April may be the cruelest month when it comes to filing income taxes. But exactly how much hassle filing will be is partially decided in the year's earlier months. In January through March, filers should be receiving or gathering important documents such as 1099 miscellaneous income and bank interest income statements, K-1 partnership statements and receipts for business expenses. If you have a lost W-2, a missing 1099 or can't locate any of the other documents needed to prepare a return, it can lead to frustration and delay in filing your return as well as possible penalties for filing an incomplete return.
How common is it for a filer to be confronted with a lost 1099 or other vital document needed to prepare a return? “Very common," says Cindy Hockenberry, a veteran of the tax business who manages the tax knowledge center at the National Association of Tax Professionals in Appleton, Wisconsin. “Everyone loses something at one time or another."
Unfortunately, the Internal Revenue Service is not necessarily forgiving of human frailty. While a return filed without a missing 1099 or other required documentation may not be rejected, it also may not be considered properly filed until the required documents are provided. So even if you send off your return on time, it could still incur penalties if it is incomplete.
The IRS charges penalties for incomplete filing that vary depending on the size of your business, but can be significant. If your gross annual receipts are more than $1 million, the IRS levies a penalty of $100 every day your return remains incomplete, up to a maximum of $50,000. If your receipts are under $1 million, it's $10 a day with a cap of $5,000.
Bear in mind that the penalties for incomplete filings are likely to be less than the 5 percent penalty of tax due that is levied for filing and paying late. So your best bet is usually to file your return when it is due, even if a lost W-2, missing 1099 or other absent documentation means you can't file a complete return. If you plan ahead and become aware of missing information in advance of the required filing date, there are ways to replace almost any document you may need to file.
How to Get Replacements
The best way to get a replacement for a lost document is to contact the place that sent it to you to begin with. The same goes if the document was supposed to have been sent but you ever received it.
For instance, if you have wages and tax withholdings from an employer but lack the W-2 statement, a lost W-2 replacement can be as simple as asking your employer for a duplicate.
Similarly, if you are a self-employed consultant with a missing 1099 reporting income from a consulting engagement, you can contact the issuer—the customer that paid you—for a replacement. Often, a lost 1099 may be missing because the issuer has the wrong address for you. So it's a good idea to call if a 1099 hasn't arrived by mid-February or so to get the error corrected and the document in route to the right address.
A missing 1099 for interest income issued by banks can be also be replaced by asking the bank to send a duplicate. The same goes for K-1 returns issued by partnerships. Banks also often have 1099s available on their websites. If the original issuer can't be contacted or is unresponsive, you can still go to the IRS for help. “Since all information returns are required to be filed with the IRS, they also have copies that can be sent to the taxpayer upon request," Hockenberry says.
—Cindy Hockenberry, manager, National Association of Tax Professionals
A prior year's return is often necessary to complete the current year's return. You may, for instance, need to know details of depreciation taken on previously purchased equipment. Fortunately, if a prior return has been lost or destroyed, you can get a copy from the IRS. The IRS has an online “Get Transcript" tool on IRS.gov that lets you download or receive by email or mail transcripts of your prior return.
Taxpayers can also request transcripts of prior year returns by mailing a completed copy of the paper Form 4506 to the IRS. The form can be downloaded at IRS.gov. “These transcripts will include tax return information including W-2s, 1099s, etc.," Hockenberry says.
While the system for lost W-2 form replacement is reliable and simple to use, there's no similar way to replace lost receipts and other supporting documents. One potential workaround is to use the description of a transaction from a bank account or credit card statement in lieu of the original paper receipt. For cash receipts, try contacting the vendor to see if a copy of the transaction record can be obtained.
“Everything is replaceable," Hockenberry declares. However, she adds, in some cases the problem is not only that a document has been lost, but that the filer can't recall exactly what has been lost. For example, a fire, flood or other disaster can eradicate records so completely and comprehensively that a taxpayer doesn't know where to look for a replacement.
“In such cases, the IRS is surprisingly merciful," Hockenberry says. She says that tax collectors can often accept reasonable estimates of important amounts based on past history, bank records and prior financial statements.
What You Can Do
As with many business problems, the best way to deal with a missing 1099 or lost W-2 is to not lose them to begin with. Of course, not much can be done to keep document issuers from making mistakes such as attempting to send a tax form to the wrong address. And, given human forgetfulness and the volume of documents required to operate a business, it's likely that some lost paperwork will always be a feature of tax time.
However, there is much you can do to reduce the frequency and seriousness of the consequences of misplacing key forms. Scanning and digitizing paper receipts, backing up files and using cloud-based storage and remote servers can all help keep occasionally forgetful business owners from experiencing more than brief inconvenience from lost paperwork.
Even if flood or other disaster wipes out all a business's records, these data safety practices can keep April from being any crueler than necessary. With that in mind, Hockenberry advises, “Business owners should seriously consider off-site storage of important documents."
A version of this article was originally published on March 13, 2014.
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