Missing Form 1099 May Establish Reasonable Cause

If you do not receive a Form 1099 to report income to you and you omit it from your tax return, are you liable for penalties if the IRS later notices the issue and makes an adjustment?  The Mabinuori v. Commissioner, T.C. Summary Opinion 2006-109, case provides an opportunity to consider this question.

Facts & Procedural History

The taxpayer employed by MetLife. He was first hired by MetLife as an independent contractor and subsequently hired as an employee.

MetLife had issued the taxpayer a Form W-2 for his wages as an employee and a Form 1099-Misc for his non-employee earnings.

MetLife issued the Form 1099-Misc to the taxpayer’s old address.  This resulted in the taxpayer not including the Form 1099-Misc income on his tax return.

The IRS discovered the issue, adjusted the taxpayer’s income accordingly, and imposed penalties.  The taxpayer disputed the penalties imposed by the IRS, which was the subject of the court case.

Form 1099 May Be Reasonable Cause

The IRS is authorized to not impose (or abate or remove) penalties for adjustments if the taxpayer acted with reasonable cause.

The general rule is that failure to receive a Form 1099 is not necessarily “reasonable cause” for failure to report income. As a result, taxpayers who do not receive Form 1099’s are generally are liable for penalties on the unreported 1099 income.

There are a number of court cases that support this conclusion. There are also a few court cases where the court found that the taxpayer was not liable penalties that resulted from unreported 1099 income.

Factors Establishing Reasonable Cause

In this case, the court found the fact that MetLife had mailed the 1099 to the taxpayer’s prior address and the W-2 to the taxpayer’s current address significant.

It also found that the taxpayer may have reasonably believed that part of his MetLife income was reimbursement for costs of setting up an office.

These factors led the court to side with the taxpayer in concluding that he had reasonable cause for his failure.  While the court sides with the taxpayer, it notes that “the facts present a close question.”