The $5,000 1099 Mistake That Triggers an IRS Audit

I just got a panicked call from a client who owes $5,400 in IRS penalties because they didn't send 1099s last year, and the IRS is now auditing their entire business. This is the first week of January. You have exactly 30 days to avoid this nightmare.

In 30 years of bookkeeping, I see businesses make the same expensive 1099 mistakes every single January. Here's what happened to this client and what could happen to you.

🔥 THE $11,400 DISASTER TIMELINE:
✅ Small construction company paid contractors throughout 2025 (electricians, plumbers, drywall installers)
✅ December: Too busy with year-end projects to deal with 1099s
✅ January: Overwhelmed, thought "maybe I can just skip them - contractors will report income anyway"
✅ January 31: Deadline passed, nothing happened immediately
✅ July: IRS letter arrives - computer system cross-referenced payments to contractors against what contractors reported
✅ Result: $5,400 in penalties for 38 unfiled forms ($290 per form when 6 months late)
✅ Plus: Full business audit of 3 years of tax returns
✅ Plus: $6,000 in accounting fees (15-20 hours at $325/hour to prepare audit response)
✅ Total cost: $11,400 + 6 months of audit stress + now on IRS radar for future returns

THE PENALTY STRUCTURE:
✅ Less than 30 days late: $50 per form
✅ 31-August 1: $120 per form
✅ After August 1 or not filed: $290 per form
✅ Intentional disregard: $630 per form
✅ Small business cap: $5,400 (but audit costs unlimited)

🎯 COMMON MISTAKES THAT TRIGGER AUDITS:
✅ "I paid through PayPal/Venmo - platform will handle reporting" (WRONG - you still need to file 1099-NEC)
✅ "I only need to track contractors over $600" (WRONG - track everyone from dollar one, they might cross threshold)
✅ Example: Graphic designer paid $200 March + $300 June + $350 October = $850 total = needs 1099
✅ Filing with incorrect info like wrong SSN = IRS rejects filing = now you're late even though you tried

What actually needs to happen: Identify every person/business paid $600+ for services (but 12 specific types require 1099s, 7 common types don't), collect complete accurate info (legal name, address, TIN) via W-9 BEFORE paying them (supposed to withhold 24% backup if no W-9), understand different 1099 forms (NEC for non-employee compensation, MISC for other payments, INT for interest, DIV for dividends), file with IRS AND send copies to recipients (Copy A to IRS, Copy B to recipient, some states require state copies), verify everything before filing (one wrong digit in SSN or misspelled name = rejected filing).

The 23 exception scenarios: Need 1099s for independent contractors providing services (but NOT corporations with exceptions), rent payments to individuals, attorney fees regardless of incorporation, medical/healthcare payments. DON'T need for merchandise/freight/storage, telephone services, payments to corporations (except attorney fees and medical). Are you starting to see how complicated this gets?

Your 3 options: Do it yourself (time consuming, shortcuts expose you to penalties), hand to CPA (works but they're slammed in January/February, charge $400-$1,200 premium for 1099 prep), skip it and hope IRS doesn't notice (we know how that ended - $11,400).Once flagged for audit, IRS often looks more closely at future returns too. You're on their radar. This is first week of January - gives you 3 weeks left. Don't let deadline pass and hope for best. The penalties are real, audits are real, and can seriously damage your business financially.

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