Posts Tagged ‘1099s’

When a W-2G (or Other Information Return) Is Wrong

Wednesday, March 20th, 2013

Let’s say you’re self-employed, and you get a 1099-MISC from a customer. He notes he paid you $1,200. However, he really paid you $900. What do you do?

First, you contact the customer and attempt for him to correct the error. Hopefully, you can show him a copy of your invoice(s) or other documentation, and he or she will issue a corrected 1099-MISC.

But what if he refuses? Here, practicality must be used. Let’s say the total of your gross receipts is $32,000, and the total of your 1099-MISCs (and 1099-Ks) is $29,000. I’d likely just enter the 1099-MISC as received, and lower the “other” gross receipts by the extra $300. (IRS instructions on information returns state to use the actual number. The problem is that the automated underreporting (AUR) unit will almost certainly send you a notice if you use the wrong number.)

Earlier this week I was faced with a different situation. My client, an amateur gambler from Indiana, entered a poker tournament in Iowa. The tournament had a $300 buy-in, and my client cashed for $2,300. Under federal law, no W-2G would be issued because the amount of his win, $2,000, is less than the threshold for issuing a W-2G in a poker tournament ($5,000). However, under Iowa law withholding on nonresident’s winnings begin at gross winnings of $1,200 (at a rate of 5%). My client received a W-2G for $2,300, not $2,000. What should be done? (My client has excellent records, including the tournament buy-in receipt.)

The amount of the win is $2,000, not $2,300. Indiana does not allow gambling losses to be deducted on their state income tax returns, so this is an issue for my client. (This can be an issue for individuals on federal returns, too. Gambling losses are an itemized deduction, so they don’t impact Adjusted Gross Income (AGI). Many tax items are tied to AGI, such as being able to contribute to a Roth IRA.) However, if I enter $2,000 as the amount won for that W-2G, the IRS’s automated underreporting unit will flag the return.

The solution is to enter the W-2G as it was received, and then subtract out the $300 buy-in just below this. I included an explanation: “Buy-in for W-2G winnings.” Should the IRS, Iowa, or Indiana flag the return, we can respond with a perfect paper trail showing that what we did is to put the income my client really earned on the tax return. Given that this is a fundamental principle of US taxation, all should be well.

The same process can be used for other information returns that are erroneous: Enter the “wrong” numbers, and modify them with an explanation. Do realize that there is a chance that the AUR unit may ask for proof. This is yet another reason why the solution to many tax issues is to document, document, document.

1099 Repeal?

Friday, July 30th, 2010

Before I head out the door, I just saw a short article that a repeal of the new requirement on issuance of 1099s (part of the health care fiasco) was introduced by Democrats today. The measure was an amendment to a bill on health care benefits on 9/11 respondents. The overall measure failed on a procedural vote (it needed a two-thirds vote to pass).

However, the fact that Democrats introduced the measure indicates that it is very likely that the burdensome 1099 requirement will be repealed before the implementation date (2012).

1099 Time

Sunday, January 3rd, 2010

It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:

  • Corporations (except attorneys)
  • Entities you purchased tangible goods from
  • Entities you purchased less than $600 from (except royalties; the limit there is $10)

Otherwise, you need to send a Form 1099-MISC to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your computer (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.

Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing is easier than electronic filing.

We should all probably enjoy this year and next year vis-a-vis 1099s. It looks like the corporate exemption for 1099s will end in the near future, and that means more paperwork for businesses and more work for tax professionals.

Mailbag: How to Get Both Sides Upset with You (Poker Coaches & 1099s)

Thursday, December 3rd, 2009

Like most tax professionals, I send out a newsletter for my clients. In my most recent newsletter, I included the following:

Under federal law, a business owner (this includes those of you who file a Schedule C — a sole proprietorship) must send a Form 1099-MISC to any non-corporation from which they’ve purchased $600 or more from (excluding merchandise).

The IRS has become quite strict about enforcing the penalties when you fail to send out 1099s when required or when you fail to submit the 1099s and the associated 1096 to the IRS in a timely manner. Here [is an example] in which you must send out a Form 1099-MISC:

– You are a professional gambler, and file a Schedule C for your gambling business. You hire John Doe to coach you and improve your play, paying him a total of $650 during 2009. You must send Mr. Doe a 1099-MISC.

The first email I received was from a poker coach (not my client). He stated that he didn’t want to complete the Form W-9 as he didn’t want anyone to know his social security number. I replied that he can apply online with the IRS at no cost for an Employer Identification Number to use in place of his social security number.

He then replied that he didn’t want to receive the 1099, and that he wouldn’t complete it no matter what. I replied that under the law he’s required to complete the W-9 or he could be fined by the IRS.

I’m certain that the individual likes the idea of being paid under the table, thus avoiding income tax. Unfortunately, he’ll likely be caught sooner or later he’ll likely be caught, through an audit of himself, an audit of one of his clients when the IRS follows-up an unsent 1099-MISC, or through some other method (i.e. a suspicious activity report, a currency transaction report, etc.)

Meanwhile, I received an email from a client letting me know that he didn’t like the idea of sending out 1099-MISCs. He saw no reason to anger his poker coach and didn’t like the idea of completing worthless paperwork.

Whether 1099s are “worthless paperwork” or not, they’re required to be sent when a business pays a non-corporation $600 (or more) for services. Poker coaching is a service. A professional gambler (such as a professional poker player) runs a business. The IRS expects proper business conduct, including the filing of required information returns such as Form 1099-MISCs. Legally, there is no option but to send out 1099s where required.

I’ve represented a few businesses in audits this year. In every case, the IRS Revenue Officer reviewed the 1099s sent by the business. It’s becoming a point of emphasis for the IRS (if it has not already been one).

Most individuals comply with the law. Most poker coaches declare their coaching income on their tax returns, so receiving a Form 1099-MISC isn’t an issue. For those who aren’t claiming all their income, it’s time to start. Sooner or later every transaction will require a 1099; it’s clear that’s the direction Congress is heading.

A Brief Note on Business Information Returns/Filings

Tuesday, January 3rd, 2006

Now that we’re in 2006, it’s time for me to go back to work. First on the agenda will be business information returns/filings, such as W-2s and 1099s. These forms must be distributed by January 31st, but do not have to be sent in to the government until February 28th (if you file the forms electronically, March 31st).

The most common form 1099 sent is the 1099-MISC. This form covers non-employee compensation, rents, payments to attorneys, and royalties. In general, a 1099-MISC must be issued if the payments during 2005 total $600 or more ($10 or more for royalties). Most payments to corporations are exempt from reporting on a 1099.

If you’re in California, you must also report this information to the Franchise Tax Board (FTB). If you file using paper returns to the IRS, the IRS will forward the filings to the FTB and you need not file directly with the FTB. However, if you file electronically, you must also file electronically with the FTB. California has stringent penalties regarding non-filings of information returns (far stricter than the federal penalties). We encourage all of our California clients to require that before any payments are made to a supplier/vendor that a W-9 be obtained.

If you’re one of our clients and want us to prepare your 1099s, please contact our office when you’re ready.

Where Paper Filing is Simpler than Electronic Filing

Sunday, December 4th, 2005

Come late January or early February, you may have to file your 1099s with the IRS. If you are in California, you likely believe that filing with the IRS satisfies your California filing requirement.

If you paper file, that’s true. However, if you electronically file your 1099s, you must also file them with the Franchise Tax Board. And if you forget to do so, you could be subject to fines.

If you have any questions regarding your 1099 filing requirements, please ask us. If we file your 1099s on your behalf, we’ll make sure that Sacramento gets their copy.