How to expertly handle 1099 penalties and corrections

As careful as your finance team is when filing 1099s, even tiny errors can lead to costly penalties from IRS and time-consuming corrections.

Of course, 1099 penalties and corrections are something you never want to deal with in the first place. But if your company does receive an assessment, you know Finance should deal with things as quickly as possible.

Here’s help you can pass along to your team.

Why were we penalized?

If you get word from IRS that your company was assessed for information return penalties, staffers’ first emotion may be confusion. They thought they did everything right. What went wrong?

Fact is, there are a number of reasons companies get assessed. Remind staffers that you can owe penalties if:

• Your company didn’t file all forms on time.
• You had inaccurate details on an information return.
• Staffers didn’t include all the details that are required to be shown on a specific 1099.
• A form didn’t have a TIN.
• A form had an incorrect TIN.
• You filed via paper when you should’ve filed electronically (e.g., if your company surpassed the 250+ threshold).
• A paper information return you filed wasn’t machine-readable (and applicable revenue procedures provide for a machine-readable paper form).

What do we owe?

According to IRS’s 2021 General Instructions for Certain Information Returns, the penalties are:

• $50 per information return if you correctly file within 30 days (by March 30 if the due date is Feb. 28)
• $110 per information return if you correctly file more than 30 days after the due date, but by Aug. 1, and
• $280 per information return if you file after Aug. 1 or you don’t file at all.

As you know, the dollar amounts only get bigger the longer you wait to correct errors. So, you’ll want to have your team jump on 1099 penalties and corrections ASAP.

How do we fix errors?

Finance staffers should know that there are two types of information return errors.

Error Type 1 mistakes are the more straightforward of the two, as they only require one information return to make the correction. Typical Type 1 errors include an incorrect amount of money, code or checkbox, or filing a return when one shouldn’t have been.

To correct one of these errors, staffers should:

1. Prep a new information return.
2. At the top of the form, put an “X” in the “CORRECTED” box.
3. Correct the recipient info (i.e., money amounts) and add other info like you did on the original form.

Error Type 2 are the more complex of the two, as you need two returns to make the correction. They involve payee issues, like no TIN, incorrect TIN or incorrect payee name, or using the wrong type of information return.

To fix one of these mistakes, have your team:

1. Prep a new information return.
2. At the top of the form, put an “X” in the “CORRECTED” box.
3. Add the payer, recipient and account number details exactly as they appeared on your original incorrect form – except put a “0” for all money amounts.
4. Prep another new return.
5. On that form, don’t put an “X” in the “CORRECTED” box. You should complete the new return as if it’s an original.
6. Add all the correct details, including the correct TIN and name.