The end of January may not seem momentous, but among tax professionals it is important, ushering in IRS Form 1099 season. IRS Forms 1099 are those annoying little tax reports that come in the mail. They remind you that you earned interest, received a consulting fee, or were paid some other kind of income. They remind you, and they notify the IRS too. There are many varieties, including 1099-INT for interest, 1099-DIV for dividends, 1099-G for tax refunds, 1099-R for pensions, and 1099-MISC for miscellaneous income.
These forms are sent by payers to you and the IRS, and surprisingly, many people can’t wait for them to arrive. That seems a little odd. Sure, it is useful to have a copy of each one that is issued. And yet paradoxically, asking for one is usually a mistake. If you find yourself wanting a form, you obviously know about the payment you received. So just report the income! You don’t need the form.
The most common is Form 1099-MISC, which can cover just about any kind of income. Consulting income, or non-employee compensation is a big category for 1099-MISC. In fact, apart from wages, whatever you were paid in 2015, is likely to be reported on a Form 1099. Companies big and small churn them out. If you’re in business–even as a sole proprietor–you also may need to issue them.
Each Form 1099 is matched to your Social Security number, so the IRS can easily spew out a tax bill if you fail to report one. In fact, you’re almost guaranteed an audit or at least a tax notice if you fail to report a Form 1099. Even if an issuer has your old address, the information will be reported to the IRS (and your state tax authority) based on your Social Security number.
Make sure payers have your correct address so you get a copy. Update your address directly with payers, and put in a forwarding order at the U.S. Post Office. You’ll want to see any forms the IRS sees. It’s also a good idea to file an IRS change of address Form 8822. The IRS explains why at Topic 157 – Change of Address–How to Notify IRS.
Like Forms W-2, Forms 1099 are supposed to be mailed out by January 31st. You need a Form W-2 to file with your return, but do you really need a Form 1099? No. Unlike Forms W-2, you don’t file Forms 1099 with your return. If you don’t receive one you expect, don’t ask for it. Just report the income. Reporting extra income that doesn’t match a Form 1099 is not a problem. The IRS does not consider that a mismatch. Only the reverse is a problem.
If you call or write the payer asking for a Form 1099, the payer may issue it incorrectly. Alternatively, you may end up with two, one issued in the ordinary course (even if you never received it), and one issued because you asked for it. The IRS computer might end up thinking you had twice the income you really did.
One settling for this common mistake is a Form 1099 for your lawsuit recovery. If you settled a suit and received taxable money in 2015, report it if it is income. But don’t ask for the Form 1099. Generally, everything is income, including money for settling a lawsuit. One of the few exceptions is lawsuit recoveries for physical injuries. Damages for physical injuries are tax-free under Section 104 of the tax code.
Yet only physical injuries and physical sickness qualify. Damages for emotional distress are taxed, unless the emotional distress emanated from physical injuries or physical sickness, in which case it’s tax-free. That’s just one of 10 things to know about taxes on legal settlements.
Although most Forms 1099 arrive in January or early February, some companies issue the forms throughout the year at the time they issue checks. Whenever the Forms 1099 arrive, don’t ignore them. Each form includes your Social Security number. If you don’t include the reported item on your tax return, bells go off.
Finally, there is one possible exception to my suggestion not to ask about Forms 1099. The IRS suggests that if you don’t receive a Form 1099-R, you should ask. Good luck this 1099 season!
For alerts to tax articles, email me at Wood@WoodLLP.com. This article is not legal advice.
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