Failure to File

If you didn’t issue Form 1099s to your contractors, don’t freak out! I’m here to help.

Since you failed to file From 1099s, the IRS is probably auditing your tax return. The auditor is claiming you lose your deductions because you didn’t issue the Form 1099s. Is this correct?

You’ll be happy to hear the answer is NO. 

Luckily for you, IRS auditors often make this claim but they are incorrect.

There is no provision in the tax law that denies you a deduction for labor expenses simply because you didn’t file the required Form 1099s.

However, the tax court has stated the non-filing of required Form 1099s can cast doubt on the legitimacy of the deduction claimed.

What does that mean? 

Well, as with any deduction claimed on the tax return, you have to keep sufficient records to substantiate the deduction amount. If you had filed Form 1099s, this would have been solid documentation to help prove expenses to the auditor.

But obviously the issue now is that you didn’t file Form 1099s so you’ll need to provide ironclad documentation to prove the expenses.

This includes some or all of the following:

  • Bank statement transactions
  • Canceled checks
  • Credit card statement transactions
  • Invoices from the contractor
  • Signed agreements with the contractor
  • A signed statement from the contractor verifying the amounts received

In order to prove your deduction in a court of law, should you have to go that far, you’ll need to show by a preponderance of the evidence that you made the payments. This means your evidence has to make it more than 50% likely that you did make the payments to the contractors.

You need to go above and beyond. 

Besides the extra trouble of proving the deductions, keep in mind the cost of not filing Form 1099s surfaces a financial penalty.

For the 2019 Form 1099s, the potential penalties are: 

  • $270 per Form 1099
  • $550 per Form 1099 if the IRS determines you intentionally disregarded the requirement

It goes without saying, you’ll want to avoid these penalties at all costs. Dot your i’s, cross your t’s and keep track of these payments so that if/when the IRS comes knocking on your door you’ll know what to do.