Understanding 1099 Fines and Penalties: Causes and How to Avoid Them
Accounts Payable plays a key role in submitting 1099 forms, a task that can be time-consuming, especially as the IRS continually updates filing rules and regulations.
No company wants to face fines or penalties for incorrect 1099 submissions, but the IRS can impose them if not filed correctly.
Common causes of 1099 fines and penalties include:
- Filing incorrect 1099 forms
- Filing after the deadline
- "Intentionally disregarding" the filing requirement (i.e., not filing at all)
It's essential to understand the correct filing procedures and verify Tax Identification Numbers (TIN) and vendor information as part of your vendor compliance plan.
What are the penalties for incorrect, late, or disregarded 1099 filings?
Filing 1099 forms requires accurate Tax Identification Numbers (TIN) for each entity. You should collect a TIN during the vendor onboarding process, typically through a W-9 or other tax form for the Request for Taxpayer Identification Number.
However, obtaining a TIN doesn't guarantee accuracy. This is where TIN matching comes into play – you must confirm that the TIN provided by a business or individual matches the IRS database.
If a business fails to file a 1099-NEC or 1099-MISC form by the deadline, penalties range from $50 to $280 per form in 2022, depending on how late the submission is.
Intentionally disregarding the filing requirement for correct payee statements results in a minimum penalty of $550 per form or 10% of the income reported on the form, with no maximum limit.
One incorrect return leads to two penalties, and the IRS applies interest on all penalties.
The IRS will impose separate penalties for failing to:
- File an accurate information return on time
- Provide accurate payee statements
Penalties for Information Returns and Payee Statements
Penalties are assessed for each information return filed incorrectly or late, and each payee statement not provided.
Interest on Penalties
The IRS charges interest on penalties, which accrues until the balance is paid in full. The interest rate depends on the penalty type and the amount owed.
Example of Penalties in Action
A city faced a $42K penalty after an IRS audit, with the largest penalty being $39,000 for not submitting its employee W-2 and 1099 tax forms on time, dating back to 2017. This shows that even small businesses can face hefty penalties if deadlines are missed.
How to Avoid Penalties for Non-Compliance
To minimize risk, consider the following steps:
- Require a W-9 before making any payments and enforce this policy.
- Perform a TIN Match/Verification.
- Do not create a new vendor without a successful TIN Match.
- Verify the tax classification of your vendors.
- Ensure the correct form (1099-MISC or 1099-NEC) is used.
- Know what needs to be reported on a 1099 form.
- Understand filing deadlines and requirements.
- Stay updated with IRS.gov for e-filing regulations.
Automate Vendor Validation
Mekorma Payment Hub’s Vendor Validation tools automate the TIN verification and check the Office of Foreign Assets Control (OFAC) sanctions list, reducing manual efforts.
The results are directly accessible within your Dynamics 365 Business Central or Dynamics GP system, allowing your team to take necessary actions to avoid penalties.
We simplify the 1099 process, ensuring smoother tax submissions and a more efficient AP team.
Get a free 30-day trial of Mekorma Payment Hub's Vendor Validation on AppSource or reach out to us to learn more.