IRS Information Returns or Reports (Explained)
An information return, like a Form 1099-NEC for contractors or a Form 1099-R for retirement account distributions, is just a short and innocuous form that arrives in the mail each year, right? It is an innocuous form that accountants care about.
Nothing could be further than the truth.
These simple forms provide the little nuggets of information that the IRS uses to identify who to audit, what tax is being evaded, and who is subject to penalties. Most tax disputes stem from information returns. These forms are serious business.
If a third party is reporting information to the IRS about you, your accounts, or your income, you should review them carefully. You should also act quickly to correct any errors in information returns. We’ll address each of these topics in this article.
What is an Information Return?
An “information return” is a form that is filed with the IRS or that the IRS uses that report information to the IRS. It differs from a tax return as it does not report a tax due. The purpose is not to report taxes. It is to report information that is or should be used by others to report their taxes.
The Form 1099-NEC, Nonemployee Compensation, issued to independent contractors is an example. This form reports amounts paid to independent contractors. It is filed by the party who paid the contractor. It does not compute the tax due by the contractor. We’ll provide other examples of information returns below. For now, suffice it to say that the purpose of information returns is to help ensure that third parties report their taxes correctly.
What Are the Most Common Information Returns?
There are more than 50 information reporting forms. This includes Forms W-2 and several different variations of Forms 1099. It also includes Forms 1042-S, 1097, 1098, 1099, 3921, 3922, 5498, 8027, 8955-SSA, W-2G, and others.
Here is a more comprehensive list:
- Form W-2 – Wage and Tax Statement
- Form W-3 – Transmittal of Wage and Tax Statements
- Instruction W-2 & W-3 – General Instructions for Forms W-2 and W-3
- Form W-2AS – American Samoa Wage and Tax Statement
- Form W-2G – Certain Gambling Winnings
- Instruction W-2G & 5754 – Instructions for Forms W-2G and 5754
- Form W-2GU – Guam Wage and Tax Statement
- Form W-2VI – U.S. Virgin Islands Wage and Tax Statement
- Form W-3SS – Transmittal of Wage and Tax Statements
- Form 1096 – Annual Summary and Transmittal of U.S. Information Returns
- Form 1098 – Mortgage Interest Statement
- Instruction 1098 – Instructions for Form 1098
- Form 1098-E – Student Loan Interest Statement
- Instruction 1098-E & 1098-T – Instructions for Forms 1098-E and 1098-T
- Form 1098-F – Fines, Penalties and Other Amounts
- Instruction 1098-F – Instructions for Form 1098-F
- Form 1098-Q – Qualifying Longevity Annuity Contract Information
- Instruction 1098-Q – Instructions for Form 1098-Q
- Form 1098-T – Tuition Statement
- Form 1099-A – Acquisition or Abandonment of Secured Property
- Instruction 1099-A & C – Instructions for Forms 1099-A and 1099-C
- Form 1099-B – Proceeds from Broker and Barter Exchange Transactions
- Instruction 1099-B – Instructions for Form 1099-B
- Form 1099-C – Cancellation of Debt
- Form 1099-DIV – Dividends and Distributions
- Instruction 1099-DIV Instructions for Form 1099-DIV
- Form 1099-G – Certain Government Payments
- Instruction 1099-G – Instructions for Form 1099-G
- Form 1099-INT – Interest Income
- Instruction 1099-INT & OID – Instructions for Forms 1099-INT and 1099-OID
- Form 1099-K – Payment Card and Third Party Network Transactions
- Instruction 1099-K – Instructions for Form 1099-K
- Form 1099-LS – Reportable Life Insurance Sale
- Form 1099-MISC – Miscellaneous Income
- Inst. 1099-MISC & NEC – Instructions for Forms 1099-MISC and 1099-NEC
- Form 1099-NEC – Nonemployee Compensation
- Form 1099-OID – Original Issue Discount
- Form 1099-PATR – Taxable Distributions Received From Cooperatives
- Instruction 1099-PATR – Instructions for Form 1099-PATR
- Form 1099-R – Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
- Instruction 1099-R & 5498 – Instructions for Forms 1099-R and 5498
- Form 1099-S Proceeds from Real Estate Transactions
- Instruction 1099-S – Instructions for Form 1099-S
- Form 1099-SB Seller’s Investment in Life Insurance Contract
- Instruction 1099-GENERAL – General Instructions for Certain Information Returns (Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G)
- Form 5498 – IRA Contribution Information
- Form W-2c – Corrected Wage and Tax Statement
- Form W-3c – Transmittal of Corrected Wage and Tax Statements
- Form W-4 – Employee’s Withholding Certificate
- Form W-4P – Withholding Certificate for Pension or Annuity Payments
- Form W-4S – Request for Federal Income Tax Withholding From Sick Pay
- Form W-4(SP) – Employee’s Withholding Certificate (Spanish version)
- Form W-4V – Voluntary Withholding Request
- Form 940 – Employer’s Annual Federal Unemployment (FUTA) Tax Return
- Instruction 940 – Instructions for Form 940
- Form 940 Sch A – Multi-State Employer and Credit Reduction Information
- Form 941 – Employer’s QUARTERLY Federal Tax Return
- Instruction 941 – Instructions for Form 941
- Form 941 Sch B – Report of Tax Liability for Semiweekly Schedule Depositors
- Instruction 941 Sch B – Instructions for Schedule B (Form 941)
- Form 941 Sch D – Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations
- Instruction 941 Sch D – Instructions for Schedule D (Form 941)
- Form 941 Sch R – Allocation Schedule for Aggregate Form 941 Filers
- Form 941-SS – Employer’s QUARTERLY Federal Tax Return (American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands)
- Instruction 941-SS – Instructions for Form 941-SS
- Form 941-X – Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund
- Instruction 941-X – Instructions for Form 941-X
- Form 943 – Employer’s Annual Federal Tax Return for Agricultural Employees
- Instruction 943 – Instructions for Form 943
- Form 943-A – Agricultural Employer’s Record of Federal Tax Liability
- Form 943-X – Adjusted Employer’s Annual Federal Tax Return for Agricultural Employees or Claim for Refund
- Instruction 943-X – Instructions for Form 943-X
- Form 944 – Employer’s ANNUAL Federal Tax Return
- Instruction 944 – Instructions for Form 944
- Form 944-X – Adjusted Employer’s ANNUAL Federal Tax Return or Claim for Refund
- Instruction 944-X Instructions for Form 944-X
- Form 945 – Annual Return of Withheld Federal Income Tax
- Instruction 945 – Instructions for Form 945
- Form 945-A – Annual Record of Federal Tax Liability
- Form 945-X – Adjusted Annual Return of Withheld Federal Income Tax or Claim for Refund
- Instruction 945-X – Instructions for Form 945-X
- Form 3921 – Exercise of an Incentive Stock Option Under Section 422(b)
- Instruction 3921 & 3922 – Instructions for Forms 3921 and 3922
- Form 5754 – Statement by Person(s) Receiving Gambling Winnings
- Publication 15 – (Circular E), Employer’s Tax Guide
- Publication 15-A – Employer’s Supplemental Tax Guide
- Publication 15-B – Employer’s Tax Guide to Fringe Benefits
- Publication 15-T – Federal Income Tax Withholding Methods
- Publication 51 – (Circular A), Agricultural Employer’s Tax Guide
- Publication 80 – (Circular SS), Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands
- Publication 1244 – Employee’s Daily Record of Tips and Report to Employer
- Publication 1494 – Tables for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income (Forms 668-W(ACS), 668-W(c)(DO) and 668-W(ICS))
As you can see these returns report everything from wage income, to retirement plan information, to health insurance coverage information.
You can also see that many of these forms allow the IRS to determine whether income is being reported correctly. Given this information, the IRS’s computer matching system can often detect many omitted items of income. This is accomplished by the IRS’s Information Returns Program (“IRP”). The IRS’s website describes the IRP as follows:
The Information Returns Processing (IRP) System receives data submitted by employers and other third parties (payers) reporting taxpayer income such as wages, pensions, interest and dividends paid during the tax year. This information is validated and stored in the Information Return Master File (IRMF). IRP also has two Correlation projects which attempts to match income reported on information returns against income reported by taxpayers on their individual income tax returns. If no match is discovered, the potential NON FILER cases are referred to Collection for possible action. If the match discovers sufficient under reported income an UNDERREPORTER case is created and routed to Examination function for follow-up.
As you can see, the focus is on unreported income.
What is the Legal Authority for Information Returns?
You can also find out about your information reporting requirements by reviewing the tax code. As with other tax issues, the tax code is the supreme law of the land. This includes setting out all information reporting requirements.
Most of the information return reporting requirements are set out in Section 6031 through Section 6060 of the tax code:
- § 6036. Notice of qualification as executor or receiver
- § 6037. Return of S corporation
- § 6038. Information reporting with respect to certain foreign corporations and partnerships
- § 6038A. Information with respect to certain foreign-owned corporations
- § 6038B. Notice of certain transfers to foreign persons
- § 6038C. Information with respect to foreign corporations engaged in U.S. business
- § 6038D. Information with respect to foreign financial assets
- § 6038E. Information with respect to assignment of lower rates or refunds by foreign producers of beer, wine, and distilled spirits
- § 6039. Returns required in connection with certain options
- § 6039C. Returns with respect to foreign persons holding direct investments in United States real property interests
- § 6039D. Returns and records with respect to certain fringe benefit plans
- § 6039E. Information concerning resident status
- § 6039F. Notice of large gifts received from foreign persons
- § 6039G. Information on individuals losing United States citizenship
- § 6039H. Information with respect to Alaska Native Settlement Trusts and Native Corporations
- § 6039I. Returns and records with respect to employer-owned life insurance contracts
- § 6039J. Information reporting with respect to Commodity Credit Corporation transactions
- § 6041. Information at source
- § 6041A. Returns regarding payments of remuneration for services and direct sales
- § 6042. Returns regarding payments of dividends and corporate earnings and profits
- § 6043. Liquidating, etc., transactions
- § 6043A. Returns relating to taxable mergers and acquisitions
- § 6044. Returns regarding payments of patronage dividends
- § 6045. Returns of brokers
- § 6045A. Information required in connection with transfers of covered securities to brokers
- § 6045B. Returns relating to actions affecting basis of specified securities
- § 6046. Returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock
- § 6046A. Returns as to interests in foreign partnerships
- § 6047. Information relating to certain trusts and annuity plans
- § 6048. Information with respect to certain foreign trusts
- § 6049. Returns regarding payments of interest
- § 6050A. Reporting requirements of certain fishing boat operators
- § 6050B. Returns relating to unemployment compensation
- § 6050D. Returns relating to energy grants and financing
- § 6050E. State and local income tax refunds
- § 6050F. Returns relating to social security benefits
- § 6050G. Returns relating to certain railroad retirement benefits
- § 6050H. Returns relating to mortgage interest received in trade or business from individuals
- § 6050I. Returns relating to cash received in trade or business, etc.
- § 6050J. Returns relating to foreclosures and abandonments of security
- § 6050K. Returns relating to exchanges of certain partnership interests
- § 6050L. Returns relating to certain donated property
- § 6050M. Returns relating to persons receiving contracts from Federal executive agencies
- § 6050N. Returns regarding payments of royalties
- § 6050P. Returns relating to the cancellation of indebtedness by certain entities
- § 6050Q. Certain long-term care benefits
- § 6050R. Returns relating to certain purchases of fish
- § 6050S. Returns relating to higher education tuition and related expenses
- § 6050T. Returns relating to credit for health insurance costs of eligible individuals
- § 6050U. Charges or payments for qualified long-term care insurance contracts under combined arrangements
- § 6050V. Returns relating to applicable insurance contracts in which certain exempt organizations hold interests
- § 6050W. Returns relating to payments made in settlement of payment card and third party network transactions
- § 6050X. Information with respect to certain fines, penalties, and other amounts
- § 6050Y. Returns relating to certain life insurance contract transactions
- § 6051. Receipts for employees
- § 6052. Returns regarding payment of wages in the form of group-term life insurance
- § 6053. Reporting of tips
- § 6055. Reporting of health insurance coverage
- § 6056. Certain employers required to report on health insurance coverage
- § 6057. Annual registration, etc.
- § 6058. Information required in connection with certain plans of deferred compensation
- § 6059. Periodic report of actuary
- § 6060. Information returns of tax return preparers
These code sections provide more details about when these forms are required and what they must contain. If there is any ambiguity or question about the actual form, you should consult the tax code.
How are Information Returns Filed?
Most information returns are transmitted to the IRS electronically. The IRS has a FIRE system, which states for “file information returns electronically.” This is an online system that you or another “transmitter” can sign up for to upload your information reporting forms.
This system was needed given that those who file information returns usually submit a lot of them. The FIRE system helps facilitate this as the forms can be uploaded in mass using this system.
There is another electronic system for health insurance information that has to be filed pursuant to the Affordable Care Act. It is called the Affordable Care Act Information Return (AIR) system.
Forms W-2/W-2c and Forms W-3/W-3c are actually submitted to the Social Security Administration. The Social Security Administration has its own electronic filing system for these forms.
The general rule is that you have to file electronically if you file more than 250 information reporting forms in any one year. If you only have a few forms, you can also mail them to the IRS. The instructions for the form will usually say whether the form has to be filed electronically or by paper sent in the mail.
What if the Information Return is Wrong?
The IRS often relies on information returns to propose additional tax. This raises questions as to what happens when the information return is incorrect?
You may be surprised to find out that the IRS is not entitled to rely on information returns in many cases. Section 6201(d) says that the IRS has the burden of providing information to prove up the information return in tax litigation cases. This burden is on the IRS as long as you and the third party cooperated with the IRS during the audit or examination. The IRS notice sent to you will not tell you this. The IRS auditor, appeals officer and attorney will probably not tell you this either. But if the IRS is asserting that you owe additional tax and it is based on an information return, the IRS basically has the burden to prove that the information return is correct–not you.
What if I Do not File or File Incorrect Information Returns?
The IRS is authorized to impose penalties if you fail to file information returns or file them incorrectly. This is set out in Section 6721.
The penalty itself is a nominal $50 or $100, usually. However, this amount applies per information return. So if you have a lot of information returns that are filed incorrectly or were not filed, you can trigger a significant penalty.
This is one penalty that the IRS has been lenient in abating. There are also provisions in Section 6721 and the regulations for Section 6721 that provide an exception to penalties if you correct the mistake within thirty days of the due date.
Common Problems and Disputes Involving Information Returns
One common problem with information returns involves the Form 1099 for household employee. This often involves nannies and in-home nurses. This form has to be filed so that you can pay Social Security taxes on the amount you pay the nanny or nurse. While you have to pay Social Security taxes for this pay, you generally do not withhold income taxes on this pay. The failure to pay this tax is often caught by disputes with the nanny over pay, resulting in a state unemployment claim or wage dispute. The IRS then picks up on this adjustment and conducts an income tax audit.
Cancellation of Debt Income
Another common dispute involving information returns involves the Form 1099-C. This form is issued when a debt is written off or discharged. A mortgage foreclosure is an example. The mortgage company will usually issue a Form 1099-C a few years after the debt is discharged. The mortgage company may send the Form 1099-C to the IRS and to your old address. If you do not report the discharged debt on your tax return, the IRS will likely send you an audit notice or adjustment notice. Luckily, there are exceptions that, if you qualify, you may not have to pay tax on this income.
Tax Basis in Stocks and Other Securities
Another common dispute involving information returns involves the Form 1099-B. This form is issued by your brokerage company. The form that is filed with the IRS is usually an abbreviated version. It may not include your tax basis information. If you do not file a tax return, the IRS will pick up the income from this form. It will not have the tax basis, thus, it will grossly overstate your tax liability. This is another situation where providing information to the IRS can significantly reduce your tax balance.
Experienced Tax Attorneys in Houston, Texas
We are experienced tax attorneys in Houston, Texas. We help clients with information returns and the tax disputes that are associated with these returns.
If you have a penalty for information returns or an audit or tax litigation, we want to hear from you. Call us at (713) 909-4906.
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