The IRS requires a variety of payers to issue 1099s. You may receive 1099s for interest payments, freelance income, dividends, brokerage transactions, government payments, and payments from retirement accounts. If you’re required to file a tax return, you must report the 1099 income on your return.
Failure to report this income can lead to tax assessments, penalties, and potentially even criminal exposure if the IRS believes you didn’t report the income in an attempt to evade taxes.
What Is a 1099 Form?
A 1099 is a form that payers use to report certain payments to individuals and other entities. For example, if you are a freelancer, your client will most likely give you a 1099-NEC reporting money paid to you. If you had gains or losses in your investment account, the brokerage will send you a 1099-B. If you received Social Security benefits, the government will send you a Form SSA-1099 reporting the payments.
Here are some additional 1099 forms:
- Form 1099–B Proceeds From Broker and Barter Exchange Transactions
- Form 1099–DIV Dividends and Distributions
- Form 1099–G Certain Government and Qualified State Tuition Program Payments
- Form 1099–INT Interest Income
- Form 1099-K—Payment Card and Third-Party Network Transactions
- Form 1099–MISC Miscellaneous Income
- Form 1099–OID Original Issue Discount
- Form 1099–R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
- 1099-S—Proceeds from Real Estate Transactions
- Form SSA–1099 Social Security Benefit Statement
- Form RRB–1099 Payments by the Railroad Retirement Board
Payers are responsible for issuing 1099s and the rules vary based on the situation. For example, if a business pays more than $600 to a non-employee, they must issue a 1099-NEC, but they don’t have to if they pay a corporation or use a credit card or certain third-party payment processor. Other payers face different rules.
Taxpayers are required to report their income from 1099s. Even if a taxpayer doesn’t receive a 1099 that they’re supposed to receive, they must still report the income.
What Happens If You Don’t Report a 1099?
If you don’t report income from a 1099, you are underreporting your income and, by extension, underreporting your tax due. If you receive a tax refund, the refund may be inflated due to the unreported income.
Once the IRS realizes you have not reported all of your income, the agency may adjust your tax return and assess a tax liability against you. If that happens, the IRS will generally send you a CP2000 notice alerting you about the unported income and showing your new tax liability.
You may also receive penalties related to the unreported tax. The IRS may assess a failure-to-pay penalty of 0.5 to 1% of the unpaid tax. Depending on the extent of the discrepancy, you may also incur an accuracy-related penalty of 20%, but that will only apply if there was a significant understatement of income.
When you receive the notice, you have the chance to appeal, but if you’re dealing with an unreported 1099 and the IRS adjusted your return with the correct numbers, there is typically no grounds for appeal. If the notice is correct, you must pay the tax due in full or make arrangements to pay it.
If you do not pay the tax due, you will incur additional penalties as well as interest. Eventually, the IRS may enforce collections against you by garnishing your wages or seizing your bank accounts and assets.
How the IRS Detects Unreported 1099 Income
When a payer issues a 1099, they send a copy to you and a copy to the IRS. The IRS’ Information Returns Processing (IRP) system matches the data on 1099 forms to the data reported on income tax returns. If it spots a discrepancy, it makes an automated adjustment and sends you a notice.
The IRS may also find missing income by auditing your return. If you are selected for an audit, you will need to substantiate the details reported on your return, and if the IRS realizes that you didn’t report all of your income, they will adjust your return accordingly.
What to Do If You Forgot to Report 1099 Income
If you forget to report 1099 income, you may need to amend your tax return. By filing Form 1040-X, you can make changes to your previously filed 1040 form. However, if the deadline for the 1040 has not passed yet, you may be able to file a superceded return with the correct information.
However, in a lot of cases, the IRS catches the error before the taxpayer, and they simply send a notice as outlined above. If you receive a notice about an adjustment to your tax return due to an unfiled 1099 form, you should review the details to make sure that you agree.
If you agree, either pay the tax in full or contact the IRS to make payment arrangements. Most taxpayers qualify to make monthly payments through an installment agreement. If you genuinely cannot afford to pay the new tax liability, you may want to look into applying for a settlement through the offer in compromise program, or if you have no assets or disposable income, you may want to see if you can get your account marked as currently not collectible.
When to Seek Professional Help
You may want to talk with a tax attorney about unreported 1099 income if any of the following apply:
- You believe you received a 1099 in error.
- The 1099 has incorrect income information.
- Some of the 1099 income was distributed to other recipients.
- You forgot to report a significant amount of money.
- You have questions about 1099s
- You want guidance and peace of mind.
An experienced tax attorney can also be critical if you’re facing any of the above issues or dealing with an audit. They can help you assess the situation, represent you in front of the IRS, deal with mistakes, and help you find the best way forward.
Avoiding Issues with 1099 Income in the Future
To avoid facing unreported 1099 income in the future, track all of your payments throughout the year. Even if you don’t receive a 1099, you must still report the income.
If you don’t receive a 1099 from a payer, contact them and ask them to send one. Payers must issue 1099s by the end of January, so you should receive yours by February. Payers can be subject to penalties if they don’t issue these forms on time. Note that you can report the income from a 1099 even if you don’t have the form.
Also, be aware that the tax on 1099 income can be surprising. If you’re dealing with a 1099-R or other 1099s related to retirement income, the payer may have withheld taxes for you, so you generally don’t have to worry about facing a tax liability when you file your return. If you have capital gains due to a 1099-B, the tax may be minimal, but if you have short-term gains and are in a high tax bracket, the tax rate may be over 30%.
However, the tax can be surprising if you’re dealing with 1099-NECs or 1099-Misc related to self-employment income received as a sole proprietor or freelancer. In most cases, you will face self-employment tax at a rate of 16.3% as well as income tax at a variable rate, depending on your total taxable income. Luckily, you can deduct the business expenses you incurred to earn that income.
You should track your business expenses throughout the year to keep your tax liability as low as possible. You may also need to make estimated quarterly payments to help you avoid penalties. If you do end up facing an unexpected tax liability when you file your return, be proactive about reaching out to the IRS and making arrangements. The IRS has a variety of relief options, even if you owe 50k, 100k, or more.
Reporting 1099 Income FAQs
How does the IRS detect unreported income from 1099 forms?
The IRS’s computers match the income reported on 1099s with your tax ID number to the income reported on the income tax return filed with your tax ID number. They will adjust your return and send you a notice if they see a difference.
What happens if I receive a CP2000 notice?
If you receive a CP2000 notice, you should reach out to the IRS immediately if you disagree with the notice or contact a tax professional for help. The IRS has a tool on its website that allows you to upload a response to the CP2000 notice. If you agree with the information, you should make arrangements to pay the taxes due.
What if you have 1099 income and you don’t file a tax return?
The IRS will contact you about the 1099 income and inform you that you should file a tax return. If you don’t file, the agency may use the information on the 1099 forms and create a substitute for return on your behalf.
Can I avoid penalties if I forget to report my 1099 income?
To minimize penalties, report the unreported income as soon as you discover it. You will not incur any penalties if you report the changes before the return due date. You should contact the IRS to request penalty abatement if you incur penalties.
What should I do if I never received a 1099 form but earned income?
Contact the payer and ask them to send you the 1099. If they do not send you the form, report the income anyway, but do not note that the income came from a 1099. Schedule C has a spot where you can report income from 1099s and another line where you can report income that was not reported on a 1099.
How can I prevent missing 1099 income in the future?
Track your income carefully and proactively reach out to payers who have not issued a 1099. When you prepare your tax return or give your income documents to your accountant, make sure that you report everything.
Reporting 1099 income is a critical part of tax compliance. Failing to report income from these forms can lead to unexpected tax assessments, penalties, and collection actions. To get help dealing with unreported 1099s or any other tax problems, contact us at Wiggam Law today.
We specialize in helping individuals and businesses solve tax problems and can help you find the most effective, sustainable solution to your tax problems. We have a successful track record of helping clients eliminate hundreds of thousands of dollars in tax debt due to incorrectly filed 1099 forms. If the 1099 is correct, we can help you resolve the tax liability and apply for penalty abatement.
Schedule a consultation with our team or call us at (404) 233-9800.