Failure to File Forms 1099 Correctly Can Result in Hefty Penalties

In 2019, Congress passed the Taxpayer First Act with the general intent of revamping the IRS to be more taxpayer-friendly. As part of this act, the threshold that triggers the requirement to electronically file many forms was reduced from 250 to ten. On February 21, 2023, Treasury and the IRS issued final regulations for the electronic filing requirement for returns filed on or after January 1, 2024. The new ten-return threshold requires filers to aggregate almost all types of information returns, including Forms 1099-MISC, 1099-NEC, and W-2.

Forms 1099 Explained

Form 1099 is a series of information returns used to report various types of non-salary income to the Internal Revenue Service. These forms serve to inform the IRS of the amounts that have been paid by the filer to the individual or entity that was paid, as well provide a record of payment for the both the filer and the recipient of the payment for their tax returns. The two most common types are Form 1099-NEC, used to report non-employee compensation, and 1099-MISC, which is used to report miscellaneous income. 

• Form 1099-MISC is filed for each person or non-incorporated entity to whom the business has paid at least $10 in royalties or at least $600 for items such as rent and medical or health care payments.

Form 1099-NEC is filed for each independent contractor or business to whom the business paid $600 or more in fees, commissions, prizes, awards, or other forms of compensation for services performed.

Penalties for Non-Compliance

It is important for information return filers to be familiar with all the filing requirements, as failure to comply can result in penalties. IRC Secs. 6721 and 6722 impose several penalties related to Forms 1099, primarily for late filing, failure to file, and filing incorrect information. Penalties will also apply if the filer fails to comply with the electronic media filing requirements for information returns. Penalties are based on the delay or extent of the error.

Penalty rates are calculated per return as follows:

Intentional Disregard

The Intentional Disregard of the Rules and Regulations Penalty applies when the facts and circumstances show that the filer knowingly or willfully failed to comply with the requirements of IRC Secs. 6721(e) and/or 6722.

Intentional disregard occurs when a filer knowingly or willfully chooses to ignore a rule or regulation’s requirements. The facts must show the filer:

1. was required to file,
2. knew of or willfully disregarded the requirement to file, and
3. consciously chose not to file or willfully disregarded (i.e., ignored) the duty to file a timely and correct information return.

There is no maximum dollar limitation for the intentional disregard of the rules and regulations penalty.

Defenses to Penalties 

The IRS will waive, abate, or not assess an information return penalty when a filer requests a waiver of the penalty and establishes reasonable cause. Reasonable cause for the information return penalties generally exists when the filer acted in a responsible manner, both before and after the failure occurred, and:

1. there are significant mitigating factors, or
2. the failure was the result of circumstances beyond the filer’s control.

“Acting in a responsible manner” generally includes exercising the same degree of care that a reasonably prudent person would use in the course of business. The filer must act in a responsible manner both before and after the failure occurs. This also includes taking steps to avoid the failure, such as requesting an extension of time to file and correcting the failure to file as soon as possible. 

Events generally considered to be significant mitigating factors include, but are not limited to:

1. First time filer -- prior to the failure, the filer had not previously been required to file this particular form or statement and
2. The filer has a history of complying with the information return reporting requirements. 

Circumstances beyond the filer’s control include but are not limited to:

• unavailability of records,
• actions of an agent,
• actions by the payee,
• reliance on an internal computer system that encountered major hardware/software problems, and
• the filer being in a geographically remote location. 

The lowered threshold effectively requires information return filers to e-file their returns except in limited circumstances. Taxpayers need to be aware of these requirements as well as the consequences for failure to comply or risk dealing with significant penalties. If you need assistance in determining your filing obligations, speak with your advisors.