Forgot to Include a 1099 Form on Your Tax Return? 

What Happens When You Fail to Report 1099 Income

Nothing makes your heart sink faster than looking through your tax paperwork weeks or months after filing your tax return—only to realize that you forgot to file forms that would change the amount of taxes you owed. This is the case for many who forget to report their 1099 income on their tax return. 

Taxpayers receive 1099 forms for freelance income, investment income, interest income, etc., and they may have to pay taxes on that money. If you fail to include that form or income on your tax return, you could be hit with IRS penalties. Explore our listings of tax pros in your area to find the guidance you need.

Understanding 1099 Forms

A 1099 form is also known as an information return. When someone other than your employer pays you at any point during the year, they send a 1099 to document that exchange of money. Even if you don’t have to pay taxes on the income listed on the form, you must still report the information on that form to the IRS when you do your taxes.

There are numerous types of 1099 forms, including those for freelancers, those who receive miscellaneous income, people who have their debt canceled outside of bankruptcy, people who receive proceeds from real estate sales, and those who receive investment dividends or capital gains. When an entity sends you a 1099 form, they also send a copy to the IRS.

Reporting 1099 Income

When you file your tax return, you can report all of the details from each 1099 form. That includes the payer's EIN, the type of payment, and the amount paid. The place you report the 1099 on your tax return varies based on the type of 1099. 

For example, if you have a 1099-INT, you report it on Schedule B or directly on 1040 if you have less than $1,500 in interest. Income from 1099-NEC, in contrast, generally gets reported on a Schedule C if you're a freelancer/small business owner or F if you're a farmer/rancher. 

When preparing small business tax returns on Schedule C for sole proprietorships or 1065 Partnership Returns, some tax preparers enter all of the details from each 1099 form. Others just enter the aggregate amount of revenue collected by the business, without entering any 1099 details. 

Types of Income Reported on 1099 Forms

There are 22 types of 1099 forms. They document the following types of income:

• Acquisition or abandonment of secured property
• Income from the sale of securities at a brokerage or barter exchange
• Cancellation of debt
• Changes in corporate control/capital structure
• Income from investment dividends and distributions
• Unemployment compensation
• Payments made to offset health insurance expenses
• Interest earned on savings
• Payments from third-party payment processing platforms, such as PayPal, Venmo, and Square
• Acquired interest in a life insurance contract
• Income from long-term care or accelerated death benefits
• Miscellaneous income, such as prize money
• Non-employee compensation, such as gig work and freelance work
• Original issue discount
• Taxable distributions from cooperatives
• Payments from qualified education programs
• Distributions from an ABLE account
• Distributions from pensions, retirement and profit-sharing plans, IRAs, and insurance contracts
• Real estate profits
• Distributions from an HSA or MSA
• Sale of life insurance policy
• Social Security benefits

How Does the IRS Detect Unreported 1099 Income?

While some people simply forget to file their 1099 forms, lump their 1099 income together into one line on their tax return or aren’t particularly organized with their tax paperwork, others intentionally leave out 1099 income to avoid paying taxes on that part of their earnings. This is not a wise idea—the IRS has numerous tools it uses to detect unreported 1099 income, including the following. 

Information Statement Matching

The most obvious and straightforward way the IRS detects unreported 1099 income is information statement matching. When a taxpayer receives a 1099 form, the IRS receives a copy of it as well. If a taxpayer does not include that 1099 on their tax return, their automated computer programs flag their return for further investigation.

Using Systems and Algorithms to Find Undetected Income

The IRS has invested a substantial amount of money into tracking unreported income and finding trends that it can use to catch non-payers in the future. When they uncover patterns of non-compliance in income reporting, they can determine which companies and industries are more prone to missing or unreported 1099s. People who fall under that umbrella are often subject to intense scrutiny.

Third-Party Reporting

The IRS encourages people who know of tax evasion to report it. It only takes one person who knows of an individual’s unreported income to land that person in a world of legal trouble. 

How Successful is the IRS at Catching Unreported Income?

In general, the IRS doesn’t have an incredibly high rate of detecting unreported income. In fact, the agency loses billions of dollars per year to unpaid taxes. However, when income is reported on W-2s and 1099s, the agency has a much greater success rate. That’s because there is a paper trail of the income, which makes it far harder for the taxpayer to avoid paying taxes on it. The IRS continues to struggle with income that is earned under the table.

Factors That Flag Unreported 1099 Income for IRS Review

A number of factors may cause the IRS to look deeper into a taxpayer’s 1099 income, including:

• Different amounts on the 1099 received by the IRS and the 1099 reported by the taxpayer
• Massive variances in income each year
• Unusual income for a taxpayer’s industry
• History of tax audits or non-compliance with IRS filing requirements
• 1099 forms for work in high-risk industries
• Excessive use of deductions

One missing 1099 form can be enough to warrant a full audit of the taxpayer’s income sources. 

Implications of Unreported 1099 Income

Failing to report 1099 income can have significant implications for taxpayers. If the IRS finds your unreported income or identifies your unfiled 1099, you may be charged fines and penalties or even face an audit. Understanding these potential outcomes makes it easier to stay organized and compliant with all IRS requirements.

Penalties

 the IRS may also assess penalties for underpaid taxes. This occurs when you fail to report all of your income—for example, by not including a 1099 form in your tax return. 

There are two types of accuracy-related penalties for underpayment: a penalty for negligence or disregard of the rules and a penalty for substantial understatement of income tax. You may face the first if you don’t take reasonable steps to follow tax laws or carelessly ignore tax regulations. The second penalty may come into play if you understate your tax liability by $5,000 or 10% of the tax required, whichever number is greater.

If your underpaid taxes are the result of negligence, the penalty is 20% of the underpayment of tax that occurred due to negligence. If you substantially understate your taxes, the penalty is 20% of the amount that was understated on the return.

On top of the initial penalties, interest is charged until the penalties and the tax debt are paid in full. 

The Audit Process

If your unreported 1099 catches the attention of the IRS and they decide to audit you, you will be notified via mail. Be wary of phone calls informing you of an audit; these are generally scams used to get people to pay “fees” to make the audit problem go away.

The audit is conducted via mail or during in-person interviews. Interviews may be held at your home, your place of business, an IRS office, or an accountant’s office. If your audit takes place by mail, the IRS will send you a thorough list of all of the information they need to conduct your audit.

In general, the IRS can go back three years when conducting an audit. However, if they find a substantial error, they do have the right to go back further. This is typically limited to six years.

Upon finishing your audit, the IRS will conclude your audit in one of three ways: no change, agreed, or disagreed. If you substantiate all the issues they reviewed, there will be no change. If they propose changes and you agree, the status is agreed. If they propose changes and you disagree, the status changes to disagreed.

IRS Notices Related to Unreported Income

There are several notices you may receive if the IRS determines that you have underreported your income. The most common one is CP2000, which is sent out when the information received from third parties does not align with the information included on your tax return. Based on this information, they may increase or decrease your taxes owed. 

If you receive this notice, follow the instructions carefully and ensure that you respond promptly. You may agree with their proposed changes or disagree with them. If you agree, then, just make arrangements to pay the new tax liability. If you disagree, you’ll need to provide documentation to support this decision.

Another notice you may receive is CP2501. If income information reported to the IRS does not match your tax return, your taxes may be affected. The response process is the same as the process when you receive CP2000.

CP3219A is another notice that may be relevant in this situation. You receive this notice when the IRS decides to change your taxes based on unreported income or discrepancies uncovered by the IRS.

Notice CP11 is sent when there’s a discrepancy between a 1099 form and a taxpayer’s tax return. The IRS will generally conduct an examination and then send out CP11 to ensure that you see how your balance due has changed.

Regardless of which notice you receive from the IRS, it is crucial to take it seriously and act quickly. Waiting too long to respond or not responding at all could mean that the IRS moves forward with its recommended changes to your tax return, even if you believe those changes are inaccurate. You may also be charged any resulting penalties and interest associated with those changes.

How to Correct Unreported 1099 Income

If you’ve realized that you forgot to report 1099 income, you can amend your tax return to include the missing forms and pay the resulting taxes.

Amending Your Tax Returns and Avoiding Further Penalties

To amend your taxes, you must complete and file Form 1040-X. If you are amending multiple returns, you must file one for each year. Column A reflects the amount you originally reported. Column C notes the correct amount, and Column B notes the difference. 

When you file this form, prepare a statement indicating why you must file an amended return. You don't have to write anything long. Just say that you forgot to report a 1099 and are adding it to your return. 

Best Practices for Managing Your 1099 Income

For many people, forgotten 1099 forms are the result of disorganization. This is particularly common among gig workers and freelancers, as they may work for multiple companies and clients. When you have a dozen clients, all of which make up a small portion of your income, it’s easy to forget one or two forms if you don’t have a plan in place. These tips and strategies can help you avoid missed tax forms and unnecessary penalties.

Tax Preparation Services

Those with complex taxes, which includes people with lots of income sources, often benefit from tax preparation services that gather and maintain data year after year. When you work with a CPA, they can track your paperwork the first year you use their services. Then, they can tell you what records to keep and what paperwork they will need at the start of the next tax season. 

This is also helpful if you struggle to keep track of deductions. You may be missing out on deductible work expenses, and a CPA can assist you in tracking and documenting everything.

Accounting Software

Keeping thorough documentation of your earnings throughout the year makes it easier to catch missed forms at the end of the year. If you track your earnings every month and then find a $1,000 discrepancy at the end of the year, you know that you’re likely missing a 1099. This gives you the opportunity to track it down before you file your taxes.

Estimated Taxes

People who earn the vast majority of their income outside of traditional employment are expected to pay estimated quarterly taxes if they owe more than $1,000 for the year. Since freelancers and other non-traditional workers don’t get taxes withheld from their checks, they are responsible for tracking their income and making the necessary quarterly payments. Failing to do so could result in additional penalties.

FAQ

How does the IRS detect unreported income from 1099 forms? 

The IRS receives copies of every 1099 sent out to taxpayers. If they receive a 1099 for a taxpayer and that taxpayer doesn’t file one in their tax return, they know to examine it. They also use algorithms and artificial intelligence to detect underreported income.

What actions should I take if I forget to report income from a 1099? 

You should move quickly to amend your tax return and pay the necessary taxes, interest, and penalties to avoid further action taken against you by the IRS.

What are the risks of not including 1099 income on my tax return? 

First, assume that the IRS will catch your unreported income. Income on your 1099 is fully documented and easy to track, so it’s just a matter of when it catches up to you. If the IRS finds out you underreported your income, they will change your tax return to include the missed income and send you a notice telling you of the change. You will also be hit with underpayment penalties. If you intentionally do not report 1099 income, they may pursue criminal charges.

How can I ensure that all of my 1099 income is accurately reported? 

Full documentation of your income sources is key. Many taxpayers find it helpful to track their income throughout the year and compare it to what is reported on their 1099s at the end of the year. Any discrepancy may be a sign of a missing 1099.

What are the penalties for unintentionally failing to report 1099 income? 

You will be expected to pay the taxes owed on the unreported income. Additionally, the IRS will charge a 20% penalty on the underreported income. Interest accrues on that penalty and the taxes owed until they are paid in full.

What if you don't file a tax return at all?

If you don't file a tax return at all, the consequences vary based on the type of 1099 and other factors. For instance, if you have a 1099 for self-employment income and you don't file, the IRS may create a substitute for return for you and assess tax against you. Then, you will need to prove to the IRS that you didn't need to file or file a correct return so that you don't overpay in taxes. 

In contrast, if you had a 1099 for just a few hundred dollars in capital gains but no other sources of income reported to the IRS, the IRS may not do anything because you are under the filing threshold for your income. 

1099 Rules for Payers

You are required to issue a 1099 if your business pays someone more than $600 during the year. Generally, you don't have to issue this form if you make the payment to a corporation, you pay with credit card, or you pay through a payment processor such as PayPal. 

If you fail to file your information return on time, you can be charged penalties for each 1099. Penalties increase the longer you wait to file. As of 2024, the penalty is $60 if you are up to 30 days late. Filing between the 31st day and August 1 doubles your penalty to $120. Filing the form after August 1 or not filing it at all results in a penalty of $310. If the IRS determines that you have intentionally disregarded your obligation to file, you may be charged $630. Note that these penalties increase each year.

Get Help With 1099 Tax Issues Today

Realizing that you’ve failed to report income is anxiety-inducing, but it doesn’t have to lead to financial disaster. By staying up-to-date on IRS regulations and keeping impeccable tax records, you can avoid further problems. These issues can often be fixed by amending your taxes or contacting the IRS via your tax attorney. 

If you are unsure of what your next step should be, use our listings to find a local tax pro in your area. With TaxCure, you can search for pros with the experience that you need.