What Happens When Someone Forgets to File a 1099 on Their Tax Return?

Filing with Form 1099

A 1099 form is an informational form you receive—not a tax document you fill out. If a business or government entity sends you money during the year that is reportable on your taxes, you should receive a Form 1099.

There are many different kinds of 1099 forms. For example, 1099-DIV informs the IRS that you were paid potentially taxable dividend income; Form 1099-C reports the cancellation of a debt, which is sometimes a taxable event and Form 1099-NEC reports payments to independent contractors. Dozens of special situations call for a Form 1099 but they all cover payments you receive that may potentially be taxable.

IRS reporting

Since the 1099 form you receive is also reported to the IRS, the government knows about your income even if you forget to include it on your tax return. Once the IRS thinks that you owe additional tax on your unreported 1099 income, it will usually notify you and retroactively charge you penalties and interest beginning on the first day they think that you owed additional tax.

Amending your tax return

If you catch the error before the IRS does, then you should file an amended tax return using Form 1040-X, Amended U.S. Individual Tax Return. Be sure to include a copy of the 1099 with the amended return and include a payment for any additional tax that you owe. If you are still awaiting a refund from the original return, you usually want to wait until you receive it before filing Form 1040-X.

Updating self-employment tax forms

If the 1099 that you forgot to include in your income is for self-employment earnings, and your total self-employment income that you earned during the year is $400 or more, you will also need to update or file Schedule SE with your amended tax return. This form is used to calculate your self-employment tax.

Most employees pay half of the Social Security tax on their income through payroll withholding and the employer pays the other half; but if you are self-employed, you are both employer and employee, so you must pay both halves of the tax. However, you can claim a deduction for one-half of the self-employment taxes you pay.

Penalty for late payments

Generally, you can expect the IRS to impose a late payment penalty of 0.5 percent per month or partial month that late taxes remain unpaid. This penalty is capped at 25 percent.

If the 1099 income you forget to include on your return results in a substantial understatement of your tax bill, the penalty increases to 20 percent, which accrues immediately. There is a substantial understatement if the tax on your income that is not included exceeds the greater of $5,000 or 10 percent of the correct tax required to be shown on your return.

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