Did you neglect to report your 1099 income to the Internal Revenue Service (IRS)? Unfortunately, the IRS is most likely going to notice. When payors issue 1099 forms, they also send a copy to the IRS. As a result, the agency is aware of your income, even if you did not declare it on your return.
However, you can avoid unnecessary penalties and taxes by taking immediate action. In this post, we at the W Tax Group explain the consequences of failure to report a 1099 and the steps you must take to resolve this issue. To get help now, contact us today.
What Is a 1099?
Form 1099 is an informational return notifying the IRS that a taxable transaction occurred. A variety of entities issue these forms for different types of income or other transactions. By comparing 1099s with tax returns, the IRS can ensure taxpayers report their income correctly.
The 1099 series consists of multiple forms – each reporting a different type of income. Some of these forms include:
- Form 1099-NEC reports non-employee compensation of $600 or more that you earned as an independent contractor.
- Form 1099-MISC reports miscellaneous income that you received, such as a settlement payout or cash prize.
- Form 1099-INT reports your interest income for the tax year.
- Form 1099-R reports retirement payouts, such as IRA or 401(k) distributions.
Example: Taxpayer A does freelance work for Company B on an ongoing basis. Each January, A receives a 1099-NEC from B covering all the payments that A received. B must file another copy with the IRS by the end of February. B can claim the amount as an expense on their tax return, and A generally must report the amount as income on their tax return.
After sending 1099 forms to taxpayers, payors sometimes prefer to wait a few weeks before filing 1099 forms with the IRS. When you receive a 1099 copy from a client, bank, or any other payor, open it immediately to ensure the amounts are correct. Report any errors before your payor files with the IRS.
Is It Necessary to Report 1099 Income on Taxes?
You must report all income on your tax return, including all 1099 income. If you receive a 1099 from your bank, an investment firm, a client, or another entity, you generally must report that income on your tax return. However, there are some exceptions as outlined below.
When you don’t have to report 1099 income
There is a slight loophole when you’re dealing with 1099s related to self-employment income. The IRS only requires you to report net self-employment income that exceeds $400. Net refers to income after employment. As a result, you may sometimes get into situations where you receive a 1099 that you don’t need to report.
For example, imagine that you receive a 1099-NEC for $1,000 for some contracting work that you did. However, to complete that job, you incurred $650 in expenses. As a result, you only had $350 in net income, and thus, you didn’t need to report the income.
When the same income is reported on two 1099s
Unfortunately, in some situations, you can have the same income reported to you twice on different 1099s. In particular, this can happen when a client issues a 1099-NEC, but they paid you through a payment platform that issues a 1099-K. In this case, you only have to report the income once, but be aware that the IRS will receive both forms. Thus, if the IRS reaches out, you need to be ready to explain the discrepancy.
When you receive income but not a 1099
You must report all income on your tax return, even if you did not receive all the appropriate 1099 forms. If a payor fails to send you the appropriate 1099 copies by January 31st or February 15th, it does not mean that you can withhold this income information from the IRS.
The IRS requires you to report all of your income. Even if you trade work for haircuts, baked goods, or farm fresh eggs, the IRS expects you to put the value of those items as income on your tax return.
Will the IRS Catch that 1099 Was Not Included as Income?
When you receive a 1099 form from a payor, the IRS will receive the same form. The purpose of this form is to let the IRS know who is responsible for paying taxes on income, and the IRS will pick up if you do not include this income on your return.
Using computerized matching, the IRS will compare all 1099 forms containing your Social Security or taxpayer identification number to your tax return. If you have a new address and payors sent 1099 forms to your old address, the IRS can still link the 1099 form with your tax account.
If the IRS finds that your tax return does not reflect the income from the 1099, it may proceed with an audit or by sending you a notice of the discrepancy.
When Should You Amend Your Tax Return?
Under certain circ*mstances, taxpayers may amend a tax return that they have filed. For example, you can amend your return if you accidentally claimed the incorrect filing status, missed out on a tax deduction, or claimed a deduction you were not eligible to claim. You must also amend your tax return if you forgot to report a taxable 1099 income.
You need to file an amended return before the filing due date to resolve a potential tax liability and avoid penalties. However, make sure that the IRS processed your original return before filing the amendment. Doing so will ensure that your amended return supersedes the original.
If you amend your return after the filing deadline and the changes create a tax liability, you may incur penalties for late payment. However, if that happens, you can request penalty abatement.
Note: When claiming a refund, you must amend your return within three years following the original filing due date. You are no longer eligible for the refund after this period.
How to Amend a Tax Return for an Updated 1099
Once you realize that you forgot to report your 1099 income on your tax return, you can amend the return to reflect this income.
You must complete and submit Form 1040-X for each return you are amending. You will notice three columns on this form:
- Column A: This column must reflect the amounts you reported in your original tax return.
- Column B: Here, you must include the amounts by which the figures in your original return need to change. For example, when amending an adjusted gross income of $620 in your previously filed return to report an amount of $1,000, you need to enter $380 in line 1 of this column.
- Column C: The last column must show the correct amount, the sum of the amounts you entered in Columns A and B. In the example above, this amount would be $1,000.
You must provide an explanation for filing the amended return in Part III of this form. Attach copies of the 1099 forms that report the income you did not include in your previously filed return. Contact us at the W Tax Group for assistance in filing an amended return.
What Will the IRS Do if I Fail to Report the 1099?
What happens if you fail to report 1099 income and do not amend your return before the IRS detects the error? The IRS’s actions in response to the underreporting of 1099 income depend on the surrounding circ*mstances. Here are some of the possible outcomes.
Notice CP200
Suppose the IRS detects a missing income from an external source, such as a 1099 form that a payor filed. In that case, the agency’s computer system will automatically generate Notice CP2000. While a CP200 is not an audit notice, you should not ignore this letter.
This notice indicates a “proposed amount due,” reflecting how the unreported 1099 income changed your tax bill. If you have forgotten to report the income and agree with the change, wait until you receive a notice of deficiency from the IRS, then pay your bill.
Notice CP11
In some cases, a discrepancy between a 1099 form and a return may result in an examination by the IRS, followed by an adjustment to your return.
When this happens, the IRS will send you Notice CP11 explaining the changes to your balance due. In response, you need to pay the due amount by the deadline, provided that you agree with the correction. If you disagree with the adjustment and the IRS’s explanation, schedule a consultation with us at the W Tax Group to resolve the discrepancy.
Are There Penalties for Late Payments?
Once the IRS adjusts your tax return, it will assess penalties and interest on the amount you owe. Interest accumulates on an unpaid tax balance from the return’s due date until you pay the amount due in full.
The IRS imposes failure-to-pay penalties of 0.5% for every month you do not pay your tax balance. However, if your unreported 1099 income represents a substantial understatement of your tax liability, the IRS may increase the penalty to a 20% accuracy-related penalty.
Penalty Abatement
You can request a first-time penalty abatement by sending the IRS a letter explaining why you failed to report your 1099 income. Attach Form 843 (Claim for Refund and Request for Abatement) and a copy of the CP notice you received when requesting a penalty waiver.
In most cases, the IRS is willing to waive penalties, especially when taxpayers have never incurred penalties before or have a valid reason for not paying on time (reasonable cause).
Examples of valid reasons for failing to pay on time include a natural disaster, the death of an immediate family member, or a system issue that delayed an electronic payment.
When Would a Criminal or Fraud Investigation be Done?
Taxpayers who fail to report 1099 income but amend their return in time or respond to a CP notice are generally not in trouble with the IRS. However, if a revenue agent or investigative analyst detects criminal willfulness, the IRS will launch a criminal investigation.
IRS investigators typically suspect tax fraud when they detect false Social Security numbers or falsified documents. Intentionally underreporting income or failure to file taxes may also constitute tax fraud.
What If You Cannot Pay Taxes on the Missing 1099?
Taxpayers who forget to report 1099 income are often ill-prepared for an adjusted tax balance. If you cannot afford to pay taxes on unreported 1099 income, you can consider one of the available tax debt resolution options.
Installment Agreement
Once the proposed amount due in a CP2000 notice becomes an assessment, you can set up a monthly payment plan with the IRS. This option involves paying down your tax balance over time. Remember that penalties and interest continue accumulating while you repay the tax debt.
A Partial Payment Installment Agreement is a type of monthly repayment available to eligible taxpayers. Under this agreement, you only pay what you can afford, and the arrangement lasts for as long as the tax debt is collectible. The IRS forgives the unpaid portion of your debt on the collection statute expiration date.
Offer in Compromise (OIC)
If your income and assets are insufficient to cover your tax balance, the IRS may grant an offer in compromise, a settlement agreement. Under this arrangement, you do not pay the entire tax balance. You pay part of it, and the IRS forgives the rest.
However, you will only qualify for an OIC if you are current and compliant. Before submitting an OIC, ensure you have filed all outstanding returns for the previous six years. You must also be up to date on your estimated tax payments for the year.
Currently Not Collectible Status
If collection action by the IRS will cause you financial hardship, you may qualify for Currently Not Collectible status. If your account is not collectible, the IRS cannot collect the tax on your 1099 income by levying your bank account, garnishing your wages, or seizing your property.
When applying for CNC status, you must submit a Collection Information Statement to demonstrate to the IRS that you experience financial hardship. If the collection period expires while your account is not collectible, the IRS will forgive the unpaid portion of your balance.
Get Professional Help When Dealing With Unreported 1099 Income
Dealing with the IRS can be a daunting prospect if you have an issue relating to 1099 income, partner with one of our knowledgeable and experienced tax professionals at the W Tax Group.
To get help, contact us to schedule an initial consultation and tell us about your tax situation. Then, we will formulate a strategy to get you in good standing with the IRS and resolve your unpaid tax balance.
