1099 Letter
Debi L. Rhinehart - Partner, November 15, 2006
Dear Client:
It has come to our attention that the IRS is increasing their compliance auditing for 1099 reporting by Individuals and Fiduciaries. For 2005, your income tax return included a reporting schedule which could be required to prepare 1099’s. As such, we have included the general requirements for whom you might be required to issue a 1099. The law has not changed, but appears to be more strongly being enforced. Please review the requirements below and review your records to see if you are subject to issuing 1099’s.
All business entities are required to issue 1099’s. A business entity includes individuals or fiduciaries who file a Schedule C (self-employed individual), Schedule E (rental property), Schedule F or Form 4835 (farm property). A 1099 is required to be issued to any entity, excluding any corporations, for whom you paid more than $600 during a calendar year for services. Common examples include: outside labor, gardening, management fees, trustee fees, cleaning, legal fees, accountant fees, repairs & maintenance, etc. This is not meant to be a complete list, but just something to get you thinking. A C-Corporation and an S-Corporation are the only two entities not required to be issued a 1099. 1099’s are required to be mailed to the recipient by January 31st & mailed to the government by February 28th. If you have more than one entity (ex: multiple rental properties), please also be aware that the $600 limit is calculated by the total amount you paid that individual for all entities. For example, if you paid your management company $200 for each of three rental properties, a 1099 would be required as you paid them a cumulative total of $600 even though you only deducted $200 on each individual Sch E.
After reviewing your 2006 activity, if you believe you have a filing requirement for 1099’s, we would be happy to assist you in the preparation of these forms. We would need from you a list of all recipients for whom you are required to issue a 1099 including: name, address, social security number or federal identification number (for partnerships & trusts) and amount paid for services during 2006. If you are unsure about what should be included, please let us know & we would be happy to discuss with you. Please provide this information to us as early as possible in January so as to allow time for preparation. As these are due by January 31st, you will need to send in this information separate from your tax return. You could be subject to a $50 per 1099 penalty for late filing and there is no extension available.
If you choose to prepare the 1099’s yourself, please provide us a copy of the forms for our records along with your tax organizer / tax information. If you choose not to file these forms, be aware that you could be subject to a penalty of up to 50% of the amount which you were required to report plus any interest due on that penalty. For example, if you were required to issue a 1099 to us for $800 and to your gardener for $1,000 and you choose not to file the 1099’s, you could be subject to a penalty of $900 (50% of $800 + $1,000) plus interest. As mentioned above, the risk of non-filing appears to have greatly increased as the IRS is now analyzing your personal or fiduciary tax return for the common 1099 expense accounts and looking for the 1099’s to have been issued.
We realize this is a new topic for many of you. Please give us a call to discuss any questions or concerns you might have.
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