Does your business solicit the services of independent contractors, freelancers, or other non-employee workers? If so, the IRS may have its sights on you. While much of the economy has been focused on the healthcare-related effects of the Affordable Care Act (ACA), there were several supplemental programs and provisions that were bundled with the ACA that have been largely overlooked.
One such provision is the expansion of Form 1099 reporting. Previously, under the ACA, corporations, partnerships, and sole-proprietorships were required to prepare Form 1099 for any vendor from whom they purchased more than $600 of goods or services. After much criticism, this provision was later repealed; however, this hasn’t deterred the IRS from closely scrutinizing and examining Form 1099.
Over the last year, there has been an increase of IRS notices related to Form 1099 filings. Most prevalent are IRS notices CP2100 and CP2100A. These notices specifically focus on incorrect, missing, or unissued Taxpayer Identification Numbers (TINs) used for the recipients of Form 1099. CP2100 and CP2100A reference the Form 1099s that the IRS believes have used the incorrect or missing TIN and ask the payer to correct the form(s) or begin back-up withholding on the recipient(s) in question.
Conceptually, back-up withholding is imposed when the IRS believes that the payee taxpayer is not reporting all income on a required tax return filing. The IRS therefore looks to the payer to withhold at a flat 28% rate and remit those funds to the IRS. Many 1099 recipients are not subject to back-up withholding; however, if prepared with the incorrect TIN, back-up withholding may be required. At a flat rate of 28%, back-up withholding is burdensome to both the payee from an economic perspective and to the payer from an administrative perspective. This could potentially result in a strained business relationship between you and your vendors. Additionally, penalties for failure to file correct Form 1099s range from $30-$100 per form. Ultimately, while simple in nature to prepare and issue, the reporting standards of Form 1099 are steadfastly becoming one of the IRS’s top areas of examination. What can be even more daunting are the correction procedures that the IRS has adopted.
If you have questions about the preparation, corrections, or requirements for Form 1099 or if you have received a back-up withholding notice and are unsure what to do, please contact Aronson LLC’s Tax Services Group at 301.231.6200, ext. 6804.