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Obama’s Health Care Act Expands 1099 Reporting Requirements

February 28, 2012

How Non-profit organizations can avoid 1099 filing penalties.

As you may know, the President’s Health Care Act contained a provision significantly expanding the level of 1099 reporting. This provision was to begin on January 1, 2012 but was met with almost universal objection because it was so far reaching and compliance would have been difficult if not impossible for many organizations. Although this portion of the Health Care Act was recently repealed, 1099 reporting changes were not eliminated and are still very important.

The IRS believes that there is approximately a $300 billion gap in the amount of taxes paid and the amount owed if all income was properly reported in accordance with the law. The IRS further believes that proper reporting of miscellaneous income via Form 1099 will put a significant dent in this tax gap. As a result, the IRS conducted and recently concluded a 4-year intensive examination of 1099 reporting. Because of these IRS efforts, the total number of cases reviewed by the IRS climbed 10% during the examination period.

Moreover, during the same period, the IRS increased its discovery of under-reporters by 210%. That is a lot people “forgetting” to report taxable income. During that same time period, IRS imposed monetary assessments increased a staggering 380%. We should all be concerned about unreported taxable income since it costs each of us additional taxes and leads to tax-increase proposals designed to close the budget deficit. Needless to say, as a result of this level of success, the renewed emphasis on regulation that began in 2008 is likely to increase the IRS enforcement efforts.

In addition to wanting all people to pay their fair share of the tax burden, compliance with 1099 reporting regulations is in your own best monetary interest. Failure to file the Form 1099 or filing one with errors subjects your organization to a $50 penalty for every Form 1099 with errors or every Form that should have been filed and was not. This penalty can easily double if the IRS finds your failure was the result of willful disregard of tax reporting requirements.

As a not-for-profit organization you know that you typically employ a number of subcontractors due to the project nature of some of your work. This makes your organization a prime target for an IRS 1099 compliance audit. It is therefore in your best interest to learn the 1099 reporting rules and how to protect yourself from a finding of “willful disregard of the tax reporting requirements”. The IRS views a lack of compliance policies and procedures, lack of staff training, lack of internal controls and even inaction as evidence of a willful disregard of reporting requirements.

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements.

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