1099s ­ Penalty and Court Case

published November, 2010

Well, it finally happened: I’ve seen my first penalty notice for 1099s received late by the IRS. There has been a “theoretical” penalty on the law books allowing the IRS to charge between $35–$50 each for lateness (depends on how past due they are received). There’s also a penalty of $100 if you “willfully” don’t prepare them on time (an example of willful would be if you were a tax preparer charging clients to prepare their 1099s on time but didn’t do your own on time). Up until now, I’d never actually seen a penalty from the IRS.

Those times are over. One of my clients who prepared their own 1099s just got a penalty notice for filing late of $750. 1099s are due out to the recipients by the end of January, and copies are due to the IRS by the end of February.

Starting in 2011, a “paid preparer” will need to sign and provide their PTIN (you may always prepare your OWN 1099s, even without a PTIN). The ineludible question is, “if I prepare the 1099s, but have my CLIENT sign, I don’t need to sign as preparer, right?” Well, no. The new rules make you responsible if you have primary responsibility for the overall substantive accuracy of the preparation of the return. Another way of saying this is “All or substantially all” of a tax return. If you are required to sign and include a PTIN but fail to do so, you’re subject to a penalty (section 6695c) (See TD 9501 for final regulations).

But wait, it gets worse. I was working on a field audit for tax year 2007 in my conference room with someone from the IRS, and she brought up Garrison v. IRS, a recent tax court case (No. 3745-07) that was decided in 2009. The Garrisons failed to issue 1099s to some of their independent contractors, and under audit, failed to produce cancelled checks or witnesses to substantiate the payments. Because of this, the court not only agreed with the IRS and TOOK AWAY THE DEDUCTION, but the court further agreed that failing to keep adequate books and records to substantiate items properly deserved a 20% accuracy related penalty. This resulted in $48,341 of additional tax and $9,668 of accuracy penalty. You learn the darndest things at an audit.

The message here is the IRS is much more serious about 1099s than they appear to have been in the past. Plan accordingly.