“Information returns” is the formal name for the vast series of 1099 forms that the IRS has created, in large part, for purposes of reporting income paid by one taxpayer to another taxpayer. Taxpayers commonly receive 1099 forms reporting their receipt of dividends, interest, proceeds from sales of stocks, bonds and mutual funds, retirement plan distributions, state tax refunds, unemployment compensation, and the catch-all – miscellaneous income. The following discusses some of the major issues associated with the issuance of 1099s.

Form 1099-MISC is used to report miscellaneous income. This form is required to be issued for payments made in the course of operating a trade or business that amount to $600 or more during a calendar year for rents and services. Nonprofit organizations are subject to the same reporting requirements as for-profit businesses.

There are two broad exceptions to the issuance of Form 1099-MISC. First, payments to corporations are exempt from 1099-MISC reporting except for medical and health care payments and payment of attorneys’ fees. Many taxpayers are under the misimpression that a Form 1099-MISC is only to be issued to individuals. Where the income recipient is a general partnership, limited partnership, LLC or LLP, Form 1099-MISC reporting applies. The second major exception relates to payments for merchandise.

The IRS utilizes 1099 forms to increase tax compliance. For 2011, the IRS added two new questions to business tax returns – Forms 1065, 1120, 1120S and Schedules C and E filed with Form 1040. The first question asks whether the taxpayer made any payments during the calendar year that would require any Form(s) 1099 to be filed. If this question is answered “yes”, a follow-up question is whether the taxpayer has or will file all required Form(s) 1099. These questions are not limited to Form 1099-MISC. For example, if a corporation paid interest on a loan from a shareholder, Form 1099-INT would be required to be issued if the interest is $10 or more.

The IRS remains concerned over the tax gap, defined as the amount of tax liability faced by taxpayers that is not paid on time. The most recent IRS tax gap study in January 2012, based on the 2006 tax year, estimated the annual gross tax gap to be $450 billion. Only $65 billion of this total is recouped via enforcement, leaving a net tax gap of $385 billion annually. The IRS uses information returns to attempt to identify the under-reporting of income, issuing “CP 2000” notices that identify discrepancies between income reported on Form 1040 and the income reported on 1099 forms filed by third parties. A standard request at the start of an IRS audit is to provide copies of all 1099 forms issued for the year(s) under audit.

State taxing authorities have a myriad of rules when it comes to information returns. The New Jersey Division of Taxation requires that copies of Federal 1099 forms be filed on or before February 15 (the IRS deadline is February 28 if paper filing and March 31 if e-filing) following the close of the calendar year where the amount paid is $1,000 or more, or where there was any New Jersey tax withheld. On the other hand, the New York State Department of Taxation & Finance does not require any 1099 forms to be filed as it relies on data received from the IRS. Various penalties can be imposed by the IRS as well as state taxing authorities for failure to file required 1099 forms.

Neil Becourtney, CPA
CohnReznick LLP