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Failure to File 1099-misc Penalty

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John R. Dundon II, EA
John R. Dundon II, EA

I have a client who failed to file 1099-misc for contract labor and am dealing with an examiner who denied all contract labor expenses because of a lack of IRS Form 1099-MISC back to 2007 even though an audit trail exists substantiating the expense. So the Service's position is for the taxpayer to admit to failing to file the 1099-misc and pay the associated penalties with that failure or have the contract labor expense denied.  Has anyone else dealt with this before?

Generally speaking the penalty is $100 per delinquent form.  However there are some exceptions… If the failure is not corrected or is corrected after August 1 of the calendar year in which the required filing date occurs, the penalty is $100 per return, up to a maximum of $1.5 million for all such failures during the calendar year [IRC Sec. 6721(a)(1)]. However, if the filer satisfies the $5 million gross receipts test for the calendar year, the maximum penalty for all such failures during the calendar year cannot exceed $500,000 [IRC Sec. 6721(d)(1)(A)].

For information returns that were required to be filed before 2011, the annual penalty is $50 per return, up to a maximum of $250,000 for all such failures during the year. The maximum penalty for a filer that satisfies the $5 million gross receipts test is reduced to $100,000.

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