Payor's Penalties

There are penalties for failing to meet the obligations imposed on payors.

First, if you submit a 1099 form without a TIN or with an incorrect TIN, you will be liable for a $50 penalty. This $50 penalty is applied for each incorrect 1099 form you submit. [26 CFR 301.6721-1(a)(1)] So, for example, if you submit 100 incorrect 1099 forms, you will be liable for a $5,000 penalty. Or, if you have only one incorrect TIN, but submit that incorrect TIN on three 1099 forms over a three-year period, you will be liable for a $150 penalty. For 1099s required to be filed after 1989 (without regard to extensions), the penalty is reduced to $15 per return if you correct the problem within 30 days of the due date. [26 CFR 301.6721-1(b)(1)] The penalty is reduced to $30 if you correct the problem on or before August 1 following the due date. [26 CFR 301.6721-1(b)(2)]

As we have pointed out, the “due diligence” standard says that a payor will not be liable for this penalty if the payor exercised due diligence in trying to obtain the correct payee TIN. The “reasonable cause” standard says that the payor will not be liable for this penalty if the payor can show that the failure to include a correct payee TIN was due to reasonable cause and not to willful neglect. Any payor who exercises due diligence is deemed to be able to show reasonable cause. Again, the “reasonable cause” standard generally applies to any 1099 whose due date, without regard to extensions, is after December 31, 1989. See the earlier section in this chapter, “Certifications,” for details on the due diligence and reasonable cause standards.

Second, a payor is liable for amounts it is obligated to withhold, whether or not it actually withholds them. [26 USC 3403] This liability is reduced to the extent the payor can show the payee paid the tax on the interest income. [26 CFR 35a.3406-2(k)(1), which directs the reader to 26 CFR 35a.9999-3, Q&A 2] For example, if the payor is required to withhold $20, it must remit $20 to the IRS, even if the payor did not withhold it from interest payments to the payee. The payor could recover the $20 if the payor could show the payee paid the tax on the interest received from the payor. [26 CFR 35a.3406-2(k)(1), which directs the reader to 26 CFR 35a.9999-3, Q&A 2] There are also civil and criminal penalties in the tax code for failing to collect and pay over taxes that may also apply. [26 CFR 35a.3406-2(k)(1), which directs the reader to 26 CFR 35a.9999-3, Q&A 2]

Finally, a payor is subject to the same civil and criminal penalties for failing to impose withholding as an employer who fails to withhold on a payment of wages. [26 CFR 35a.3406-2(k)(1), which directs the reader to 26 CFR 35a.9999-3, Q&A 2]