What Happens When Someone Forgets to File a 1099 on Their Tax Return?
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-MISC 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.
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 realizes that you owe additional tax on your unreported 1099 income, it will notify you and retroactively charge you penalties and interest beginning on the first day your tax payment is late.
If you catch the error before the IRS contacts you, then you should file an amended tax return on Form 1040X, Amended U.S. Individual Tax Return. When you amend a tax return, don’t complete your entire return over. All you need to do is update the form with any figures that change as a result of the additional income.
However, if any of your schedule attachments change, you must complete the entire schedule again. Most importantly, be sure to include a copy of the 1099 with the amended return and include a payment for any tax you now owe. If you are still awaiting a refund from the original return, wait until you receive it before filing Form 1040X.
If the 1099 that you forgot to file is for income you received through self-employment, and you earned $400 or more from self-employment during the year, you will also need to update or file Form 1040SE, which lists your income subject to self-employment tax.
Most salaried workers 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.
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 1099 income exceeds the greater of $5,000 or 10 percent of the correct tax required to be shown on your return.