Have you ever had to deal with unscrambling an incorrect IRS Form 1099 that sticks you with too much income? If so, you may already know that those IRS Forms 1099 you are receiving are the most important tax forms. Sure, there are many tax forms, and there are even many Forms 1099. So how can one form be so important? And how harmful could a little Form 1099 be anyhow?
They are small, look innocent, and there are so many of them. That might lull you into thinking they don’t count. But be careful. During Form 1099 season, companies big and small churn them out. When in doubt, many companies issue the form. That way they won’t get penalized by the IRS. And once the form is issued, it becomes your problem. The IRS gets a copy of every one.
Each form 1099 is matched to your Social Security number, so you’re almost guaranteed an audit if you fail to report one. The normal deadline for mailing Forms 1099 to taxpayers is January 31. Then, the payer has until the end of February to send copies of all Forms 1099 to the IRS. Some payers send forms to taxpayers and the IRS simultaneously, but most take advantage of the 30 day delay.
Don’t just put arriving Forms 1099 in a pile. Open them immediately to check for errors. Open the envelope and check the form. Say you get a Form 1099-MISC on January 31 reporting $8,000 of consulting pay, but you know you received only $800? Inform the payer immediately in writing and by phone. There may be time for the payer to correct it before sending it to the IRS.
That’s better for you. If the payer has not sent in the Forms 1099, ask the payer to destroy the incorrect form. Also ask the payer to confirm to you in writing that the erroneous form was destroyed. Keep copies. If the payer has already sent an incorrect form to the IRS, ask the payer to send a corrected form. There’s a box on Form 1099 that needs to be checked to show it is correcting a prior 1099. That way the IRS doesn’t add the amounts together.
Keep the forms in a safe place. You’ll need them if you do your own return. If you have a paid preparer, you should give your preparer copies of each Form 1099. Of course, there are many types of income you must report that will not appear on a Form 1099.
Plus, even if you are supposed to receive a Form 1099, the fact that you may not receive it does not mean you don’t have to report the income. You still do. Just report it on your tax return. Moreover, if you are missing an IRS Form 1099, for some types, don’t ask unless you really need the form. For most Forms 1099 that do not report withholding, you don’t really need the form. Income is income regardless of whether you receive a Form 1099.
Moreover, although mismatching is a legitimate concern, mismatching concerns are a one-way street. That is, reporting more income than the amount reported on Forms 1099 does not trigger a mismatch on IRS computers. In contrast, if you fail to report something on your return that is reported on a Form 1099, that is a mismatch. What about other Forms 1099 you think are wrong?
You may agree that you received the payment, but you may disagree that it is income (say, a physical injury lawsuit recovery). You may say money is capital gain not ordinary income. It might even be recovery of basis and not income at all. In any such case, you may need professional help. You need to explain, but not to over-explain.
And be patient. A Form 1099 may come as late as March or April, even though it is supposed to be mailed to you by January 31. You don’t want to spend money fighting tax bills that you might have avoided entirely by more careful reporting. So whether the Forms 1099 you receive are right or wrong, don’t ignore them.
For alerts to tax articles, email me at Wood@WoodLLP.com. This article is not legal advice.
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