Summary of Form 1099 Penalties

The Congressional Research Service (the “CRS”) today published a summary of the Form 1099 Information Reporting Requirements as Modified by the Patient Protection and Affordable Care Act (the health care reform bill). You can find the entirety of the publication at the bottom of this post.

As you may or may not be aware, the health care reform bill requires, starting in 2012, persons in business to 1099 anyone, even corporations, they buy more than $600 in “goods” from during the calendar year. Meaning, if you are in business and buy a new laptop from Apple, you are going to be required to issue a Form 1099 to Apple. Absurd!

You may be interested in knowing what penalties you are subject to if you fail to issue Forms 1099 as required by law. The CRS summarizes the potential penalties as follows:

Both the failure to submit an accurate information return to the IRS and the failure to provide a copy of the information return to the payee are subject to monetary penalties assessed by the IRS. As a unique information return is required with respect to each payee, penalties are assessed on each deficient information return. The penalty for failing to file a correct and timely return with the IRS is $50 for each defective return not to exceed $250,000 for a single payer. If the deficiency is corrected within 30 days of the due date, the penalty is reduced to $15 per return, not to exceed $75,000. If corrected later than 30 days, but before August 1, the penalty is $30 per return, not to exceed $150,000. No penalty will be assessed against a person if defects are corrected by August 1, and the total number of defective returns does not exceed the greater of 10 or one-half percent of the total number of information returns required to be filed by the person.

Some small businesses may be able to take advantage of reduced ceilings on aggregate penalties for payers with gross receipts of less than $5,000,000. For these payers, the ceilings are $100,000 (for uncorrected violations), $25,000 (if corrected within 30 days), and $50,000 (if corrected after 30 days, but on or before August 1). Higher penalties may also be assessed where persons intentionally disregard their duty to file an information return.

Failure to provide a correct and timely statement to a payee is also subject to a $50 penalty per return, not to exceed $100,000 per payer. Higher penalties may also be assessed where persons intentionally disregard their duty to provide a payee with a copy of an information return.

It is a misdemeanor for any person to willfully fail to make an information return as required by law. Persons convicted of this offense may be punished by a fine of up to $25,000, imprisonment for up to one year, or both. A willful violation occurs when there is “a voluntary, intentional violation of a known legal duty.” However, a violation that results from a good-faith misunderstanding of the requirements of the IRC is not a willful violation, as that term has been interpreted by the courts.

In light of these penalty provisions, it is especially appropriate that Congress repeal the new Form 1099 rules. In addition, Congress ought to consider indexing the $600 to inflation since the date of the first enactment of this threshold. As the CRC states:

Also potentially affecting the administrative burden on payers is because the $600 threshold, which triggers the reporting requirement, has remained constant over time, since at least 1954. In contrast, other dollar amounts specified in the IRC have been legislatively increased over time or indexed for inflation. For example, the personal and dependent exemption amounts were $600 in 1954, but over time have risen to $3650 for tax year 2010. As the buying power of $600 decreases, the number of transactions captured may increase as it becomes more likely that minor expenditures will aggregate to at least $600 and trigger the reporting requirement.

Form 1099 Requirements