I received an email from a dental client of mine yesterday – he unwittingly inspired this post. His question was, “What do I do with this mountain of 1099s that I have received in the business?” This is a short question with a long answer.
First, the rules
The may be a refresher for most of you, but 1099 filings are required when you pay a non-corporate service-provider or independent contractor more than $600 per year. The term “non-corporate” includes individuals, partnerships and limited liability entities.
Now, the challenge
The challenge comes when payors do not have accurate information on file. A payor should have a Form W-9 on file for every payee that might require a 1099 filing. But, as you can imagine, this is an administrative headache that is often overlooked. The result is that many payees receive 1099s in error and others do not receive 1099s that should.
What is the issue?
As many medical service providers know, it is hit or miss whether insurance companies or other payors will send a 1099 to the individual service provider or to the entity for whom the service provider works. If the 1099 is erroneously sent to the individual, that is a problem. Why? An individual may be assessed tax on income he did not receive.
You see, the IRS has a matching program to ensure that the income information that you provide on your personal income tax return agrees to what has been reported to the IRS on your behalf. Any discrepancies kick out a tax notice and a possible tax assessment. Even if the IRS is wrong, it is painful trying to get that assessment removed.
What do you do?
A corporate entity should not receive any 1099s. If it does, contact the payor to have them correct their records. If you receive a 1099 personally in error, your choices are (1) ignore the 1099 and pray you don’t get a notice or (2) report the income on your personal return and take a deduction for the same amount since it is reportable by the business.
If you receive an IRS notice, you have a couple of options. You can attempt to handle it yourself by calling the number listed on the notice or you can send the notice to your CPA to handle. In either case, act quickly. Non-response to a tax notice can turn a proposed tax assessment into a final tax assessment. With the passage of time, your appeal options become limited.
Finally, we recommend you retain tax returns and supporting documents for seven years. For corporate entities that receive 1099s in error, I see no reason to retain those 1099s. In an examination setting, the IRS makes no attempt to match 1099 totals to corporate revenue.
Navigating this issue can be tricky. Call us if we can help.