The IRS has requirements and systems in place to verify all your income is reported. It’s best to include all your income on your tax return. In some cases, estimating the income is acceptable. Excluding a 1099-MISC from your tax return opens yourself up to an audit and possible monetary penalties.
Just like you must be ready to prove all your expenses to the IRS, so do your clients. The first step in documenting those expenses would be to gather all your information via a W-9 form. This form includes your TIN (taxpayer identification number). This can either be your SSN or EIN for your business.
Your client will use this info to send you and the IRS a 1099-MISC. Although a client must have made payments of at least $600 to you during the year before they are required to file this form, some companies may issue one regardless of the amount. Companies who are required to issue 1099-MISC forms are likely to follow those requirements as not doing so will subject them to penalties.
If you don’t receive a 1099-MISC from your clients, that doesn’t mean they didn’t send one to the IRS.
Before 2016, companies had until March 31st to file information statements (1099-MISC, W-2, etc.) to the IRS. The issue arose where taxpayers could file their tax returns as early as late January and the IRS would have no documents to verify the tax return income against. The due date was changed in 2016. Information statements are now due January 31st, the same due date for freelancers to receive their 1099-MISC.
Now that the IRS receives this information earlier in the year, they can more efficiently use their matching system to verify your reported income and pay reported by your clients. Remember, the 1099 sent to the IRS includes your TIN (SSN or EIN), the same number you use to file your tax return. The matching system works by determining how much income should be reported for that TIN.
This makes it much more difficult to under-report your income since the IRS received the same forms you did at the same time. In fact, this was the main purpose of the date change. Some taxpayers were taking advantage of this lapse of information reporting to claim a lower tax liability or higher refund than they were entitled.
A common misconception is that if you don’t hear from the IRS within a reasonable amount of time after you file your tax return (such as a few months or after receiving a tax refund), then you’re in the clear. That’s not always the case. There may be some taxpayers that get lucky but generally, the IRS has 3 years to audit your tax return from the date you filed or the due date of the return, whichever is later. So, if you make it past 3 years, you should be in the good, right?
Well, that depends on another IRS rule which states that if you under-report your earnings by over 25%, the IRS has 6 years to audit your tax return. Let’s say that 1099-MISC was just a small piece of your freelancing income. So, that six-year rule doesn’t apply and it’s been three years. You're in the clear until you receive an IRS audit notice or letter informing you of the missing income.
That’s because there is one more rule to be aware of. If the IRS determines you filed a fraudulent tax return, (i.e. intentionally not reporting your 1099-MISC), there is no time limit on auditing your tax return.
In short, the IRS has plenty of time to catch that missing income.
First, the IRS imposes many requirements that businesses must follow to avoid monetary penalties. Second, their matching system verifies your reported income against the information provided by your clients. Finally, the statute of limitations for auditing your tax return can range from three years to no limit. It’s best to set aside money for your 1099 taxes, and report your freelance income based on your records if you haven’t received a 1099-MISC.
If necessary, file an amendment for your tax return if any 1099’s received are different than reported. Be sure that your records and actual amounts are close, if not exact. You may incur penalties for under-reporting your income.
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