The Good News
No provision in the tax law denies you a deduction for labor expenses simply because you didn’t file the required Form 1099s.
The Bad News
The IRS states that the non-filing of required Form 1099s can cast doubt on the legitimacy of the deduction claimed. Failure to file can also come with penalties ranging from $270 per Form 1099s, or $550 per Form 1099s if the IRS determines you intentionally disregarded the requirement.
What to do if You Didn’t
As with all deductions, you must substantiate them with accurate record keeping. Issuing 1099s provides reliable documentation to help prove expenses to an auditor.
If you failed to file Form 1099s, you need to provide ironclad documentation to prove the expenses, including some or all of the following:
- Bank statement transactions
- Canceled checks
- Credit card statement transactions
- Invoices from the contractor
- Signed agreements with the contractor
- A signed statement from the contractor verifying the amounts received
Ultimately, to prove your deduction in a court of law, you’ll need to show that you made the payments by a preponderance of the evidence. This means that your evidence has to make it more than 50% likely that you made the payments to the contractors.
For the Next Time
Filing the 1099s is the simplest way to avoid trouble down the line. If you need my assistance or would simply like to discuss Form 1099s, please contact me.