Experience shows that many people do not read their tax returns; whether it be their personal, partnership, corporation, sole proprietorship, or other business entity returns. While tax preparers work to anticipate all questions that may apply to a tax return, there may be a tendency to presume an answer, unless a taxpayer addresses a specific issue. For this reason, the taxpayer must read all of their return to help their preparers know more about each of their current business dealings. For example, on Form 1040, Schedule B there is a question: Do you have an off-shore bank account? Then there are several follow-up questions. Studies reveal that a taxpayer is frequently not even aware that an applicable question is on the return. The outcome is that this answer is sometimes incorrectly answered by the taxpayer, with the inadvertent commitment of perjury. Taxpayer punishment, rather than accident-forgiveness, is more often than not the result. This is because the IRS makes it clear, under the signature line on the return, that a false statement could constitute perjury.
Similarly, business returns, that is partnership returns, corporate returns, and sole proprietorship returns, among others, contain questions concerning whether or not the taxpayer made any payments during the year that would require the taxpayer to file Forms 1099. For example, on the partnership return (Form 1065), that question appears as question 18a. On Form 1120 (corporate return), it is question 15a. The concern is that, once again, the taxpayer is sometimes not even aware the question is on the return. As noted above, this is due to the taxpayer very frequently not reading the return, except for their own dollar numbers. Penalties for failure to file Forms 1099 continue to be high, as do penalties for late 1099s, running as high as $100 each.
These questions as to whether or not the taxpayer made any payments during the year that would require the taxpayer to file Forms 1099 could also result in even more serious difficulties. If the answer is “yes,” then the IRS wants to know whether the taxpayer did, or will, file the required 1099s. If the answer is “no,” but, in fact, should have been “yes,” then the taxpayer faces the possibility, once again, that they have made a false statement. If the taxpayer answers “yes,” but then states the 1099s have not been filed, then that is a red flag for an audit. Payroll tax audits are becoming more and more frequent as a result of the IRS having conducted national research on this issue and determining that there was a high level of noncompliance. Further, since the Affordable Care Act requires that businesses having a certain number of employees provide a specific level of insurance for staff, the IRS is aware that many entities are trying to avoid having the requisite employees and are treating people as independent contractors. Therefore, the IRS is focused on whether 1099s are being filed for those individuals.
The point is that you need to be sure that, if you have to file 1099s, you are doing so. But, in addition, also be fully aware that the IRS is specifically checking, when you file your individual sole proprietorship, corporate, or partnership return, whether or not you did so. Being alert of these issues can avoid unnecessary and accidental problems, and all the difficulties that those may lead to in terms of audits, the expense of correcting the issue, and possible penalty assessments or more serious punishment.
Are you signing on the bottom line? Then read all of your tax return, because the buck really does stop with you.