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Amid Growing IRS Compliance Risks, Businesses Cling to Manual 1099 Processes

As we approach the 1099 filing season, a new report from Avalara, Inc. unveils troubling insights into the state of tax compliance among U.S. businesses. The 2025 Avalara 1099 Readiness Report, based on a survey of 1,000 accounts payable professionals, highlights the ongoing reliance on manual processes, despite the escalating complexities of IRS regulations. This reliance poses significant risks that could lead to penalties and strained vendor connections.

The Current State of 1099 Compliance

The report reveals that merely 24% of businesses have fully automated their tax compliance processes. Alarmingly, 22% continue to depend on manual or semi-manual methods, tethering many accounting teams to outdated workflows that involve spreadsheets and burdensome data entry.

Kevin Halverson, Avalara's General Manager of Accelerator Businesses, stated, "As we're entering a new era of tax compliance, the demands of 1099 reporting have outgrown manual processes." According to Halverson, Agentic AI promises a transformative impact on finance operations by reducing errors and expediting workflows, allowing organizations to file with confidence.

With the January deadline looming, millions of firms grapple with preparing and submitting 1099 forms. Each incorrect filing not only raises the potential for penalties but also increases scrutiny from the IRS, ultimately affecting vendor relationships.

Key Insights from the Report

As companies gear up for peak filing season, the report identifies five critical trends shaping the landscape of 1099 compliance this year:
1. Resource Drain: On average, U.S. companies devote around 40 hours each January to manage 1099 compliance. Large organizations, especially those filing over 10,000 forms, might find their workloads exceeding 100 hours.
2. Compliance Complexity: Uncertainty stemming from unclear IRS communication is making the reporting process even more daunting. A notable 31% of respondents advocate for enhanced guidance from the IRS regarding requirements and deadlines.
3. Data Quality Woes: Challenges regarding data integrity persist, as obtaining accurate vendor information and resolving mismatches with Taxpayer Identification Numbers (TIN) are among the leading issues faced by accounting teams.
4. Interest in Automation: Despite the recognition of the need for automation, actual adoption remains low. While 78% of leaders intend to invest in compliance tools, only a quarter have successfully implemented a fully automated solution.
5. The Role of Agentic AI: By automating tedious tasks and enhancing data integrity, Agentic AI is reshaping the tax compliance landscape. Organizations exposed to the risks associated with manual processes are now looking to technology for a streamlined approach.

The Future Ahead

The findings of the Avalara report capture a pivotal moment for businesses navigating the complexities of tax compliance. As 2025 unfolds, it’s clear that organizations will need to prioritize technology investments to mitigate risks associated with 1099 reporting. Failure to keep pace with these changes could lead to heightened penalties and operational inefficiencies.

In conclusion, it’s not just about meeting IRS mandates; it’s about fostering transparent and efficient workflows that enhance accuracy and safeguard relationships with vendors. With the looming challenges of the upcoming 1099 season, it’s an urgent call to action for finance teams to embrace modernization.

For detailed insights, the full 2025 Avalara 1099 Readiness Report is available for download.