Hi,
You have the two highest bits of T1CON set to 10 and T1CON.3 set to 1 which, if I read the datasheet correctly, sets TMR1 up to be clocked from an external crystal (32768Hz) connected between the SOSCI and SOSCO pins. Do you have a crystal connected here?

If you want TMR1 to be "driven" by the main oscillator (the internal 16MHz oscillator in your case) you should set the two high bits to either 00 (Fosc) or 01 (Fosc/4). This mode however won't work if you want TMR1 to wake the PIC up from sleep since the main osciallator (now "driving" TMR1) is shut down when you enter sleep mode.

/Henrik.