By Lyndel Lackey, HoganTaylor Tax Partner, and Ashley Cooper, HoganTaylor Tax Manager
As information return filing season is upon us, we wanted to take the time to remind you of the risks associated with failure to file timely or filing incorrect Form 1099s. This summer an update was passed to the Trade Preferences Extension Act and the change doubled all penalties on all 1099 filers for incorrectly reporting tax information. The following penalties are based on when you file the correct information return:
- $30 per information return if you correctly file within 30 days (by March 30 if the due date is February 28); maximum penalty $250,000 per year.
- $60 per information return if you correctly file more than 30 days after the due date but by August 1; maximum penalty $500,000 per year.
- $100 per information return if you file after August 1 or you do not file required information returns; maximum penalty $1,500,000 per year.
If any failure to provide a correct payee statement is due to intentional disregard of the requirements to furnish a correct payee statement, the penalty is at least $250 per payee statement with no maximum penalty. With the penalties above it is especially important for exempt organizations to be aware of the requirements for 1099 reporting and for them to evaluate their internal policies and procedures. Below are some key questions to ask during this information return reporting season to make sure your in compliance:
- Are workers that perform services for the organization being classified properly, whether as employees or independent contractors? Exempt organizations periodically may require the services of workers that may work in specialty areas, where the organization does not have employees that can provide the needed services. An example of this is a manual labor intensive task required, where the organization engages outside workers to perform these tasks. In order for the IRS to determine that workers are properly classified, they analyze the working relationship between the organization and the worker, and also determine whether the organization exercises behavioral and financial control over the worker. The IRS also uses a 20-factor test to help in its determination of proper worker classification. If the IRS determines that a worker has been improperly classified, and should have been classified as an employee based on the factors mentioned, they will assess employment taxes on the payments to the workers, with limited relief available under certain circumstances. We suggest analyzing any contemplated worker relationship before engaging the worker, and insure in good faith that the worker is properly classified.
- Are payments to vendors properly analyzed where compliance with Form 1099 filing requirements are met? We have observed that exempt organizations may have token compliance in the 1099 area by preparing and filing 1099’s for payments to individuals who are indeed independent contractors. However, payments to business entities for services received are generally subject to 1099 reporting requirements, unless an exception applies. General exceptions are annual payments less than $600 for non-employee compensation, payments to an entity treated as a C- or S-Corporation for tax purposes, payments for merchandise, and limited items that are not of a service nature. If no exception applies, and a 1099 is not prepared and filed, there are separate failure to file and failure to furnish penalties of $100 per occurrence, with those penalties scheduled to increase. We suggest reviewing your 1099 preparation procedures, and insure that compliance with these rules is being met.
- Similarly, are payments to vendors in compliance with backup withholding rules? We are observing some compliance shortfalls in the area of obtaining EIN’s from vendors, and therefore issues with backup withholding arise. If in a vendor arrangement a taxpayer identification number/EIN has not been provided by the vendor to the organization, the organization is required to withhold backup withholding on reportable payments at a 28% percent rate at the time it makes the payment to the payee. In an audit situation, this can potentially result in a large withholding tax assessment, with related penalties. We suggest mandating that Form W-9 be obtained on all vendors that would fall under these requirements.