What is an Information Return? A Comprehensive Guide
You’re probably aware of a tax return, but do you know what an information return is and why it matters? We’ll discuss who files information returns, the data you can find in this form, and the process of submitting it to the IRS. This will help you navigate the proper reporting of information.
What is an Information Return?
An information return is a tax document that reports transactions to the Internal Revenue Service (IRS). Any taxpayer engaged in a trade or business who makes reportable transactions during the calendar year is mandated to file information returns.
This includes individuals, partnerships, corporations, estates, and trusts. Those required to file information returns must also furnish statements to other transaction parties.
There are over 50 information reporting forms available. Here are standard information reporting forms you might encounter:
- Form W-2 – Wage and Tax Statements
- Form W-3 – Transmittal of Wage and Tax Statements
- Form W-2G – Certain Gambling Winnings
- Form W-3SS – Transmittal of Wage and Tax Statements
- Form 1096 – Annual Summary and Transmittal of U.S. Information Returns
- Form 1098 – Mortgage Interest Statement
- Form 1098-E – Student Loan Interest Statement
- Form 1098-F – Fines, Penalties, and Other Amounts
- Form 1098-Q – Qualifying Longevity Annuity Contract Information
- Form 1098-T – Tuition Statement
- Form 1099-A – Acquisition or Abandonment of Secured Property
- Form 1099-C – Cancellation of Debt
- Form 1099-DIV – Dividends and Distributions
- Form 1099-G – Certain Government Payments
- Form 1099-INT – Interest Income
Who Files Information Returns?
Taxpayers who make reportable transactions are required to file information returns. Some of the common taxpayers who file these forms include the following:
- Businesses that make payments to independent contractors
- Financial institutions paying interest or dividends
- Employers reporting wages and salaries
- Mortgage lenders reporting interest paid by borrowers
Why are Information Returns Important?
Why is it vital to report third-party network transactions or other data in information reporting? We’ll explain the relevance of information reporting.
Role in Tax Reporting and Compliance
Information reporting is crucial to ensure accurate reporting of various types of income. Reporting transactions gives a clear picture of one’s tax liability, ultimately affecting income tax and individual income tax return. It also helps with the underreporting of income, which may prompt fines from the IRS. Proper reporting can also impact income taxes for companies.
The information reported can facilitate IRS verification of tax return information. Reporting ensures you remain compliant with the IRS’s rules and regulations.
Benefits For Businesses
Information returns ensure businesses remain compliant with IRS rules and regulations. Companies must report not only their employees’ wages but also their nonemployee compensation. Information returns help maintain accurate financial records, giving companies the confidence to present complete information in case they’re audited.
Information returns provide documentation for business expenses, which can help lower one’s overall tax liability. Noncompliance with the IRS can have severe consequences, and these forms prevent unnecessary tax-related troubles.
Benefits For Individuals
The information reported in these filed forms provides an income record for tax return preparation. Reporting all your income streams can maximize your income tax returns. When you ensure your income is reported correctly, you avoid potential problems with the IRS.
Information returns can serve as documentation for loan applications or other financial purposes. It may impact your retirement account distributions, too.
Information Return vs Tax Return
Information returns shouldn’t be confused with tax returns. Information returns are intended to report specific financial transactions, while tax returns report your overall income deductions and calculate tax liability. The income payer files information returns while the recipient files tax returns.
Regarding the recipient of these forms, one copy of the information return is usually furnished to the IRS, while another is sent to the payee. Meanwhile, tax returns are filed with the IRS and state tax agencies, if applicable.
The due date of information returns depends on the form submitted. Most forms are due on January 31, while tax returns must be submitted on or before April 15 (for individuals) unless extended by the IRS.
The content of information returns depends on the specific types of income and transactions contained in the form. In contrast, a tax return provides a comprehensive overview of one’s income, deductions, and credits. Information returns do not involve calculations, only raw data, while tax returns include calculations of one’s tax liability.
Information returns involve using specific forms, such as Form 1099, W-2, and 1098, while tax returns involve forms like 1040 for individual taxpayers and 1120 for corporations.
What Information is Included in an Information Return?
Each form utilized for information returns requires specific data relating to the reported data. However, you usually encounter the following requirements:
- The payer’s name, address, and tax identification number
- Recipient’s name, address, and tax identification number (usually SSN or EIN)
- Amount paid during the tax year
- Type of payment (e.g., nonemployee compensation, interest, dividends)
The data you must supply depends on the nature of the form you’re filing. Here are some information you’re expected to supply for commonly used forms:
Form 1099-MISC:
- Rents
- Royalties
- Other income
- Fishing boat proceeds
- Medical and health care payments
- Nonemployee compensation (for tax years before 2020)
Form W-2:
- Wages, tips, and other compensation
- Social security wages
- Medicare wages and tips
- Federal income tax withheld
- State and local income tax information
Form 1098:
- Mortgage interest paid
- Points paid on the purchase of a principal residence
- Property taxes paid
- Mortgage insurance premiums
How to File an Information Return?
To ensure all information you provide on information returns are accurate and updated, follow these steps:
- Gather necessary information throughout the year: Keep a record of required information so you can easily access relevant data.
- Verify the accuracy of all data, especially tax identification numbers: You should double-check all data shared to ensure no mistakes.
- Choose the correct form for each type of payment: There’s an appropriate form for each transaction, and you must ensure you submit the right one to avoid any possible complications.
- Complete the forms, following IRS instructions carefully: Each form comes with instructions, which you should follow diligently.
- Provide copies to recipients by the required deadline: You should furnish copies to relevant parties besides the one submitted to the IRS.
- Submit forms to the IRS by the appropriate deadline: Most forms are due on January 31, but the due date varies from one to another.
- Keep copies for your records: You should ensure you have copies ready in case they’re needed.
Deadline for Filing Information Return
As mentioned, the due date for each form varies from one to another. The instructions for each form mention the deadline for your easy reference. The Form W-2, which details one’s wages, is due on January 31. This form is submitted to both the recipient and the IRS.
If filed by paper, Most Form 1099 and 1098 documents are due to recipients on January 31 and the IRS on February 28. If you file electronically, you have until March 31 to submit relevant documents. Not all information returns are due on the exact dates, so you should be mindful of when they’re due to avoid any complications.
Consequences of Failing to File an Information Return
What happens if you fail to file an information return on time? You might have to pay penalties if you don’t submit the forms on time. The penalty increases the later you submit information returns. That’s why you should be mindful of their deadlines.
The penalty for information returns filed within 30 days of the due date is $50 per form. This increases to $110 per information return if you file over 30 days after the due date but by August 1. If you file after August 1 or don’t file at all, you’ll be charged $280 per information return.
Failure to file information returns can increase your chances of getting audited by the IRS, posing more potential complications. Moreover, you may encounter legal problems if it’s found that your noncompliance was willfully done. If you don’t file information returns, there might be noncompliance in the recipient’s tax returns, which may cause problems for both parties.
Exemptions to Filing an Information Return
There may be instances where you’re not necessarily required to submit information returns on certain transactions. For example, 1099-MISC is generally not required for payments under $600 in a year, and 1099-INT is not needed for interest payments under $10.
There are cases wherein you don’t have to report payments to some corporations, merchandise, and
tax-exempt organizations. To avoid confusion and remain compliant with the IRS, conferring with CPA tax professionals would be ideal.
Can You Amend an Information Return?
What if you commit an error while accomplishing an information return? The good news is that you’re permitted to make amendments. You should follow these steps in case you made an error with any form submitted:
- Complete a new information return with the correct information. To make the correction, you must complete the relevant form.
- Mark the “CORRECTED” box on the form. You need to indicate that you’re re-submitting the form to correct.
- File the corrected return with the IRS. The IRS should have a copy of the corrected form.
- Provide the recipient with a copy of the corrected return and a copy of the corrected form for their use.
When should you file an amended information return? As soon as possible. You should file the form as soon as you discover the error. The sooner you make the amendment, the less likely you’ll incur potential penalties.
File Information Return with Professional Help
Given so many required forms and things to worry about, it’s perfectly understandable if you need help accomplishing information returns. Given the potential penalties, you’d want to avoid making mistakes. This is where a professional CPA consultant can help. Sign up today to learn more.
FAQs
Is an information return a tax return?
No, an information return is a form with data about tax-related information. You don’t need to make calculations to submit this document.
Is a W-2 an information return?
Yes, Form W-2 counts as an information return. You’re required to disclose details without necessarily making calculations for this form.
What is an annual information return?
An annual information return is filed to disclose tax-related data to the IRS. The deadline for each form varies, but they’re usually filed annually.
What are examples of return information data?
Some sample data you can expect from information returns include the names of dependents, the payer’s name, address, and tax identification number. The anticipated data depends on the form involved.
Is a 941 an information return?
No, this is a tax return form because it details an employer’s quarterly federal tax returns.
What is the difference between a W-2 and a tax return?
A Form W-2 details your wages and taxes paid, and your emp provides information. Meanwhile, a tax return is a report submitted to the government that details taxes owed and the taxes paid by your employer.