISC include:

(1) generally, payments to a corporation;

(2) payments for merchandise, telegrams, telephone, freight, storage, and similar items;

(3) payments of rent to real estate agents;

(4) wages paid to employees (these must be reported on Form W-2, Wage and Tax Statement);

(5) military differential wage payments made to employees while they are on active duty in the Armed Forces or other uniformed services (these also must be reported on Form W-2);

(6) business travel allowances paid to employees (may be reportable on Form W-2);

(7) cost of current life insurance protection (must be reported on Form W-2 or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.);

(8) payments to a tax-exempt organization, including tax-exempt trusts (IRAs, HSAs, Archer MSAs, and Coverdell ESAs), the United States, a state, the District of Columbia, a U.S. possession, or a foreign government; and

(9) certain payment card transactions if a payment card organization has assigned a merchant/payee a Merchant Category Code (MCC) indicating that reporting is not required.

Attorney fee payments made to corporations generally must be reported on Form 1099-MISC.

Unless you specifically engage me to prepare your 1099s, you are responsible for preparing and filing Forms 1099. If you are audited, the IRS will want documentation of expenses and will look at whether 1099s were filed. Any wage and labor amounts to be deducted on your return will be separately classified and will not be hidden or bundled with other expenses, since there are specific lines on the returns for wages and labor.

There are many other types of information returns that you may be required to file depending on the types of activities in which your business engages in. Please call me at your earliest convenience with any questions.

Sincerely,

[Your Name, Your Firm]


Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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