Client received bad 1099

[BHoffman]

My client loaned $2k to an associate. He paid her back the $2k and gave her a 1099-MISC for that amount. Now what? I told her to explain to him that the IRS doesn't look kindly on those who issue 1099s in order to deduct nondeductable loan repayments.

[veritas]

Ask for

a corrected 1099.

[Gretel]

...and if that cannot be accomplished enter the income on Sch. C and offset with same amount as expenses and report issuer of 1099 to IRS.

[taxea]

Was this a personal loan? Did she any interest on the loan? Either way he should not have issued the 1099. I suspect that he will not correct it so here is what I would do so the IRS has the documentation ahead of time.

1. Declare the "income" on ln 21 and adjust the same amount out with a detailed statement. This will zero out line 21 and document that the income was payment of a loan. I would include his information on the statement (not an actual statement but the box that you can open to explain the line item:
1099 from (EIN/SSN) and his name for payment of personal loan. 1099 issued in error, issuer refuses to correct the 1099.

The IRS won't see the actual return and may send a letter to your client questioning the 1099. Sometimes their computer comparison program doesn't know where to look. If this happens it is a simple matter of providing a hardcopy of the return with the explanation box highlighted. taxea

[veritas]

So your client

helped out this associate with a loan and he pays it back with a 1099?

I'll be there is more to this story.

[taxea]

my thought exactly. taxea

[BHoffman]

Client is a realtor. Lent money to a Landlord to pay for an open house - caterer, flowers, etc. Landlord paid her back and gave her a 1099-MISC. I told Client to ask for a corrected 1099-MISC. Have high doubts Landlord will comply.

I'm going to prepare a letter, notifying Landlord that the 1099 was issued in error and requesting a correction. Client has her cancelled check showing the loan and documentation of the repayment. I don't think we're going to report this amount on her tax return at all because it's an error and would result in overstated income. I think it would just compound the error and the problem. Just because some guy issues a 1099-MISC doesn't make it the law that it must be reported. The law states we must report our income, not other people's errors. We can respond to IRS if they question it.

Thanks for replies.

[Nashville]

Could be Innocent

Could be an innocent mistake. Most accounting software packages with an accts payable function have a 1099-MISC subroutine, and claim to be so easy to run that "a clerk could run it."

And that is very likely what happened. If your SS# is associated with the vendor record in your clients' accts payable, you will probably be issued a 1099 regardless of what the payment is for.

Easy way out is to show this in revenue, then back it out in "Sales Returns & Allowances." No harm done. If you are claiming Revenue in excess of ALL 1099s received, then simply do nothing. You will be under the radar.

[Burke]

I don't think we're going to report this amount on her tax return at all because it's an error and would result in overstated income. I think it would just compound the error and the problem. Just because some guy issues a 1099-MISC doesn't make it the law that it must be reported. The law states we must report our income, not other people's errors. We can respond to IRS if they question it. Thanks for replies.

And question it they will. And bill for the taxes, interest and penalties on the unreported income by computer CP 2000 when it does not match to the return. Better to put it down and subtract it out on Sche C than to ignore it. If she is a realtor, she is filing one anyway.

[BHoffman]

What are the rules about reimbursements and 1099s? I think I remember seeing a discussion somewhere about it. Does anyone know offhand?

[veritas]

How about

your client sending the associate a 1099 for $4,000.

[BHoffman]

That was a real tempting suggestion