No one likes receiving Forms 1099, since they generally stick you with income. If you have income, you must report it, whether or not you receive a Form 1099. But seeing the dollars reported to your Social Security number can be chilling, especially if you think it’s wrong.
Information reporting has become the centerpiece of IRS enforcement efforts. But suppose you receive a Form 1099 you know to be wrong? Say you’re paid a consulting fee of $30,000 in 2014, but the 1099 you receive in January 2015 is for $300,000. What should you do?
First, act promptly. You may be able to approach the issuer, show you really only were paid $30,000, and get the issuer to reissue it correctly. Ideally, do this before the issuer sends the Form 1099 to the IRS. A Form 1099 consists of several parts: for the recipient, the IRS, and the state. Forms 1099 should be sent to taxpayers by January 31 and to the IRS by February 28.
Thus, if you call and write the issuer of the incorrect Form 1099 as soon as you receive it, you may be in time. The issuer may be able to destroy the incorrect one and issue a new form. If you follow this path, keep a written record. Ask for a letter from the company saying that they eroniously issued a Form 1099 for $300,000, destroyed it, and then properly issued one for $30,000.
Why keep this? Because you may find that the company did transmit the incorrect Form 1099 to the IRS after all. This way you’ll be able to explain it. If the issuer of the Form 1099 has already sent it to the IRS, ask for a “corrected” Form 1099. The issuer will prepare a Form 1099 in the correct amount and check a “corrected” box on the form.
What happens if the issuer won’t cooperate? There’s no good answer. You’ll need to address this on your return. For example, you could show the $300,000 payment on your return (on line 21, or on a Schedule C), and then explain the $270,000 overstatement. You could do so in a statement or footnote by showing $30,000 on line 21, but adding “see statement.” The statement might say:
- Erroneous Form 1099-MISC $300,000
- Less error amount $270,000
- Net to line 21 $ 30,000
Does this make your audit risk higher? It may, and that’s an argument for doing all you can to make sure the Form 1099 is correct in the first place. But you probably don’t have much choice. After all, you practically guarantee an audit if you merely report the $30,000 figure and don’t explain. In that event, the IRS will likely send you a notice asking for tax on the missing $270,000.
Is there any other possibility? If you are really miffed you could try to sue the payor for issuing the erroneous Form 1099. However, most such lawsuits go nowhere and are expensive. And forget trying to bring the IRS into your dispute. Besides, you won’t have the suit concluded before the deadline for filing your tax return.
The difficulties faced by taxpayers who receive erroneous Forms 1099 are one reason to be as specific as possible in written agreements so the amount and number of Forms 1099 is explicit. For example, in settling litigation, a settlement agreement should be specific about each Form 1099 that will be sent. For more tax tips about settling litigation, see 10 Things To Know About Taxes On Damages.
For alerts to future tax articles, follow me on Forbes.com. Email me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.
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