You might think that not reporting the income you earn as a freelancer or independent contractor isn’t a big deal because the IRS doesn’t know about it. This is a dangerous assumption because it’s likely that if you generated more than a de minimis amount of income, whoever paid you that money reported it to the IRS with a 1099 form. As a result, if you have a tax return that should have included 1099 income (or didn’t file a return at all), the IRS will notice the unpaid taxes and come after you for it.
The goal of this article is to explain how the IRS knows about 1099 income, what happens if you don’t file taxes on your 1099 income, and what you should do if you discover undisclosed 1099 income. If you need help dealing with unreported 1099 income, contact the tax professionals from Damiens Law Firm, PLLC, as soon as possible. The longer you wait to address this problem, the harder it will be to fix.
Key Takeaways
- Businesses and other entities (for instance, banks) may be required to file a 1099 form if they pay income to a taxpayer.
- When the IRS receives a 1099 form, its computers expect to see the income reported on a tax return.
- If the taxpayer doesn’t file the expected tax return, the IRS will send a series of notices asking for the missing return or an explanation as to why the return doesn’t need to be filed.
- If the taxpayer ignores these notices, the IRS will file a tax return for the taxpayer called a substitute for return, or SFR.
- The best way to deal with unreported 1099 income is to file the missing tax return(s), as this will minimize penalties and interest charges and reduce the chances of tax enforcement actions by the IRS, such as liens and levies.
What’s 1099 Income?
The term “1099 income” refers to income that gets reported to the IRS on a 1099 form. There are many different types of 1099 forms, depending on where the income comes from and/or how it’s earned. Some of the most common IRS 1099 forms include:
If You Get a 1099, the IRS Gets a 1099
A 1099 form is generated only if certain conditions are met, such as receiving an amount of income that exceeds a certain threshold. Should this occur, the applicable organization (such as a bank or employer) will file the appropriate 1099 form with the IRS. These businesses will also send you a copy of the 1099 so you can confirm that you earned that income, as well as make sure the reported amount is correct.
What Happens If You Don’t File a Tax Return for 1099 Income?
The 1099 filing requirement means the IRS learns about your income, despite you never telling them. Then, should you fail to file a tax return or file a return without reporting the 1099 income, the IRS will know and reach out to you. Below is an overview of the different stages that occur when the IRS learns about 1099 income that the taxpayer never reports.
Stage 1 – requests to report the 1099 income
The IRS waits for a tax return that never comes. Alternatively, you file a tax return, but don’t include the 1099 income on it. Either situation will trigger a response from the IRS, which will typically begin with one or more tax notices. Among the most common are CP59, CP515, and CP516, as they get sent if the IRS is expecting a tax return from you, but hasn’t received one.
Stage 2 – final warning
If you don’t respond to the IRS’s initial notices, you’ll get a final warning notice, such as CP518. This notice will reiterate that you need to file a tax return or explain to the IRS why you aren’t required to file one. You’ll also be informed that should you continue to ignore the IRS, the IRS will file one for you to decide what taxes you owe, along with any applicable penalties and interest charges.
Stage 3 – the substitute for return
The IRS files a substitute for return (SFR) for you and lets you know about it with a CP2566 notice. The SFR is almost guaranteed to result in you owing taxes to the IRS when you don’t owe anything or owing more than you’re legally required to pay in taxes. You can respond to the SFR and CP2566 by:
- Filing the missing tax return.
- Explaining why you weren’t required to file a tax return.
- Inform the IRS that some of the information they relied on to prepare your SFR is wrong.
- Pay the tax the IRS has assessed against you.
Stage 4 – notice of deficiency
If you don’t respond to the SFR, the IRS will send a Notice of Deficiency. That gives you 90 days to respond (150 if mailed out of the country). If you don’t respond, the IRS can move forward with involuntary collections.
Stage 5 – involuntary collections
If you don’t pay the tax debt, delinquent tax collection efforts will begin. These could include enforcement actions, such as tax liens and levies, which could include asset seizure and wage garnishment.
Why SFRs Are a Big Deal for 1099 Workers
At first glance, it might seem like the IRS is doing you a favor by filing a tax return for you. But this isn’t the case at all. As mentioned earlier, you can expect the SFR to show that you owe more than you really should. This will be because the IRS doesn’t have all of your financial information, information which would likely reduce your tax liability.
These could include things like deductible business expenses (such as mileage if you’re a gig driver), tax credits, filing status, and exemptions.
How To Handle Unreported 1099 Income
The best thing to do if you discover 1099 income is to file the necessary tax return(s). Even if you’re filing late, it’s better than the alternative of doing nothing. Some of the benefits that come with filing the missing tax return are:
- Claiming deductions, exemptions, and/or credits.
- Reducing penalties and interest.
- Limiting the chances of the IRS accusing you of tax evasion or fraud.
When To Get Professional Tax Help
If you’ve just learned about 1099 income you should have reported to the IRS and paid taxes on, it’s possible to handle things yourself. However, you should strongly consider first talking to a tax professional for guidance on how to proceed if:
- You’ve received a late warning notice, such as CP518.
- The IRS has already filed a substitute for return for you.
- The unreported income is a significant amount, such as more than $10,000.
- You have two or more years of unfiled tax returns containing 1099 income; or
- You need recent and accurate tax returns to apply for a loan.
Getting help from a tax pro is important because they can identify potential tax concerns, discuss possible solutions, and advise you on which approach works best for your unique situation. Get started with a free consultation from Damiens Law. You can reach us online or by calling 601-476-2693.
Unreported 1099 Income FAQs
Do I need to file if I never got a 1099 form?
Yes, because even though you may not have gotten a 1099, the IRS may have. Even if the IRS didn’t, you’re supposed to report taxable income to the IRS regardless of whether a 1099 form is generated. If you don’t, the IRS could still find out about it if it conducts an audit of you or the business that should have created the 1099.
What should I do if I lose my 1099 form?
You can ask for another copy from the issuing entity. If another copy isn’t available, you can proceed with your tax return preparation as if no 1099 exists.
What should I do if no 1099 form was generated (and it should have been)?
If contacting the issuing entity doesn’t result in a 1099, you can contact the IRS and let them know that there’s a missing 1099. The IRS will contact the entity that should have filed the 1099 and sent you a copy.
Can I get into trouble if I’m a freelancer and my client doesn’t file a 1099 with the IRS?
No, but your client could. But remember, even if your client doesn’t file a 1099, you’re still legally obligated to report taxable income to the IRS.
How long will it take the IRS to act if I don’t file a 1099 income tax return?
It’s difficult to say, but in many cases, the IRS sends CP59 notices roughly a year after the applicable tax return was due. However, it’s entirely possible for several years to pass before the IRS contacts you about unreported 1099 income. During that time, any relevant penalties and interest will have been accruing.
What are the penalties for unreported 1099 income?
Most 1099 taxpayers face two potential penalties: failure to pay and failure to file. However, if the IRS believes you intentionally didn’t report or pay taxes on your 1099 income, then you could also face possible jail time for criminal tax evasion.
Sources
– https://www.irs.gov/businesses/understanding-your-form-1099-k
– https://www.irs.gov/forms-pubs/about-form-1099-misc
– https://www.irs.gov/forms-pubs/about-form-1099-nec
– https://www.irs.gov/payments/failure-to-file-penalty
– https://www.irs.gov/payments/failure-to-pay-penalty
– https://www.irs.gov/newsroom/what-to-do-when-a-w-2-or-form-1099-is-missing-or-incorrect
– https://www.irs.gov/businesses/small-businesses-self-employed/reporting-payments-to-independent-contractors
– https://www.irs.gov/individuals/understanding-your-cp518-individuals-notice
– https://www.irs.gov/individuals/understanding-your-cp59-notice
