Who Receives It

Nearly every adult taxpayer will probably receive at least a few 1099 forms during the course of her life. Most people receive a few every year. Businesses are required to send one copy to the person who received the payment, and another copy is filed with the IRS. The penalty for neglecting to send 1099 forms is $50 per missed form, so many business owners prefer to err on the side of caution and send them to everyone they've paid for any reason throughout the year.

How They Are Used

1099 forms and other information returns are the tax man's way of staying informed about potentially taxable income. If you earn commissions by posting referral links in online forums or allowing ads to appear on your website, for example, you have created potentially taxable income. The business that pays you is required to issue a 1099-MISC form if you earn $600 or more of this "non-employee compensation" in a calendar year. Many small business owners don't understand the rules, so they send out 1099 forms regardless of how little you earn. Government bodies will send you a 1099-G for unemployment or other government payments you receive, large or small.

Who Has to Report the Income

Whether you receive a 1099 form or not, all earned income and many types of "unearned" income are supposed to be reported on your tax return. If you don't receive an information return, it does not absolve you of responsibility to report the income. The IRS does not receive a 1099 form in this case, but there are other ways the government can learn about those payments. One way is by auditing the business that pays you. That business has deducted the payments as expenses, and the IRS can follow the trail to you fairly easily during an audit. Many people don't claim income that isn't reported on a 1099 form, but they are gambling by doing so.

Reportable But Not Taxable

Having to report the income on your tax return doesn't mean you will be taxed on it. Some 1099 income, such as unemployment compensation, is only partially taxable. Non-employee compensation reported on a 1099-MISC should be reported on a Schedule C when filing your tax return, but you will probably have expenses to claim against it, which will result in a smaller taxable amount. With enough expenses, you could even end up with negative Schedule C income, which will lower your household taxable income.

Computer Matching

If you receive a 1099 form , you must report the income on your tax return. The IRS has developed an accurate computer matching system that will compare what you report on your tax return to all of the information returns they receive. If you receive a 1099-MISC in the amount of $2,000 and don't report at least that much gross income on a Schedule C or on the "miscellaneous income" line of your tax return, you can expect to get a letter from the IRS saying it changed your tax return and reduced your refund. If it doesn't catch the $2,000 difference when it processes your tax return, you'll receive a letter at a future date asking you to pay additional taxes and interest on that unreported income. Never ignore any of the information returns that come your way in January. Your best bet is to report the income on your tax return by using the proper forms that will allow you to deduct your legitimate expenses against it.