The IRS will charge you penalties mainly for using the wrong tax forms that they can’t scan. Providing incorrect information will not cause you to pay a penalty as long as you have a reasonable cause. A reasonable cause is that you didn’t know because you filed the 1099 according to the W9 you got from the contractor.
There are a ton of reasons why the IRS will penalize you for everything related to 1099s and contractors. You’d be surprised, but the main reason why the IRS will hit you with a penalty isn’t for providing the wrong information. The IRS is most worried about you using the wrong form!
What do you mean the wrong form…?
Every year the IRS gets millions and millions of 1099s for contractors all over the country. Every form is entered into a giant scanner that’s older than grandma. This scanner needs you to use “special paper.”
What’s special paper?
Special paper has an acidity level of 6.5ph, non-reflective black ink, specific margins and about 20 to 30 other requirements. This special paper is meant to make sure that the scanner will read the form clearly. It costs the IRS $3 dollars to process a form manually and about 20 cents to scan a form.
What if the 1099 I sent in is wrong? Will I be penalized?
Generally – No. Shocking! The IRS knows that it’s more expensive to them to track, punish and collect the penalties for 1099 mistakes than it’s worth. The IRS ends up punishing themselves. But, avoiding a penalty requires that you have a “reasonable cause” to have provided incorrect information.
One of the best reasons is that you followed the W9. This makes it all the more important to have good W9 records to keep track of your 1099 contractors.
What do I do if the 1099 information is incorrect?
You can re-file a corrected 1099 form, if you discover that the information was wrong. If the IRS discovers that the information is incorrect, then they’ll send a notice asking for the right information. But, you can avoid a penalty by having the proper documents.
One of the most important things for a business to do is keeping their documents and tax information up-to-date. The best way to do this is to have a system. Software is the easiest way to do this, but you could also go the old fashioned analog method as well. Keeping paper documents is also a reasonable option.
E-filing is the best choice because there’s zero room for you to make a mistake. The IRS gives you more time to file the 1099s and you’re required to file fewer forms because software lets you automate the process efficiently. But, going old school and filing paper forms is another option that businesses can take.
The problem with paper forms is the inconvenience they cause during paper jams and the issue that they lead to greater chances of tax audit due to improper filing.