Businesses and individuals who make certain payments in the course of their trade or business are required to file Form 1099 with the IRS and provide a copy to the payee. (See our article on forms 1099). Failure to comply with these requirements can result in significant penalties. This article provides a comprehensive overview of the penalty structure for not filing Form 1099, as well as important exceptions, reductions, and best practices for compliance.

Understanding the Penalty Structure

The IRS imposes penalties under Internal Revenue Code sections 6721 and 6722 for failing to file correct information returns (such as Form 1099) and for failing to furnish correct payee statements. These penalties apply separately for each Form 1099 not filed with the IRS and for each payee statement not provided to the recipient.

For tax year 2025 (returns due in 2026), the penalty amounts are as follows:

• Filed correctly within 30 days after the due date: $60 per return/statement (maximum $683,000 for large businesses; $239,000 for small businesses)
• Filed after 30 days but by August 1: $130 per return/statement (maximum $2,049,000 for large businesses; $683,000 for small businesses)
• Filed after August 1 or not filed at all: $340 per return/statement (maximum $4,098,500 for large businesses; $1,366,000 for small businesses)
• Intentional disregard of filing requirements: $680 per return/statement, with no maximum limit
• A small business is defined as one with average annual gross receipts of $5 million or less for the previous three years

Separate Penalties for Filing and Furnishing

It is important to note that the penalty applies separately for failure to file the information return with the IRS and for failure to furnish the payee statement to the recipient. If both are missed for a single payee, two penalties may apply.

Exceptions and Reductions

There are several circumstances under which penalties may be reduced or eliminated:

• Reasonable Cause: No penalty will be imposed if the filer can demonstrate that the failure was due to reasonable cause and not willful neglect. This generally requires showing that the filer acted responsibly and that the failure was due to events beyond their control or significant mitigating factors.
• De Minimis Rule: If a filer submits returns on time but makes errors and corrects them by August 1, the penalty may not apply to the greater of 10 returns or 0.5% of the total number of returns required.
• Safe Harbor for De Minimis Dollar Amount Errors: If the error on the return or statement is $100 or less ($25 or less for tax withheld), no correction is required unless the recipient requests it.
• Electronic Filing Requirement

If a filer is required to submit 10 or more information returns (aggregated across all types), they must file electronically. Failure to do so without an approved waiver may also result in penalties.

Correction Procedures

If an error is discovered after filing, a corrected return should be filed as soon as possible. The IRS has specific procedures for correcting different types of errors, including incorrect taxpayer identification numbers, names, or amounts.

IRS Assessment and Notification

The IRS will send a notice if a penalty is assessed. Interest will accrue on the penalty until it is paid in full. Filers may dispute the penalty or request abatement if they believe they have reasonable cause.

Best Practices to Avoid Penalties

• File all required Forms 1099 and furnish payee statements by the due date.
• Ensure all information is accurate and complete.
• File electronically if required or obtain a waiver if unable to do so.
• Apply for an extension if more time is needed to file or furnish statements.

Conclusion

The penalties for not filing Form 1099 can be substantial, especially for larger businesses or in cases of intentional disregard. However, the IRS provides relief in certain circumstances, such as reasonable cause or minor errors. To avoid penalties, businesses should implement robust procedures for tracking payments, collecting payee information, and meeting all filing deadlines. If you have questions about your specific situation or need assistance with compliance, consult a qualified tax professional.

Written by Tracy Fickett, BUSBooks, LLC