1099 Reporting and IRS Penalty Notices

The Internal Revenue Service is sending out penalty assessments regarding what they are referring to as improper reporting of taxpayer identification numbers on forms 1099.  They are assessing penalties at the rate of $50 per occurrence.  Many cooperatives issue thousands of 1099's and are receiving notices indicating problems with in excess of 150 1099's.  Penalties are being assessed in excess of $7,500 in some cases. 

I have previously written regarding the importance of form W-9 and how form W-9 is used in the 1099 reporting process.  I continue to strongly urge all taxpayers to continually update their W-9 forms for all non-employees that you issue a check to. It must be legible and signed.  If it is not legible, an error could result on form 1099 which eventually may (will) appear in the form of an Internal Revenue Service penalty assessment. 

When you receive a letter from the Internal Revenue Service expressing a potential problem with forms 1099, please take the following steps:

1.) Forward a copy of the letter to us.

2.) Review the problems listed on the IRS listing. The IRS provides a listing including the name and the EIN of those that they have identified as being incorrect.  From what I have seen, some of the "errors" can be as minor as "John Q Smith" being listed as "John Q. Smith."  Compare to your records and summarize the errors into missing EIN's, incorrect EIN's, incorrect names and of course those are not correct. 

3.) Immediately request a legible, signed W-9 from those listed on the IRS letter.  This request is referred to by the IRS as a "B" notice.  This notice must include the threatening language that "the failure to return this form by a certain date (say two weeks out) will result in backup withholding."  The IRS requires that this language in included. 

4.) Provide us at least two copies of these "B" notices.  I should be able to send these to the IRS along with a letter of explanation to get any penalties waived.

It is possible that additional correspondence will be required in order to have the IRS abate the penalty including a summarization of the problems referred to in #2 above, as well as the new W-9 forms that have been received. It seems like each situation is different and requires different action even though the issue is the same. 

Should you have any questions regarding this issue, and certainly if you receive an IRS letter indicating a problem with your 1099's, please call Charles Telk in our Des Moines office.