Whether you've earned dividends, received consultation fees, or worked as an independent contractor, you can expect to receive a 1099 form every January to help you file your returns. But what happens if your form goes missing or you forget to file? Will the IRS catch a missing 1099 form?
The truth is, sometimes 1099 forms get lost or people forget to file. There are several reasons why. Your form can get issued late, go to the wrong address, simply vanish in the mail, or life gets in the way. Whatever the reason, you don’t need to panic -- losing a 1099 form or forgetting to file doesn't mean you’re doomed to remain in the IRS bad books.
The IRS requires you to attach a form W-2 when filing your tax return, but with 1099 forms, it’s the opposite. You only need to know how much to report, as the organization only cares about the information contained in the 1099 and not the actual form (even though you should still report cash payments).
The problem arises, however, when you don’t know how much income to report. To get your income information, you can call your client and ask for the missing data. You can then simply key in the amount when filing your tax return.
Another great idea? Requesting duplicate forms to ensure you’re always armed with proper records. Note that the forms you receive from one client don’t have to look exactly like the ones from another. As long as the information contained is correct, you don’t have to worry.
But what if you receive a duplicate and it contains errors?
Once you receive your Form 1099-R, it can be tempting to toss it to your pile of other forms you never seem to care about. But this can cost you. Too often, 1099s contain some errors and report the wrong income amount.
In such cases, you need to let your client know about the error immediately. There’s normally enough time to correct an error before the IRS receives your form.
If your client already sent an incorrect 1099 form to the IRS, then you can request them to resend an up-to-date one. The new form 1099 needs to state that it is correcting a prior mistake. Be sure to do it before the deadline or you'll receive a 1099 late filing penalty.
Your client must send a copy of your 1099 to both you and the IRS. Similar to W-2 forms, 1099s are normally submitted by January 31st. If Jan. 31 happens to fall on a holiday or weekend, then the 1099 due date shifts to the upcoming business day.
The 1099 copy that the IRS receives contains your Taxpayer Identification Number -- the exact number you use to file your returns. And since they get the 1099 form very early in the year, they have enough time to determine whether your reported income matches what your client reported.
Filing returns that don’t match the information the IRS records sends a red flag to the organization. What follows next? An IRS employee or agent examines you.
Note that the IRS doesn’t penalize you for reporting higher income than what you earned. What the organization considers a mismatch, though, is reporting lower income, so you can expect to receive a notice from them, as we’ll see later.
If you under-report your income, the IRS will send you a notice through the mail. Your notice may include interest on the amount you owe, and your interest may continue to accrue until you pay your owed amount in full. Depending on your tax situation, you will have to pay penalties. Congress recently increased the penalty for not filing 1099 tax returns.
All of this will be included in your notice.
Suppose you find an error after you’ve filed your returns, but you haven’t received a notice from the IRS yet. You don’t have to panic. The solution lies in a simple document: the Form 1040-X.
Form 1040X lets you correct tax returns that you’ve previously filed, keeping you safe from the IRS’ hefty fines for underreporting your income.
To amend 1099 tax returns, follow this process:
Previously, you’d only amend returns manually on paper, regardless of whether you filed your previous returns electronically. But in recent times, the IRS has allowed taxpayers to amend their returns through PCs or smartphones, so you don’t have to endure the hassle of mailing your Form 1040-X.
If you’re self-employed or you’ve worked as an independent contractor, you can expect to receive Form 1099-NEC (formally the form 1099-MISC). The income you receive is referred to as “nonemployee compensation”.
Here are the conditions you and your clients must meet:
You'll still need to file a 1099 under $600 if you didn't receive a form. If you’re missing a form 1099 reporting your self-employment income, you’ll need to update Form 1040-ES. The form shows your income and the self-employment tax you’re subject to; it allows you to figure and pay your estimated tax.
You may need to pay estimated taxes if you’ve earned income that’s not subject to withholding, which may include:
Typically when you’re an employee, your employer withholds a certain tax amount from every paycheck and pays the IRS and sometimes the state government too. You’re essentially paying your taxes as you earn, or in simple terms, paying ‘’as-you-go”.
You often split your Social Security Tax 50/50 with your employer, meaning half of your taxes are paid through payroll withholding while your employer pays the remaining half.
When you’re an independent contractor, you act as both the employee and the employer. The result? You have to pay both halves. The good news, though, is that you can easily get a deduction for one-half of the taxes you owe.
To determine your estimated tax, you need to get a sum of your tax liability for the year then divide the resulting figure by four. Your tax liability can include self-employment taxes, income taxes, among others. You can easily calculate self-employment tax due by using our free calculator.
It can be a great idea, when estimating taxes to use your earned income and claimed deductions for the previous tax year as a starting point. The Form 1040-ES contains a worksheet that can guide you when making your calculations.
If you estimate your taxes either too high or too low, you’ll need to refill another Form 1040-ES worksheet to get a more accurate figure. If you provide inaccurate income details to the Internal Revenue Service, you might get slapped with costly fines.
in order to avoid a tax underpayment penalty, the IRS requires you to report estimated taxes that are at least 90% of your real tax liability -- or either 100% or 110% of your previous year’s liability, depending on your level of adjusted gross income. If you fail to do so, then the organization will charge you interest on the amount you owe.
Often, you’ll receive a normal CP11 notice if you file returns with missing 1099s. But in more severe cases, the IRS might notify you that they want to “examine” you, which means you’re getting an audit.
The chances of the IRS auditing you are naturally very low if you’ve only lost a 1099 form. There’s a possibility, however, that your unreported income might be too high for the organization to ignore, as it’s raising serious red flags. If the IRS looks further into your filed returns and discovers more errors, you may be more likely to receive an IRS audit.
The Internal Revenue Service identifies taxpayers to audit generally using 3 methods:
On top of these methods, the IRS uses a computer program referred to as the Discriminant Inventory Function System (DIF). Whenever you file returns, the program assigns a numeric score that determines whether or not you’re safe from examinations. The higher your score, the more you’re likely to get a visit from an IRS agent.
IRS fraud investigations are very rare, especially for taxpayers who have lost their 1099s. If you’re missing a 1099 form because of forgetfulness or poor documentation, then you may be clear of any fraud investigations.
However, if you’re using your missing 1099 form as an excuse to intentionally under-report your income, then you might answer either criminal or civil charges.
Civil charges can attract a penalty of up to 75% of your underpayment. This means that, on top of the taxes and interest you owe, you’ll have to also pay a 75% tax penalty if the IRS determines you're guilty of civil fraud.
For criminal fraud, the penalties are steeper. If you’re convicted of criminal tax fraud, you might face a five-year jail time and a $250,000 fine. But criminal investigations are unheard of for a missing or lost 1099 form.
What can trigger such an investigation is either a taxpayer attempting to defraud the government or evading or avoiding to pay taxes on 1099 income intentionally.
Chances are high that the IRS will catch a missing 1099 form. Using their matching system, the IRS can easily detect any errors in your returns. After all, they also receive a copy of your 1099 form, so they know exactly how much you need to pay in taxes.
To be on the safe side, make sure you keep all your records safely. And if you notice any mistakes in your 1099s, try to amend your tax returns immediately.