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Issuing a Fraudulent Form 1099 Can Cost You Money

Published on: 10:12AM Jul 31, 2014

When a farmer makes certain payments to service providers and other vendors, they are normally required to issue a Form 1099 if the total amounts paid exceeds $600 in a year. Normally, this is a very straight-forward process, however, if the farmer willfully files a fraudulent form 1099, the penalty for this can be very costly to the farmer. In a recent Northern Illinois court case, we can find out how bad it can be.

In Shiner v. Turnoy, we find two parties that could not agree on about anything. Turnoy and Shiner had agreed to split the commissions from the sale of two life insurance policies. The face values of these policies was not listed but Turnoy decided the commission amount was about $300,000 and sent a check to Shiner for $149,059.91 for his half. Shiner vigorously disputed these calculations and filed suit to obtain his legal share. The check was issued late in December and as of the end of the January when 1099s were due, the check had not yet been cashed. The key issue is that there was language on the check indicating that if Shiner cashed it, he would legally give up any rights to additional compensation.

The Court ruled that Turnow willfully knew that the check was in dispute and that Turnow willfully compelled his CPA to issue a fraudulent form 1099. Under Section 7434(a) of the Internal Revenue Code, a person can bring a civil action to recover damages from anyone willfully filing a fraudulent information return. Damages can equal the greater of $5,000 or the sum of the plaintiff's damages, plus the costs of filing and maintaining the action, and at the court's discretion, reasonable attorney's fees. The Court ruled in favor of Shiner in this case, however, the actual damages were not reported by the Court, but we know the amount owed will be at least $5,000.

I have had several occasions where clients that were not happy with another business partner or vendor and wanted to issue a form 1099 that might not have been totally "kosher". In all cases, I was able to talk them out of this and part of it is due to explaining the risk associated with the penalty under Section 7434(a).

The bottom line is make sure the 1099s you issue each year are in compliance with the rules. If you do something wrong "willfully", it can cost you.