One of the IRS's chief weapons in its ongoing fight to prevent taxpayers from underreporting their income is its information return program. An "information return" is not a tax return. Instead, it is a form that provides the IRS with information about a financial transaction. Most information returns are used to report to the IRS taxable income that is not considered salary and wages and/or is not withheld. The person or entity that paid you is required to file the form with the IRS and give you a copy.
IRS computers automatically check the amounts on the information returns the agency received against the income reported on your return. If you've reported less income than shown in the information return, you can expect a letter demanding payment of extra taxes, interest, and penalties.
How well does the information program work? The IRS received over 2.23 billion information returns. Its automated underreported program contacted over 4.5 million taxpayers using the information on these returns. These contacts resulted in additional tax assessments of $7,112,605,000 (2012).
There are many different types of information returns. Each type is used to report a different type of payment or transaction. Most information returns fall within the 1099 series of forms. Here's a list:
Fortunately, most taxpayers need only worry about receiving a few of these different forms. These include:
Financial institutions are required to file this form if they pay you more than $10 in interest during the year.
This form must be filed if you own stock or other securities and receive over $10 in distributions, such as dividends, capital gain distributions, or nontaxable distributions, that were paid on stock and liquidation distributions.
This form must be filed by a client who pays an independent contractor at least $600 for professional services during the year.
This form must be filed if you have a business and have at least 200 transactions and at least $20,000 in sales during the year that are processed by third-party payment processors such as PayPal and Google Checkout. This form is also issued as by credit card payment processors.
Brokers or mutual fund companies must file this form when you sell stock. It shows the amount and date of the sale, and provides cost basis information.
This form is used to report unemployment compensation, state and local income tax refunds, agricultural payments, and taxable grants.
This is the form filed when you get a distribution from a retirement plan, such as an IRS, Roth IRA, 401(k) plan.
Be sure to save all information returns you receive. Most need not be filed with your tax return, but there are exceptions. If you have a tax preparer, give him or her all your information returns.