1099 mishap in CA

[DMICPA]

Client of mine performed services for CA in the amount of $2,000. Today, gets a 1099 from the great State of Ca in box 3 "other income" (should be box 7) for $200,000, not $2,000.

Client has a fit and tries to call Ca to get it corrected. so far Ca is not interested in correcting this.

What is a person to do? I suggested reporting as issued and backing it off the Schedule C under incompetent Ca personnel.

Arnold really is a terminator.

Wouldn' t we go to jail if we did something like this?

[Koss]

Form 1099-MISC

I might report only $2000 on Line 1 of Schedule C, and attach a statement to the return.

In the statement, in plain English, I would simply declare that the 1099-MISC is erroneous, and that the payer has refused to correct the error.

This approach will almost certainly generate some degree of scrutiny by the IRS. But if the Notice CP-2000 comes, you can simply direct the IRS to review the return itself. Adding the statement proactively--as part of the original return--is far more persuasive than trying to explain unreported income after the fact.

Your idea about backing it out of the Schedule C as an expense, labelled "incompetent CA personnel," is amusing.

But the IRS might not be amused. It's not an expense, so it doesn't really belong in that section of Schedule C. And the taxpayer never received that money, so it shouldn't really be reported as income to begin with.

Personally, whether I was the taxpayer or the tax pro, I would much more comfortable explaining why I left the income off the Schedule C--because I never actually earned that money--as opposed to trying to explain why I reported income that I never really received, and then backed it out using a smart-***, fictitious expense.

Don't take these comments personally. I probably have the most warped sense of humor on this message board. But I'm not sure I would pull that on the IRS.

BMK

[Koss]

Warped Humor

Maybe your client should just send the State of California a bill for $198,000...




BMK

[David1980]

I think the backing stuff out as an expense approach is done to try to slide beneath the matching system the IRS uses. Whether that's proper or not really depends who you are talking to.

But for $200,000, I think you're going to get someone looking at that either way. Might as well preparer the return correctly and then attach the statement as Koss suggests.

[DMICPA]

1099 Mishap

Thanks for your responses. I would not actually list it as an expense.

Most likely I would report the correct amount but it would have a schedule attached as to the 1099 amount and the correct amount all in the Income section.

If the taxpayer had the original checks which totalled the $2,000, I would attach copies of those with the 1099 and explain that the State did not issue a correction but here are the correct amounts.

I am not looking for an audit so I will do everything possible to explain the situation very clearly on the return and attach backup.

The IRS 1099 matching program does not take into account mishaps by the issuer. It is important to at least have the $200,000 mentioned on the return so maybe the IRS agent that comes up with a flag on this will see the statement explaining what actually transpired.

[S T]

had a few of these

Is this a notice from California for a prior year return? or is this a 1099 form for the current year return?

Call the issuer (payor) and have a corrected 1099 completed and filed, or even offer to complete it yourself on their behalf.

Otherwise you will have to go to Plan B or Plan C and then do the "notice responses" which to me is more grief.

Sandy

[DMICPA]

This is for the current year 2009.

I have instructed the client to keep trying to bug the State to get this corrected prior to preparing the return.

We can go directly to our local Franchise Tax Board if necessary to get a face to face hopefully. I previously tried to visit the City of Los Angeles business license division but they had their doors locked and would not open them unless there was an appointment. The phone number on the form to make an appointment was disconnected. Great!!!

Performing the steps necessary now to correct this is by far better than having to file with an explanation. If we get this corrected now, the IRS will not be involved so it is far better now to try to resolve this before filing.

[S T]

Well

It is only Feb 2, 2010, so there is some time to make necessary corrections.
I take it a State of California payor is the issuer?
How about a certified letter with a copy of the incorrect 1099 form and showing what the corrections should be.

And then maybe also a phone call to obtain a fax # and a person's attention (as in maybe a Suprervisor of the Dept or the Dept that issues the 1099 forms) to fax a similar document.

I had to do that with the Calif State Lottery on one of my business clients a couple of years ago. Finally, they corrected the information and sent new forms

Oh the slow wheels of government and God forbid we need corrections or that the Government Agency would make a mistake

Sandy

[DMICPA]

Sandy-Great idea. Will do that.