 looking at the income tax formula we're focused on line one income remember in the first half of the income tax formula is in essence an income statement but just an outline just a scaffolding other forms and schedules flowing into these line items for example the schedule C the small business form in essence an income statement in and of itself with income minus expenses or business expenses and the net income flowing into here line one on the income tax formula first page of the form 1040 we're focused on line number eight schedule C would then flow into the schedule one which would flow into here the first page of the form 1040 here is a schedule C profit or loss from business where we could see the income and expenses in essence an income statement income minus expenses information returns what are they how do we deal with them if you make or receive payments in your business you may have to report them to the irs on information information in returns to understand them let's first take a step back think about the tax system we have an income tax system income then is bad for taxes obviously income is good in general but if we have to report the income it's going to increase our tax bill generally the irs has an incentive to try to verify the income that we are reporting to make sure that we're paying the proper amount of taxes when you look at normal financial transactions there's usually going to be someone providing goods and services someone's paying for the goods and services the person providing the goods and services is going to be receiving money generally cash for the goods and services that they are providing having income which is good for them but it's also a taxable possible event if they're most likely going to have to report that income the one that's paying for the goods and services may get a deduction possibly if they're a business and lot not an end user meaning if you're paying for like a haircut then you don't get a deduction for your haircut generally unless you're a politician or something maybe you get a deduction your haircut I don't know but if you're a normal if you're a business that's paying for goods and services to another business or contractor then you might get a deduction for it which means that would be a tax benefit so it's it's a bad thing because you have to have money going out you're paying for goods and services but it might be good for taxes because you get a deduction the irs has leverage on the payer in the transaction because they're the one that wants to get the deduction so that means they're going to be able to say if you want the deduction we want you to report the income to us on who you are paying this is most clear in an employee employer situation which is why generally if you think about the tone of what the irs is saying they usually want businesses structured in an employee employer situation so they can have the most control over the employer to not only report the income that they're paying to the employees but do the withholdings on the government's behalf but if you don't have an employee employer situation then they still possibly might want information on who you paid such as processing the 1099 forms right so that's another format where they're saying we're not going to make you do withholdings but we want you to tell us who you gave the money to and if you don't we'll penalize you and again they have to leverage on the person that is paying so that the recipient of the money they can double check and make sure that they're reporting their taxes so that's the general structure that's you always kind of want to keep that framework in mind the irs used to have a system more of an audit type of system kind of like if you were on a freeway and police officers are pulling people over for speeding they're not going to catch you every time you're speeding but if they do catch you then they're going to have a ticket that's high enough that it's going to prevent you from speeding audits used to be similar they used to basically random random audits used to be the primary tool that they would have and if they audits you and catch you then cheating then they would have penalties on it but now more and more they're becoming more intrusive meaning they want to get the information beforehand and they're they can do that by getting inserting themselves within the financial transaction requiring where they have leverage which is on the payer side of things to report more and more on who they're paying the money to so that's generally what we have here so the irs compares payments showing on the information returns which each person's income tax return to see if the payments were included in income so you must give a copy of information return you are required to file to the recipient or pay payer in addition the forms described below you may have to use other returns to report certain kinds of payments or transactions so notice when you think about 1099 forms and w2 forms for that matter we think about them as something we have to give to to the person that did the work kind of to help them generate their tax return and again that's usually the perspective that's going to be the angle that will be given when you're like researching this from the government of course as well but obviously what they really want is for you to give that information to the government right so that they so they have the 1099 so they can double check that the person is reporting that income on on their taxes so for more details on information returns and when you have to file them you can see the general instructions for certain information returns you can find out the irs website