Scott Heintzelman of The Exuberant Accountant has a very good post on the new rules coming for 1099 reporting for all businesses starting in 2012. In one of my previous posts, I indicated that these rules were coming, but Scott does a very good job of highlighting the changes.
One thing that needs to be stressed that most of us probably have ignored is that if we do not comply properly with these rules, two bad things can happen.
First, if you do not report the transaction to the IRS, they can assess a penalty of $50 per form 1099 not reported up to a current maximum of $100,000. Under the current rules, if you missed one or two 1099s that should have been reported, the total penalty might be less than $500. Under the new rules, if you are required to issue form 1099 to all businesses that you purchase goods and services from, the penalty could add up very fast. For example, if you deal with 100 vendors that you paid more than $600 to during 2012 and do not report any of these transactions on form 1099, your potential penalty is at least $10,000.
Second and perhaps more important is that if you do not provide your federal identification number to your customers, they may be required to perform backup withholding on payments to be transmitted to you. This backup withholding is usually 20% of the total sale. Therefore, if you sold grain for $250,000 to your local elevator and backup withholding applies, the elevator would only give you a check for $200,000 and send $50,000 to the IRS. You would be able to get the $50,000 back when you file your return, but that means you have to wait until the following year to get your money.
Under current rules, backup withholding does not apply to the sale of farm products, but it is my opinion that with the new rules, backup withholding will probably apply on the sale of any product including farm products. Therefore, it will be very important to provide your EIN to any customer you sell products to.
I would strongly suggest that you review your current accounting system and procedures to make sure that you are ready for 2012. As the scientist Carl Sagan would say, the IRS is about to get "billions and billions" of form 1099s starting in 2012.