The IRS recently began mailing penalty notices, specifically Form 972CG, “Notice of Proposed Penalty,” for 2018 information returns that were required to be filed in 2019. Many of the notices include penalties for late-filed Forms 1099-MISC, “Miscellaneous Income,” with amounts included as nonemployee compensation (NEC) in Box 7. This wave of late notices is a result of the ongoing confusion created when the due date for Forms 1099-MISC with NEC was accelerated from Feb. 28 (March 31 if electronically filed) to Jan. 31. Though the new Form 1099-NEC, which will be required to report NEC for 2020, should ease some of this confusion, taxpayers will need to adapt to the new form and address penalties imposed for years before 2020.
Nonemployee compensation information returns due Jan. 31
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Background
Normally, paper-filed Forms 1099-MISC are due Feb. 28, and electronically filed Forms 1099-MISC are due March 31 of the year following the calendar year to which the returns relate. However, the Protecting Americans From Tax Hikes Act of 2015 accelerated the due date for Forms 1099-MISC with NEC to Jan. 31 to align independent contractor reporting with Form W-2 reporting. Even though this change was first effective for the 2016 calendar year, many taxpayers mistakenly continued to file Forms 1099-MISC returns with NEC by the Feb. 28 or March 31 due dates and were unaware that their Forms 1099-MISC with NEC were filed late until they received a penalty notice.
Looking ahead
To eliminate confusion, the IRS announced in July 2019 that beginning with calendar year 2020, taxpayers will be required to file Forms 1099-NEC to report payments of $600 or more in NEC. NEC can include fees, commissions, prizes, awards, or other forms of compensation for services. Form 1099-MISC will continue to be used for other payment types; however, Box 7 no longer will be used for reporting NEC.
For 2020, taxpayers will need to adapt their information reporting processes to accommodate the new form and change their reporting procedures for the Form 1099-MISC. Taxpayers who haven’t already made these changes have only a few months to get ready.
In the meantime, taxpayers who receive penalty notices should act quickly because the Form 972CG typically provides only 45 days to respond with a request for penalty relief. Given that the IRS is struggling to reduce its backlog of paper filings, it is unclear when a taxpayer’s penalty relief request will be processed. Taxpayers should work with their tax advisers to protect against collection activity while penalty requests are pending.
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