In prior years we have found the IRS compliance penalties for not filing various tax forms to be nothing more than a slap on the wrist. No longer!! The penalties have now reached the point where they could close a business.  The penalties for failing to file 1099’s, W-2s and Business returns of 1120S and 1065 have become frightening.

Businesses file W-2s for wages and Form 1099 to report dividends, interest, non-wage compensation and rent paid in the course of the tax year.  The penalty for not filing these forms is $270 per form, which will be doubled to $540 since the penalty is for the form sent to each recipient and the IRS.  The maximum penalty for a calendar year varies based on gross income of the business issuing the forms.  For a business making more than $5 million in gross receipts, the maximum penalty is $3.339 million and less than $5 million the penalties could be up to $1.113 million.  The forms are to be filed to the IRS by January 31, 2020 and mailed to the recipients. Those 31 days in January are a very small window for you to comply with the rules.  The penalties alone could put you out of business!

Some of the more common errors on 1099s include

  • Failure to recognize that vendors which are LLPs and LLCs are not “corporations” and therefore service providers do not qualify for the exemption from filing.
  • Failure to obtain W-9 information from new vendors.  Without the W-9 information, it is a requirement to withhold 30% and remit to the IRS as federal withholding.
  • Failure to identify multiple vendor payments in a year, which exceed $600 in total.
  • Failure to provide 1099s for rent payments.

Penalties for failing to file the 1065, Partnership Return, or the 1120S, Subchapter S Corporation return, are assessed based on the number of partners or shareholders.  The penalty is $205 per partner or shareholder per month for 12 months with no maximum!  The returns are due by March 15th.  Partnerships and S Corporations can file for extensions for time to file which gives the business until September 15th to get the return filed.  If the return is not filed by the extension, the extension is ignored and the penalty is assessed from the original due date.

Don’t let the penalties catch you off guard and make sure your information is into your tax preparer with plenty of time to file.

Please contact your Ketel Thorstenson tax advisor for further guidance.