There are more than 40 types of information returns that the Internal Revenue Service (IRS) requires to be filed. Information returns are vital to reporting and verifying income tax in the U.S. and matching individual tax returns to determine compliance.
Filing the correct returns in a timely manner is contingent upon having correct information to remain within compliance. Failure to file on time or with incorrect information may result in penalties charged to taxpayers (if they don’t immediately make the correction) or you, the preparer, for failure to comply with an information reporting requirement.
Some errors are easier to fix than others. The IRS penalizes based on the size of business, type of failure and tardiness of filing. Avoid errors and potential penalties with these tips:
- File by the due date. Business tax returns are due based on your business type and most information forms are required to be e-filed or mailed by a specific date every year. Missing the due date for your business tax return will cost you. The penalty is five percent each month the return is late and can be a maximum of 25 percent. If you file more than 60 days after the due date, the minimum penalty is $135 or 100 percent of the tax return. For sole proprietors and single-member LLCs, penalties and fines are based on the amount underpaid or paid late and will not stop accruing interest until the balance is paid in full.
→ Takeaway: Don’t panic if you cannot pay the full amount of taxes you owe. Submit your return on time and pay at least 90 percent of the tax due to avoid a penalty. Even with an extension, you must estimate how much you owe, if anything, and send in that amount by the due date.
- Ensure correct spelling and Tax ID Number (TIN) The IRS penalizes for reporting incorrect taxpayer ID on information returns. If the (TIN) is incorrect or missing, the taxpayer is subject to backup withholding and you’ll get a backup withholding notice.
→ Takeaway: Make sure names are spelled correctly and the tax ID number is accurate before submitting the return to the IRS. To avoid this error, we highly recommend using a TIN matching program like our TIN Checking service.
- File a form when needed and use the right form. A common mistake for businesses is failing to file an information return when one is required. Additionally, some taxpayers use the incorrect year of the form. For example, there’s often confusion about 1099-MISC forms. As a rule, this form is provided by employers to individuals and businesses (e.g. independent contractors) you paid at least $600 in rents, services, prizes and other awards for business purposes. The form should also have the tax year at the top, especially since there are always changes.
→ Takeaway: When preparing taxes for 2021, make sure the form you’re using says 2020. Also, request a W-9 from any vendor you expect to pay more than $600 before making any payment. This will give you the vendor’s mailing address, TIN/EIN and business structure.
In summary, file your tax return by the return due date and double check records for errors. Anything from reporting the wrong amounts and math errors to filing the wrong form will cause problems. Save yourself a headache and use our tax preparation software for your information returns. Find out more about 1099 penalties here
And, if you discover you made an error on an information return, submit a corrected form as soon as possible. At eFile360, we support the filing of corrected forms with the IRS and mail copies to recipients. We know that mistakes happen and we’re there to help make the necessary corrections.