IRS Cracking Down on Form 1099 Reporting
by Bill Leary, CPA, Director, Tax Group, Doeren Mayhew
As we approach February, taxpayers need to consider whether they are required to file
information returns (Form 1099s) with payees and the Internal Revenue Service (IRS) by Feb.
28, 2013. The IRS is becoming more serious about income reported on Form 1099s, and
business owners can be held liable and face penalties for not reporting income paid to a
What Are Information Returns?
“Information returns” includes a series of 1099 forms required by the IRS that report the various
types of income paid (or received, in some cases) throughout the year, other than the salary paid
to employees. One of the most common reports interest paid on mortgages, but the information
reporting rules are far more inclusive.
When Is Reporting on a 1099 Required?
Information reporting on IRS Form 1099 has been required for certain businessrelated
payments, as well as passivetype payments, for more than 60 years. More than 85 million
Forms 1099MISC are filed each year by some 4.2 million filers. In general, information reporting
requirements relate to payments that may result in taxable income for the payee.
Taxpayers engaged in a trade or business must file Form 1099 to report certain payments made
to U.S. nonexempt recipients (which include partnerships and individuals) who are not partners
or employees receiving W2s (payments to foreign persons and foreign partners with U.S.
businesses or investments are subject to separate reporting requirements).
Reporting is required for certain payments including rents, interest, dividends, royalties and
payments for services, including independent contractors. If the total amount of payments made
to a payee over a year equals at least $600, the payer is required to file an information return with
the IRS providing information identifying the payer, the payee, and the total amounts paid to that
payee over the past calendar year. Some of the more typical situations requiring reporting
● Management fees paid to the management companies
● Legal and professional fees
● Interest payments
● Corporate distributions
● Cancellation of debt income
● Medical and health care payments
● Prizes and awards
● Settlement proceeds paid to attorneys
● Services (including parts and materials)
1 A Form 1042S (Foreign Person’s U.S. Source Income Subject to withholding) is used to report income paid to a nonresident
regardless of whether the payment is taxable. Unlike form 1099, form 1042S is not due to be issued until March15th of every
2 See, e.g., http://www.irs.gov/Businesses/U.S.TaxWithholdingonEffectivelyConnectedIncomeAllocabletoForeignPartners and Rocen et.
al, “The U.S. Payors’ Guide to CrossBorder Withholding and Reporting,” International Tax J. (JanuaryFebruary
Other common reporting situations include landlords whose rental activities constitute a trade or
business; these taxpayers are obligated to report payments to unincorporated service providers
of $600 or more.
In general, reporting such payments is required if the recipient of the payment is not a
corporation – for example, when the recipient is an individual, partnership, limited liability
company treated as a partnership under federal tax rules or sole proprietorship. Payments made
to attorneys in the course of a trade or business are required to be reported on a Form 1099
regardless of whether the attorney is incorporated or unincorporated. Payments made to
corporations are also required in the case of medical and health care payments. Credit card
companies and similar businesses must report the annual gross dollar amount of payment card
transactions settled for each of their merchant payees.
When Are Information Returns Due?
Information returns must be provided to taxpayers by Jan. 31, 2013, reporting income for the
previous calendar year, regardless of the businesses’ yearend. Extensions are not available.
Filing with the IRS is due by Feb. 28 (or March 31, if electronically filed). In addition to information
about the return preparer and payee, the returns must include the recipient’s social security
number or Federal EIN, which can be supplied on IRS Form W9 (“Request of Taxpayer
Identification Number and Certification”). If a payee is not willing to provide this number, you can
withhold 28 percent of the invoice amount as backup withholding and submit it to the IRS. The
vendor would then have to report income to the IRS in order to recover the money withheld.
Taxpayers are now required to explicitly confirm their compliance with Form 1099 reporting when
they make their annual tax filing. Failure to file on time can result in penalties of up to $100 per
payee, with a maximum penalty of $1,500,000. If the failure to file is due to intentional disregard,
however, the penalty is increased to $250 per payee, and there is no limit on the amount of the
3 Beginning January 1, 2013, withhold, on behalf of the IRS, 28% of gross dollar payment card transactions settled for any
merchant who fails to furnish their TIN to the credit card company or for whom the merchant’s legal name and Taxpayer
Identification Number (TIN) reported on a Form 1099K do not match according to the IRS’s records
Bill Leary is a Director in the Tax Group at Doeren Mayhew, and can be reached at
713.789.7077 email@example.com. For more information on IRS or state and local information
reporting, contact our CPAs in inTroy, Mich., or Houston, Texas.