The New 1099 Reporting Requirements: More Arsenal for the IRS to Fight Tax Fraud

Obamacare is a tax the Supreme Court said in National Federation of Independent Business v. Sebelius (2012). Part of this new healthcare law requires businesses to file Form 1099 for every business-to-business transaction of $600 or more. Many commentators are calling this a logistical nightmare for small businesses.

One of the purposes of a 1099 is to help prevent tax fraud and tax evasion. It provides a paper trail for the IRS. Form 1099 is used to report income types other than wages, salaries, and the like. Specifically, the goal is to make sure there is a “matching” of income individuals report on their returns and the amount they actually earned.

OLD AND NEW LAW

Under the old law, a business must file a 1099 only when it pays (annually) more than $600 to an unincorporated business for services. The new law is more expansive. It requires businesses to comply with this 1099 informational reporting even when it pays $600 to an incorporated business for its services, reporting also the TIN for the business that provided the services. Thus, for example, if your business hires a contracted I.T. firm for its computer issues, or a custodian to clean up after hours, then you likely need to send them 1099s.

THE NEW LAW CREATES A BURDEN FOR BUSINESSES

Effectively, the new law places a burden upon the business requesting the services. On the 1099 form, the business is required to report the TIN for the service-providing business; and if the TIN is wrong (or no TIN was provided), the business is required to withhold 28% of the service contract. Part of the difficulty, of course, is a practical one: How will the business issuing the 1099 know in time whether it was provided the correct TIN from the other business rendering the services? In many transactions, the business renders the services, receives payment, and the parties figure out the tax issues later. This law seems to place things somewhat in reverse. For the 1099-issuing business to withhold 28% of the total service contract, it must first inquire whether the TIN was valid.

PENALTIES AND POSSIBLE CRIMINAL EXPOSURE

A business may be fined $50.00 for each false 1099 it reports, or for a correct report it fails to file. Intentional or willful failing to file a 1099, however, doubles this fine (or worse). However, if tax fraud is discovered, the penalties and interest increase dramatically. Tax fraud is the willful attempt in any manner to evade or defeat tax or the payment of such tax. It is punishable by a fine of up to $100,000 in the case of individuals (and up to $500,000 in the case of corporations) or imprisonment up to five years, or both, plus the costs of prosecution. It is also described as a felony in IRC § 7201.

WHAT DOES THIS MEAN FOR YOU?

It means, among other things, that documentation of your transactions with other businesses, whether incorporated or not, is more important. The IRS is looking for a “smoking gun,” where there is a disparity between income received by individuals and income reported. If you are an independent contractor, and you have “hidden” some of your income, the IRS now has more resources to discover the deception. It will review the 1099 reports from those you do business with, do a little forensic accounting, and unearth the fraud.

Sometimes, however, the fraud is only apparent rather than real. Parties using different income methods—accrual vs. cash—can make it look like there was tax fraud when there really was not. This is where competent legal counsel helps.

Tax law is notoriously complex, so it is understandable that mistakes occur. The IRS, however, is not so forgiving. That is why if you are a business owner or an independent contractor in trouble with the IRS (or could be) who reported less than you actually earned, you need competent legal counsel. Due to the complexity of the intersection of taxation and criminal law, few attorneys are competent to handle this sort of controversy. The Tax Law Offices of David W. Klasing, however, specializes in this area of law; we can help you navigate through your legal options. After reviewing the facts of your case, we are able to inform you whether you are likely to obtain an arrangement with the IRS to deal with your 1099 issues, to eliminate or reduce your liability, or to pay it at a manageable level.