On April 4, Sovos hosted a webinar, “Corrections and Correct TINs: Best Practices to Maintain Compliance,” in which Sovos experts discussed how organizations should best prepare for the complexity and riskiness of 1099 corrections. Missed the webinar or don’t have the time to watch the full on-demand version? Here is a brief recap.
1099 corrections for Tax Year 2017: Here’s what payers need to know
The cost to file a correction increases as time elapses, so dealing with corrections rapidly is critical to the process. IRS penalties for late or incorrect filings for Tax Year 2017 are:
- Files received not more than 30 days late: $50 / form
- 31 days late-August 1: $100 / form
- After August 1: $260 / form
For most companies, though, dealing with corrections isn’t just about tracking one form type or deadline. The corrections process becomes exponentially more complex when an organization files a variety of different forms types with varying deadlines. The IRS can impose different correction penalties depending on how far away the correction filing is from the original filing deadline, which can vary by form type.
Keeping track of original deadlines is important when filing corrections to make sure the organization is filing during the most cost-effective window for saving money on correction penalties imposed by the IRS.
For organizations that don’t file for a filing Extension of Time (EOT), the best times to file corrections by form type to receive the smallest possible penalty are:
- 1099-Misc Box 7 and W-2: March 2nd
- 1042-S: April 13th
- All other 1099s: April 30th
- 5498: July 2nd
For Tax Year 2017, as in past years, organizations have the option to file for an EOT to push almost all correction deadlines out by 30 days. The exception is the W-2, which is eligible for EOT only if an organization can prove a hardship in filing.
However, beginning in Tax Year 2018, the IRS is likely to remove the EOT for filing corrections, meaning organizations will be under more pressure than ever before to get files corrected on time and avoid financial penalties. On top of that, penalties for late or incorrect filings will increase for Tax Year 2018.
How 1099 corrections will change for Tax Year 2018
According to IRS guidance, Tax Year 2018 will introduce both effectively tighter deadlines and larger penalties for corrections. While deadlines themselves will not change, the agency is likely to eliminate the EOT for 1099-MISC forms with non-employee compensation (box 7 amounts), meaning the IRS will require organizations that usually apply for an EOT to file 30 days earlier than usual.
The end of the EOT heaps pressure on organizations to make sure information is accurate with tighter deadlines. In the first year of the PATH Act, late filings of W-2 forms doubled, and corrections went up by 30 percent.
The disappearance of the EOT from 1099-MISC box 7 forms is likely to exacerbate that trend, and as a kicker, filers will face larger penalties if they are unable to get forms corrected by August 1. The IRS has confirmed that penalties will be on the rise, with the fine for late or incorrect files submitted after August 1 moving from $260 to $270 per file and the maximum fine shifting from $3.193 million to $3.282 million.
Eliminating the number of 1099 corrections filed
A lack of predictability and KYC processes is the enemy for accounts payable and finance professionals, who are either always working with new contractors and vendors each year or constantly onboarding new customers. With less time to prepare forms and the stakes higher for making errors, clean data and well-defined processes are critical. Any sort of pre-emptive method for avoiding corrections becomes extremely important as well.
Generally, there are three types of corrections organizations file:
- Name Changes (Two Return/Transaction Type)
- TIN Changes (Two Return/Transaction Type)
- Amount Changes (One Return/Transaction Type)
Two of those correction types are generally avoidable with TIN Matching, Name and TIN changes. The IRS gives payers the ability to prevent errors upfront by performing name and TIN matches against its database. Matching names and TINs before filing tax forms enables payers to take action before a filing error occurs. There are two types of TIN matching the IRS allows:
- Bulk TIN Matching matches many records against the IRS’s database at one time.
- Interactive TIN Matching enables payers to quickly verify on the fly that information is correct.
Cleaning errors up helps resolve the two biggest issues that are about to further complicate 1099 corrections. By proactively reducing the number of errors in an original filing with the IRS, companies have fewer corrections to submit and can reallocate resources to different projects. Of course, the other positive result of proactively avoiding errors, and therefore corrections, is staving off IRS penalties.
Best practices for filing 1099 corrections
Interactive TIN matching enables organizations to put in place a critical best practice for avoiding 1099 errors and corrections: verifying 1099 recipient information during the onboarding process rather than in bulk just before tax season. To the greatest extent possible, companies should know as soon as they sign on with 1099 recipients that the information they have for those parties is accurate.
Another best practice is to have automated, centralized reporting process. Automation, which includes features such as interactive TIN matching, enables payers to eliminate errors and develop repeatable, reliable reporting processes. Centralizing reporting in one team, using one automated system, not only guards against errors, it also saves time and money in the reporting process.
Predictability is one of the critical goals of any organizations that handles 1099 reporting. Unfortunately, the regulations surrounding 1099 corrections are unpredictable and liable to have negative and costly consequences. In Tax Year 2018, the challenges of the EOT likely ending and penalties increasing again will add to the complexity of the 1099 reporting and corrections process.
Fortunately, organizations with the right tools and processes can deal with change efficiently and effectively. Having best practices in place to avoid corrections is the best way to stave off the potentially negative byproducts of the corrections process.
Watch the replay of a recent Sovos webinar to learn much more about corrections for form 1099.