• Larry McClanahan

Can the IRS Deny Your Deductions When You Don't File Form 1099-MISC?

Imagine this: you own a business and didn’t issue Form 1099-MISC to your contractors.

Now, the IRS is auditing your tax return and the auditor claims you lose your deductions because you didn’t issue the Form 1099s. Is this correct?

No. IRS auditors often make this claim, but they are incorrect.

There is no provision in the tax law that denies you a deduction for labor expenses simply because you didn’t file the required Form 1099s (there can be penalties, see below).

But the tax court has stated that the non-filing of required Form 1099s can cast doubt on the legitimacy of the deduction claimed.

As with any deduction claimed on the tax return, you have to keep sufficient records to substantiate the deduction amount. If you had filed Form 1099s, then this would have been solid documentation to help prove the expenses to the auditor.

But since you didn’t file Form 1099s, you need to provide ironclad documentation to prove the expenses, including some or all of the following:

  • Bank statement transactions

  • Canceled checks

  • Credit card statement transactions

  • Invoices from the contractor

  • Signed agreements with the contractor

  • A signed statement from the contractor verifying the amounts received

Ultimately, to prove your deduction in a court of law, should you have to go that far, you’ll need to show by a preponderance of the evidence that you made the payments. This means that your evidence has to make it more than 50 percent likely that you did make the payments to the contractors.

Besides the extra trouble of proving the deductions, keep in mind that the cost of not filing Form 1099s triggers a financial penalty.

For the 2019 Form 1099s, the potential penalties are

  • $270 per Form 1099, or

  • $550 per Form 1099 if the IRS determines you intentionally disregarded the requirement.

Filing the 1099s is the best way to follow the law and avoid trouble. If you need my assistance or would simply like to discuss 1099s, you can connect with me here.

[Sourced from the Bradford Tax Institute. Used with permission.]

Copyright © 2019-2020 McClanahan Tax & Advisory LLC. Larry McClanahan is an Oregon Licensed Tax Consultant #907479-C and is owner of McClanahan Tax & Advisory LLC and SecondHalf Planning & Investment LLC. See Disclosures page.