The Internal Revenue Service could be doing more to encourage businesses to report miscellaneous income payments on 1099-MISC forms, according to a new report.

While businesses reported about $6 trillion worth of such payments in 2006, the Government Accountability Office estimates that even a small share of payers that fail to submit the 1099-MISCs could result in billions of dollars in unreported payments on the payees’ tax returns. Data from the IRS suggests that payees are more likely to report such income on their tax returns if the IRS receives the payers’ information returns.

The IRS does not know to what extent payers fail to submit the required 1099-MISCs, but various sources point to the possibility of a significant problem. For tax year 2005, 8 percent of the approximately 50 million small businesses with assets under $10 million submitted 1099-MISCs, but the IRS does not know how many of the other 92 percent were required to report payments but did not.

Many business payments, such as payments to corporations, are not subject to 1099-MISC reporting. If even a small share of the businesses that did not submit a 1099-MISC should have, millions of 1099-MISCs could be missing with significant amounts of unpaid taxes by payees. The GAO’s prior work in 2003 also found significant 1099-MISC payer noncompliance by some federal agencies.

The GAO recommended that Congress should consider requiring payers to report payments to corporations on the 1099-MISC form. The GAO also recommended that the IRS should research the extent of payer noncompliance and the reasons for it, identify common reporting errors, and provide more guidance about 1099-MISC requirements. The IRS agreed with most of the recommendations. However, it disagreed with the suggestion of adding a tax return checkbox asking if payers have submitted the required 1099-MISCs and adding a chart to help payers navigate the detailed instructions for the form.

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