Episode 38: Correction Deadline Approaching to Avoid Penalties

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Welcome to this week's episode of Information Return Intelligence, the fast moving weekly podcast where we talk about all things related to 1099s and 1042s and the W9. And this week we're talking about corrections and the fact that there's a key deadline coming up for getting corrections filed without being penalized by the IRS. Information return intelligence is powered every week by IOFM. So a key deadline is coming with corrections where if you submit your corrections by this deadline, you're not penalized. And that deadline is this year it's August 3rd. Usually it's August 1st, but the first is on a Saturday, so it's Monday, August 3rd. Let's break this down. The IRS can assess penalties against you for filing a 1099 with incorrect information on it, and that is true even if you filed the original form on time, because you're required to file a complete and accurate form by the due date. So if you file something on time but it has errors or is missing information, then it is not complete and accurate. And therefore you could be penalized. How much would they penalize you? The answer is that it depends on when you get a complete and accurate form to them. How far past the original deadline is it that you're getting a complete and accurate form? That's how the penalty would be assessed. The law, however, allows you to correct a certain number of forms by August first. If the number of forms you're correcting is the greater of ten or half a percent of the number of forms you originally filed, then there is no penalty as long as you correct by August 1st. Now just hearing that it can be a little hard to wrap your head around. So let's look at an example of what we mean by this greater of 10 or half a percent of the number of forms you originally filed. One way of looking at it is that you always get 10 freebies when you file 1099s. If you're a big filer, then you get more than ten. So say that your organization files 10,000 forms. You could have errors on up to 50, 50, 50 of those forms without penalty as long as you file your corrections by August 1st, or this year it's August 3rd, since the first is on a Saturday. If you filed less than 10 forms, saying you only filed six forms, you could have errors on all six of those forms, and not be penalized as long as you fix all six of them by August 1st, or again this year, August 3rd. Let's talk some more about other things with penalties and corrections. So there is no penalty and no correction required for certain types of errors on a 1099, and those types of errors are wrong first names, wrong addresses, what are called de minimis dollar amounts, which means if the error is no more than $25 for withholding and no more than $100 for other amounts, you don't have to fix the form and there is no penalty. So say that you file a 1099 for a contractor that should show $3,000 but your finger slipped and you typed $3,030, $3030 instead of $3000. That's a $30 error, and it's not a backup withholding error, it's a contract labor box error. So you have the $100 de minimis dollar amount, you don't have to fix it. And there isn't a penalty in the off chance that the IRS might come along and start looking at your filings. There is a provision that says if the recipient of the form requests a correction, you are required to correct. And we're not going to talk about that today. We'll talk about it in some other episode at some point down the road where it could be a de minimis dollar amount that you do have to fix if your recipient requests a correction. Now, I think we've talked in other episodes. Well, maybe one other episode earlier this year or even late last year, or whatever. We've talked about it before, and we'll talk about it again. How the IRS does computer matching. And that is they take the first four letters of a person's last name and their taxpayer identification number, and they combine those two pieces, and that becomes that person's record at the IRS, and everything gets filed under that record. And so for tax compliance, they're gonna be pulling from that all of the information forms that were filed for that person and comparing it to their tax return that they filed. And so that's why when we look at things that don't need to be corrected, it's things like wrong first names and addresses, is because that is not something that the IRS uses in their computer matching. So one way of looking at this is is it subject to penalty? Well, ask yourself, does it impact tax compliance? Does it hinder the IRS's ability to enforce tax law? So we know when they do computer matching with 1099s, comparing it to someone's tax return, they're looking at the first four letters of the last name or the business name and the taxpayer identification number. So wrong last names or business names and wrong taxpayer ID numbers are things that the IRS cares about. And so errors with those things can generate penalties and therefore a need for you to correct. Dollar amounts that are not de minimis. The de minimis thing, the less than a hundred dollars or less than twenty-five dollars if it's backup withholding, the reason that exists is because those small dollar amounts are not really going to change the math too much, and it's more hassle for the IRS to try and enforce things with those smaller dollar amount errors. It's more hassle than it's worth. But a dollar amount beyond that is not de minimous. So an error in a dollar amount that's not de minimis, you have to correct or you could be penalized. Or if you put something on the wrong form or in the wrong box, you have to fix it or you could be penalized. And now let's hear a word from our sponsor, IOFM, the Institute of Finance and Management. Financial operations professionals, accounts payable, procurement, procurement to pay, accounts receivable, credit and collections, order to cash, whatever your organization calls it, and whatever your role, you're facing mounting pressures to improve performance. But despite the challenges you face, there are few reliable, independent, and comprehensive places to turn for help. That's where IOFM comes into play. Join literally thousands of your peers and become an IOFM member today. Check them out at IOFM.com. And now back to the show. Let's talk a little more about corrections. You have to file corrections in the same way you filed the original form, including the same e-file system. So if you filed the original in IRIS, you have to file the correction in IRIS. If you filed on paper, some people still do that. If you filed on paper and you discover something you need to correct, then you file on paper. Now we've talked about this August 1st deadline or again August 3rd in 2026. And we talk about that in terms of getting out of a penalty for the error or errors on the form or forms that you filed. So the question is if it's after that date, should we still bother with filing a correction? And the answer is a resounding yes. If it's after August 1st or again August 3rd this year, you should still correct the errors. Just know that you might be penalized. Now if you file after that magical date, right now the penalty is $340 per form. That goes up a little bit each year. Right now it's $340 per form. Which is a lot, but I would say two things. Number one, sometimes the IRS doesn't assess this penalty. I've seen that where people have corrected after August first or even filed an original form after August first, and not been penalized at all. You could be penalized. The second thing is that while that is a lot, and that's annoying and maybe a little scary, if you know that you made an error and you willfully choose not to correct it, then you are in what is called intentional disregard territory. And the penalty for intentional disregard is the larger of $680 per form or 10% of the dollar amount shown on the form. So if it's a 1099 NEC showing $10,000 of contract labor, that's a $1,000 penalty. So it's better to correct and minimize your penalty than to not correct and have the IRS discover later on, oh hey, you made errors that you didn't fix, and so now we're going to drop the hammer on you with an intentional disregard penalty. A few other odds and ends on this. If you have used FIRE to file your forms, you almost certainly know by now that FIRE is shutting down at the end of this year. So you could still file corrections in FIRE through December. But what if it's next year and you discover something that you need to correct that you had filed this year? And FIRE, you filed it in fire and now fire is gone. And the IRS has said IRIS will be the only system next year, including for corrections. How is that going to work? The IRS has said that they are aware of this as an issue. They have not put out any explanation on what to do yet, but they are aware that fire users will face this issue. And then just a trivia note, I like to bring trivia notes out. August first is the key date for filing corrections. That's what this entire episode was about. Or August 3rd this year, because the first is on a Saturday. This goes against pretty much everything in the tax world, where deadlines are either the end of the month or the fifteenth day of a month. For example, personal tax returns are due on the fifteenth day of the fourth month. That's where the April 15th deadline comes from. Here it really is August first because section sixty seven twenty one of the tax code specifically says that's the date. Thank you for joining us for another episode of Information Return Intelligence. Like and subscribe, share with your friends. You can catch all of our episodes online at podcasts.dinasonmedia.com. I'm Jason Dinason. Information Return Intelligence is sponsored every week by IOFM and produced by Dynason Media Ventures. Join us again next week, Dinason Media Ventures.