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November 28, 2023

1099 Penalties: What Happens If You Don’t Issue or File?

Learn what is the penalty for not issuing a 1099 to protect your business from financial risks.

As a business owner or professional, you need to understand the possible repercussions of not filing 1099 forms. One of the most common questions asked is, “What is the penalty for not issuing a 1099?” Knowing the answer to this query ensures your compliance with IRS regulations and helps you steer clear of potential pitfalls. 

In this blog, we’ll discuss the penalties associated with failing to issue or file 1099 forms accurately and on time. We will also elaborate on the exceptions that come with this vital aspect of financial responsibility. 

Penalties Associated with the Late Filing of 1099 Forms

When you or your employer fails to file your 1099 by the due date, it exposes you to a late filing penalty. This applies if you miss the deadline, provide incorrect information, or fail to include necessary details. Not filing 1099 penalty varies based on the time of correction.

Penalty Structure: 

  • $50 per 1099 if filed within 30 days of the due date, with a maximum annual penalty of $588,500 ($206,000 for small businesses).
  • $110 per 1099 if filed more than 30 days after the due date but by August 1, with a maximum annual penalty of $1,766,000 ($588,500 for small businesses).
  • $290 per 1099 if filed after August 1 or if the required 1099 is not filed. The maximum annual penalty is $3,532,500 ($1,177,500 for small businesses).

Note: According to the IRS, your venture falls under the category of small businesses if you incurred an average annual revenue of $5 million or less over the previous three years. 

Penalty Exceptions:

  • The penalty can be waived if the failure to file is due to an event beyond your control, not willful neglect. You must demonstrate efforts to prevent the failure.
  • Errors or omissions can still lead to 1099 processing if they don’t involve TIN or payee name discrepancies.
  • De minimis rule: The penalty can be waived if corrections for the first ten forms (or ½ to 1% of the total number of 1099 forms you are required to file) are filed before August 1. However, note that the de minimis rule for corrections can still result in huge penalties since you’re still held responsible for the remaining 90% of the forms. 

Failure to Provide Correct Payee Statements 

Providing correct payee statements by the due date is mandatory. Failure to do so incurs a penalty, and the severity depends on when the correct statement is furnished.

Penalty Structure:

  • The penalty amount varies based on when the correct payee statement is provided.
  • If the error doesn’t hinder the payee from filing their tax returns, the penalty may be waived.

Penalty Exception: 

  • Intentional disregard of payee statement requirements incurs a penalty of at least $570 per payee statement, with no maximum penalty.

E-Delivery of File 1099

The IRS permits businesses to replace traditional paper statements with electronic delivery methods. While this offers a streamlined and environmentally friendly alternative, adherence to strict guidelines is a must to ensure compliance.

Despite the push for electronic filing, the IRS allows up to 99 returns to be filed on paper without incurring Form 1099 penalties for failure to file electronically. This provides flexibility for businesses that may still rely on traditional methods for certain scenarios.

What if I Fail to File 1099 Electronically? 

If you are required to file electronically but fail to do so without an approved waiver or reasonable cause, a penalty of up to $280 per return may apply. To avoid getting penalized, you need to be aware of the electronic filing requirements and take the necessary steps to meet them. 

Civil Damages for Fraudulent Filing

The penalty for filing false 1099 extends beyond regulatory liabilities. In cases where you claim payments to another person that are not truthful, you expose yourself to potential civil damages. This legal recourse allows the affected party to seek financial restitution, adding a layer of accountability to fraudulent actions.

Potential Liability

If the recipient of a false 1099 can substantiate the fraudulent filing and demonstrate resulting harm, the civil damages sought could amount to $5,000 or more, depending on the extent of the misinformation and its impact on the affected party.

This emphasizes the importance of maintaining vigilance and ethical standards when preparing and filing 1099 forms. Intentional misrepresentation invites regulatory penalties. It also opens the door to legal consequences that can significantly impact your financial standing.

Wrapping Up

When dealing with tax regulations, diligent adherence to filing 1099 requirements is a must. The penalties outlined for late filing, errors, and omissions emphasize the significance of accurate and timely submissions.

Remember that compliance extends beyond regulatory repercussions. Willful disregard or filing of false 1099 may lead to severe civil damages, potentially impacting your financial well-being or business credit

Take proactive steps to stay informed, seek professional advice when needed, and prioritize ethical practices in your financial responsibilities. By doing so, you’re shielding your business from penalties. At the same time, you’re reinforcing its reputation as a responsible and trustworthy entity.

Disclaimer: 

While this article offers valuable insights, it is not intended as legal or financial advice. For tailored guidance regarding specific actions or inquiries, we strongly recommend consulting with your trusted tax preparer.