Understanding Form 1099

January is 1099 time. AmeriPride Tax Group Managing CPA urges taxpayers to collect these documents carefully to avoid problems with the IRS.

1099s are the forms most people love to hate. For taxpayers, receiving them means more work on the tax forms. For business owners, it means scrambling to complete send out forms.

The reality is that the only group that seems to like these forms is the IRS. Why? Because the Internal Revenue Service drops the data from these forms into its computers to track income on ordinary taxpayers. Though the United States taxing agency audits less than 1% of all individual tax returns, they match 1099s and W-2s (wage report forms from employers) against the 1040s filed and send notices to taxpayers, which state that, based on those matches, they owed more.

Want to avoid becoming a statistic for the 2010 tax year? Read the top nine about form 1099:

1. The 1099 form comes in several flavors. These include the 1099-G for state and local tax refunds and unemployment benefits; 1099-R for pensions and payouts from your individual retirement accounts; 1099-B for broker transactions and barter exchanges; 1099-S for real estate transactions, and of course the 1099-INT for interest; 1099-DIV for dividends etc. There are many categories, but the Form 1099-MISC (for miscellaneous) seems to prompt the most questions and covers the biggest territory.

2. Be sure people know your address. Information is reported to the IRS (and state tax authorities) based on your Social Security number, not your address. If you got paid by anyone make sure they have your correct address because regardless of whether or not you got the form, you can rest assured that the IRS received it. Take the extra time to update your address directly with businesses and individuals who paid you, and be sure to put a forwarding order in with the U.S. Post Office so that you get a copy of every form that the IRS receives.

3. Report errors and issues the moment you find them. Don't place 1099s in a pile and let them sit; open them as soon as you receive them. Why? If you receive a 1099-MISC on Jan. 31 reporting $19,000 of income, when you know you received only $1,900 from the company, you need to rectify the problem immediately. You see there is about one month between the time when you will receive your form and the date that the payer is required to file their form, which means that they have time to correct their error before the IRS even sees the problem. That scenario is clearly better for you. However, even if the payer already sent the incorrect form to the IRS, they can still file an amendment. They simply mark a special box on the form to show that the new form is correcting a prior 1099.

4. Send 1099s early and often. If you are required to file a 1099 for a contractor or other payee, complete your form early. As a rule of thumb, businesses must issue the forms to any payee who receives $600 or more during the year unless they are a corporation. Of course that’s just the basic rule; there are many, many exceptions, which is why you should consult your tax professional.

5. Timely filing of 1099s is imperative. Businesses are typically required to file Forms 1099 on or before Jan. 31 of each year for the prior calendar year. Interestingly, some businesses make it a practice to send a 1099 form when they send you a check so they won't have to send your form at another time. That means you could get 1099s throughout the year. If you get them, put them in a safe place where you’re sure to find them come tax season.

6. If you earned it, report it. Forgetting income is a big no-no with the IRS. Despite penalties for companies who issue 1099s late, some may arrive as late as April or May. And remember that things do, periodically, get lost in the mail. So while you may not have a 1099 in hand, that doesn’t mean that the company didn’t send a copy to the IRS.

7. Report every 1099. The IRS' computerized matching of the 1099 to your return means that they are likely to catch any omission. Be forthcoming with your tax preparer and never, ever ignore income, especially income listed on a 1099.

8. Respond to IRS follow up. If the IRS catches a discrepancy, don’t ignore it. If you earned the money, pay the taxes. If there’s a legitimate reason why you don’t believe you can or should, consult a competent CPA or attorney and communicate directly with the IRS to avoid penalties, etc.

9. File information with state tax forms, too. States assess income tax, as well and they receive the same information that the IRS does. If you discover that you overlooked a 1099 on your Federal Tax Return, you will want to amend your state return as well, before the state catches up to you.

The 1099 form is a key component to the IRS's computer matching program. Regardless of whether you receive one or not, report all income and avoid costly issues in the long run.