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Client Alert – IRS Steps up Enforcement of Form 1099 Misc

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The requirement to file a Form 1099 Misc for specified payments goes all the way back to 1917. Presently, this Form must be filed for rents paid, nonemployee services received as well as payments to an attorney, accountant, or other service provider.

The IRS is stepping up enforcement by way of increased audits and imposition of severe penalties for failure to properly file all required 1099s. In addition, all business income tax returns (viz., Forms 1065, 1120S, 1120, etc.) currently require a representation that all necessary 1099s have been filed.  The representation subjects the individual signing the return to potential penalties for perjury if compliance has not been met.

A recommended “best practice,” is to obtain a completed Form W-9 from the e.g., service provider at the time the services are being rendered. A properly completed Form W-9 discloses the taxpayer identification number (employer identification number for an entity or social security number for an individual) and warrants that the service provider is also a US taxpayer.[1]

Another recommendation applies to situations where a taxpayer identification number is not provided at the outset. In such cases, payment of the invoice could be made contingent upon the service provider disclosing this information.  Alternatively, if this information is not disclosed, “backup withholding,” or withholding for taxes applicable to the amount invoiced, is generally required.[2]  In this case, the service provider is paid the net amount after withholding taxes.  The withheld amount is then remitted to Treasury.

Here is an overview of some of the more common types of payments that trigger this filing requirement:[3]

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

(2) $600 or more in rents;

(3) $600 or more for services (including parts and materials);

(4) $600 or more in prizes, awards, other income payments;

(5) $600 or more in medical and health care payments;

(6) gross proceeds of $600 or more paid to any attorney (note that for settlements paid directly to an attorney, both the plaintiff and attorney each must be issued a 1099);

(7) Direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.

For further questions, especially for those with rental real estate payments or financial transactions (including interest payments), please contact your Janover advisor for a more in-depth review:

[1] If payment is made to a non-US taxpayer, a separate Form, a W-8 should be obtained and the payment may be subject to a separate tax withholding regime.  Please contact your Janover tax advisor if this is the case.

[2] There are exceptions such as payments made to a foreign vendor who performs all services offshore.

[3] Generally, 1099s do not need to be issued for payments for goods, utilities, or certain specified payments to S or C corporations (though you can elect to do so). The following payments must be reported even if made to a corporation:  medical and health care payments; fish purchases; gross proceeds paid to an attorney such as for a legal settlement, substitute payments in lieu of dividends and payments by a federal executive agency for services.

 

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