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Federal agencies reducing incorrect 1099-MISC statements

The accuracy of miscellaneous income statements submitted by federal agencies and other entities on the Form 1099-MISC has significantly improved, but better communication and outreach could further reduce the number of incorrect 1099-MISC statements filed each year, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, noted that entities need to file a Form 1099-MISC information return statement for payments of $600 or more. Those payments can include nonemployee compensation, medical payments, rents, and proceeds paid to attorneys. In tax year 2015, federal entities reported more than $520 billion in miscellaneous income payments to the IRS on nearly 750,000 information return statements. The IRS reviews the accuracy of the Taxpayer Identification Number information contained on the 1099-MISC and when it identifies incorrect information, such as missing or incorrect payee TINs, it usually notifies the entity about any mismatches. TIGTA noted that accurate TINs are essential to the success of IRS programs that match tax information reported by payers against filed tax returns to determine whether payees have filed and reported the payments on their income tax returns.

According to IRS data, federal entities have significantly improved the accuracy of the payee TINs submitted on Forms 1099-MISC. Between tax years 2009 and 2016, the number of miscellaneous income statements submitted by federal entities with missing or incorrect payee TINs listed on error notices has fallen 80 percent.

1099-MISC error notices

The IRS has attributed those improvements to a TIN matching program from the federal government’s General Services Administration that matches federal payee information against IRS records at the time a company or individual registers to do business with the federal government.

According to the IRS’s own data, in tax year 2015, federal entities were notified by the IRS of more than 17,000 miscellaneous income statements with missing or incorrect TINs reporting more than $5 billion in payments. However, TIGTA found that few federal entities withheld federal income tax, despite being notified of their responsibility to do so. TIGTA estimates these federal entities could have potentially withheld nearly $400 million in backup withholding in tax year 2015 for missing and incorrect TINs if all the payments were reportable and not exempted from backup withholding provisions.

TIGTA talked about the notification process with five of the federal entities that received a notice from the IRS for missing or incorrect TINs submitted on their 2015 miscellaneous income statements. They expressed concern about some of the technological barriers to accessing the notice and accounting systems that weren’t capable of performing backup withholding, along with other concerns.

In its report, TIGTA recommended the IRS explore alternative notification processes and do more outreach activities so the with federal agencies understand their filing and withholding requirements. The IRS partially agreed with TIGTA’s recommendation that it conduct targeted outreach activities with federal entities, but disagreed with the other recommendation that it should explore alternative notification processes that enable payee lists provided with CP2100 error notices to be more easily accessed.

“IRS does not currently have a file sharing system to transmit files to federal agencies outside the current process of mailing an encrypted CD,” wrote Sunita B. Lough, commissioner of the IRS’s Tax Exempt and Government Entities Division, in response to the report. “We will pursue using such a system should one become available in the future.”

However, TIGTA said it continues to believe that the IRS should consider alternative forms of delivering the error notices.

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