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Tax Season Compliance Reminders

January 23, 2014

As we start the filing season for 2013 tax returns, we wanted to remind you of a few compliance issues and update some information regarding 1099 forms for businesses.

 

First, 1099 forms: You are required to provide 1099s to all individuals who are not employees that you have paid $600 or more for services over the course of the year. While corporations are not subject to these requirements, partnerships and many LLCs are. To be safe, we suggest that forms W-9 be sent to all your vendors that could be subject to the requirement. If required, 1099’s must be distributed to recipients by January 31, 2014 and filed with the IRS by February 28, 2014. If you need help give us a call.

 

It appears that the Internal Revenue Service has made 1099 forms an audit issue when examining business tax returns. Penalties for noncompliance have been increased, and are assessed at $100 per failure to provide the form to the recipient, plus an additional $100 per failure to provide the form to the IRS. For businesses with a large number of covered vendors, penalties can mount quickly.

 

If you only are required to file one or two forms, $200 per failure is not the end of the world. However, a few collateral issues may arise, including the IRS imposing backup withholding on the individuals that should have received 1099s. This means the payer is responsible for withholding and paying the taxes due by the recipient, as is the case with employees. In this case, the payer is responsible for paying the taxes without regard to whether they were actually withheld. Late penalties and interest could also be assessed if backup withholdings are imposed. Payers can escape the assessment if they can prove the recipient paid the tax due, but the burden of proof is shifted to the payer.

 

Additionally, the IRS may challenge the classification of individuals as employees or independent contractors. The IRS may argue that independent contractors are actually employees, and should be treated as such for tax purposes. In order to qualify for relief from retroactive reclassification, along with meeting other factors, the payer must have actually filed a 1099 for the individual in question. Not timely filing 1099s gives the IRS a blank check to reclassify individuals, leading to very undesirable results. This area is further complicated by the unique Massachusetts laws surrounding independent contractors. Please contact us if you are unsure of your situation.

 

Second, keep in mind the following record keeping requirements:

  • If you use your car in your business you need to be able to document your business miles.

  • If you entertain customers or clients you need to be able to document who, when, where, why, and how much for each expense.

  • If you contributed an amount greater than $200 to a charity, you need a written letter from the charity documenting the gift and also what (if any) value you received.

Please pay special attention to these items. If you have questions please call us.

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