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What's your TIN again? Helping the IRS close the "Tax Gap."

In spite of pervasive 1099 and W-2 reporting requirements, the US income tax system for most small businesses is still largely an honor system.  According to IRS studies, this segment of taxpayers account for approximately 84% of the $450 billion estimated tax gap.  As a result, the IRS continues the push to increase 1099 reporting to try and whittle away the large amount of unreported or underreported income among small businesses.

This push can clearly be seen in the question to identify companies required to file 1099’s that was added to all 2011 business entity income tax forms.  Furthermore, the IRS has increased the penalties associated with non-filing of 1099’s to a maximum of $250 per 1099, with an additional maximum of $250 per 1099 not provided to payees.  This means that you can face a total of up to $500 per non-filed 1099. Even if you are only required to file a handful of 1099 forms, at $500 per non-filed form, you can see how the penalties can quickly mount up.

Anyone engaged in a trade or business is required to file Form 1099-MISC for each non-incorporated vendor (including LLC’s) to whom they have paid at least $600 cumulatively during the year for:

•    Rent
•    Services (including parts and materials)
•    Prizes and awards
•    Other income payments
•    Medical and health care payments
•    Crop insurance proceeds
•    Cash payments for fish you purchase from anyone engaged in the trade or business of catching fish
•    Cash paid from a notional principal contract to an individual, partnership or estate
•    Fishing boat proceeds
•    Gross proceeds of $600 or more paid to an attorney

Likewise, the following types of payments made to corporations generally must also be reported on 1099-MISC:
•    Medical and health care payments
•    Fish purchases for cash
•    Attorneys’ fees
•    Gross proceeds paid to an attorney
•    Substitute payments in lieu of dividends or tax-exempt interest
•    Payments by a federal executive agency for services

As the end of the year approaches, it is a good time to start to consider if you have all the necessary information to prepare 1099’s to report 2012 payments.  Remember that the IRS requires 1099’s to be provided to payees by January 31, and requires the forms to be filed with the IRS no later than February 28.  Take the time to review your accounting records to identify possible payments required to be reported and to review your records to insure that you have the proper name, taxpayer identification number, and address for each payee who will receive a 1099. It is important to verify a proper name and TIN because the IRS also imposes an additional penalty of $30 a form for TIN/Name mismatches.

It is good business practice to obtain a completed W-9 Request for Taxpayer Identification Number and Certification from each vendor you do business with before authorizing any payment to be made to them.  For businesses who have reportable payments to a large number of vendors, it may also be beneficial to consider participating in the IRS TIN matching program or some equivalent program from an authorized vendor in order to insure that all names and TIN’s provided by vendors match up to the information on file with the IRS.  

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