The deadline to issue Form 1099s to your contractors is fast approaching, on January 31, 2020. But what happens if you forget to issue them?
You’re probably already thinking the worst: You’ll get audited, and the auditor will tell you that because you didn’t issue your Form 1099s, you lose the deduction for labor expenses.
The good news is, although IRS auditors often make the above claim, it isn’t true.
There is no provision in the tax law that states that you’ll use your deduction simply because you didn’t file the required Form 1099s.
However, NOT filing them could potentially cast doubt on the legitimacy of the deduction and cause you to unnecessarily pay penalties.
Like every other claimed deduction, you must keep sufficient records to substantiate the deduction amount. Usually the Form 1099 is sufficient documentation to prove expenses to an auditor, but in the case that you don’t file them, you’ll have to provide other solid documentation to prove the expenses.
These other expenses will include some or all of the following:
- Bank statement transactions
- Canceled checks
- Credit card statement transactions
- Invoices from the contractor
- Signed agreements with the contractor
- A signed statement from the contractor verifying the amounts received
It should be added that should you have to prove your deduction in a court of law, you’ll need to show by a preponderance of evidence that you made the payments. In other words, your evidence will need to show a more than 50% likeliness that you actually made the payments to the contractors.
In addition to the extra trouble above, NOT filing Form 1099s will also result in a financial penalty. For 2019, the potential penalties are as follows:
- $270 per Form 1099, or
- $550 per Form 1099 if the IRS determines you intentionally disregarded the requirement.
If you want to avoid trouble and additional tax headaches, make sure you file your Form 1099s by January 31. If you need our assistance, call our office at (732) 566-3660.