Land Sale Reported On 1099MISC

[geekgirldany]

I have a client that is getting caught up on past years tax returns.

I am starting on 2005. For that year he sold a piece of shoreline to a subdivision developer. This sale was reported on a 1099-MISC as non employee income. Had not seen the guy for awhile when he came by to get caught up on taxes. He showed me some notices and I saw it right off. I told him to get in touch with the developer. Developer said "accountant prepared it, talk to my assistant". Client could never get assistant. So it is left as a 1099-Misc. I told him to keep trying.

There is a CDP hearing scheduled at the end of the month.
So I need to get this return completed. I have a few questions:

1. Can the sale of shoreline be treated the same as sale of easement?
For example the allocation of basis.

2. What paperwork will be needed to prove the 1099-Misc was incorrectly issues?
I am thinking any letters regarding the sale, attorney paperwork, etc.

Thank you all for any help
Dany

[taxxcpa]

Erroneous 1099

One way might be to report it on Schedule C with an offsetting cost or expense to zero it out, then report it as it should be if there had been no 1099. This would be a little unorthodox, but would not be evading any tax. It would be similar to the way tax preparers often handle Corporate income that is reported to the owner's SSN instead of the Corporate EIN.

This might preclude any IRS inquiry, but if the IRS did question it, then the letters and documents evidencing that it was a land sale should satisfy any auditor.

[FEDUKE404]

Did I miss something here?

"he sold a piece of shoreline to a subdivision developer"

By what logic would you "offset" this?

If it were an easement, there could well be different issues at hand but that does not appear to be the case. Even so, there would still likely be legit tax issues, using allocated cost basis et al.

As for "What paperwork will be needed to prove the 1099-Misc was incorrectly issues?" what exactly would be your basis for stating said document was incorrectly issued?

Perhaps I need to take off my tax bifocals and just go back to watching boring stuff on TV....

FE

[geekgirldany]

One way might be to report it on Schedule C with an offsetting cost or expense to zero it out, then report it as it should be if there had been no 1099. This would be a little unorthodox, but would not be evading any tax. It would be similar to the way tax preparers often handle Corporate income that is reported to the owner's SSN instead of the Corporate EIN.

This might preclude any IRS inquiry, but if the IRS did question it, then the letters and documents evidencing that it was a land sale should satisfy any auditor.

Thanks so much. Well the IRS has already caught the 1099-MISC and is what led to the CDP hearing. So I am not sure if the Schedule C would work or not. I'll have to think on that. Good suggestion. I guess I will just have to end up trying to prove it was not a 1099misc through letters and documentation.

[geekgirldany]

"he sold a piece of shoreline to a subdivision developer"

By what logic would you "offset" this?

If it were an easement, there could well be different issues at hand but that does not appear to be the case. Even so, there would still likely be legit tax issues, using allocated cost basis et al.

As for "What paperwork will be needed to prove the 1099-Misc was incorrectly issues?" what exactly would be your basis for stating said document was incorrectly issued?
FE

I was trying to figure out how to handle the sale of the shoreline. Would it be similar to the sale of easement as far as allocation of basis?

As far as proving the 1099MISC was incorrect... I thought signed documents showing the sale and any other information he could dig up would prove it was reported wrong.

[Gary2]

I was trying to figure out how to handle the sale of the shoreline. Would it be similar to the sale of easement as far as allocation of basis?

The default rule for an easement is that you don't allocate the basis, unless you can show that it only affects part of the property. In this case, you have an outright sale, so you have no choice, and being shoreline, I doubt any proportional approach based on land area would be right. I'd imagine you'd need an appraisal, allocating the basis according to relative value.

[Snaggletooth]

Horse Out of the Barn

Dany, the horse is already out of the barn. The IRS will have to change their records once they are convinced the error was made by the issuer of the 1099-MISC. A Schedule C at this point is too late (if indeed it was a viable idea to begin with).

But the burden is on your client. The "matching" program used by the IRS will assume the amount of the 1099-MISC is Revenue to be shown on the Sch C, with NO EXPENSES to offset the revenue. Then it will be taxed at ordinary income rates, PLUS self-employment. The corrected version will instead show a capital gains transaction, with a possible basis. The tax differential has a potential to be substantial. Proposing a lower tax definitely places the burden on your shoulders.

Add to this the fact that he hasn't filed in nearly 5 years. Not pretty, but salvageable. Get as many documents as you can, preferably a closing statement with an amount on it that agrees with the 1099-MISC.

[FEDUKE404]

Confusion abounds

Other than to "correct" a possibly erroneous Form 1099-MISC (in what box was the sale income actually reported?), I'm a bit confused as to how a Schedule C could ever be relevant here.

What business code would you use on the Schedule C??

...And I also remember recent discussions here that Schs C/SE would not be used anyway unless the client R-E-A-L-L-Y was in "business." (You know, ye olde guy putting up the windows or "he only did it once" et al discussions.)

From the outside looking in, this entire situation sounds like a Sch D activity - maybe a 4797 if the facts fall into place.

Do you think perhaps the original lawyer just did not have any Forms 1099-S lying around the office?

Now back to my morning coffee....

FE

[Jesse]

I've on occasion done a "dummy" schedule C to avoid follow up correspondence. Last year someone won a trip and the radio station reported it on 1099MISC as Non-employee Compensation. Went round and round and they would not correct to put in other income box so I did a Schedule C and put in other expenses "Prize won - transferred to line 21".

If it was a real estate developer a schedule C could be required with the "land" being inventory.

[Burke]

Agree with Jesse here. The Sche C is not relevant except for the purpose of matching with IRS computers (in the initial stage of preparing a valid return -- not in this case after the fact and circumstances as stated). Then reporting it correctly on Sche D as a sale.

On the second point, if TP is a real estate developer where the land is inventory, it is correctly reported on a Sche C as gross profit, less COGs (basis). That info was not qualified in OP, but could be the case.

[geekgirldany]

Thank you all for responding. I've been away from the office the last two days. This was a land sale reported on a 1099MISC on line 7 NonEmployee Compensation. My client is not in the real estate business.

Taxxcpa was suggesting the Schedule C just to report the 1099MISC and then show it as an expense to comply with the IRS matching rules. But as Snag said the horse if out of the barn and I also think this can not be done.

As I said this was not a business for my client. A large subdivision was built very close to his home. They wanted his shoreline so that the subdivision people could dock their boats there. The developer also purchased two other folks shorelines.

I believe Gary hit the nail on the head. My client will have to get an appraisal done for the shoreline. The 1099MISC he received has that it was for "property" and gives the address. Plus I have a checkstub that also states the address and that it was for the shoreline. I am hoping that is enough.... but then we will be looking at getting the basis on the shoreline.

thank you all for your help
dany

[geekgirldany]

Levy Action

Had CDP Hearing today and because client received statutory notice of deficiency back in 2008 doubt as to liability could not be raised. So the lien is staying in place. She said she was not in the position to discuss the 2005 tax return (the 1099Misc problem) to just get the return in asap.

Now levy action will be coming soon. She said he would receive a letter. To my understanding this will be a 30 day levy action letter the client will receive.

How long will it take for this levy action notice to be sent? Trying to give my client an expectation on this.

I am also considering TaxxCPA and Jesse advice on the Schedule C for the wrong 1099MISC. I am thinking if I prepare the return showing the 1099 MISC with the Schedule C and then take it back off. Then this might speed up the processing progress of the tax return.

Wish people would just file on time.

[FEDUKE404]

Three questions

Had CDP Hearing today and because client received statutory notice of deficiency back in 2008 doubt as to liability could not be raised. So the lien is staying in place. She said she was not in the position to discuss the 2005 tax return (the 1099Misc problem) to just get the return in asap.

Now levy action will be coming soon. She said he would receive a letter. To my understanding this will be a 30 day levy action letter the client will receive.

How long will it take for this levy action notice to be sent? Trying to give my client an expectation on this.

I am also considering TaxxCPA and Jesse advice on the Schedule C for the wrong 1099MISC. I am thinking if I prepare the return showing the 1099 MISC with the Schedule C and then take it back off. Then this might speed up the processing progress of the tax return.

Wish people would just file on time.

1. How did you ever conclude the income was "wrong" albeit perhaps not reported in the proper manner??

2. Why are you averse to reporting it on a Sch D (most likely correct place) and simply proceeding??

3. Does the client really think such continued evasive maneuvers will change anything with the IRS overall re a 2005 tax return with apparent unreported income??

FE

[geekgirldany]

1. How did you ever conclude the income was "wrong" albeit perhaps not reported in the proper manner??

2. Why are you averse to reporting it on a Sch D (most likely correct place) and simply proceeding??

3. Does the client really think such continued evasive maneuvers will change anything with the IRS overall re a 2005 tax return with apparent unreported income??

FE

I must have worded my post incorrectly.

1. By "wrong" I was meaning the land sale was reported incorrectly on a 1099-MISC. So yeah it was "wrong" to report it on that form it should have been reported on a 1099-S.

2. I would of course report the land sale correctly on Schedule D. I was speaking of others suggestions to reporting the 1099-MISC on a Schedule C and then deducting it back off on Page 2 of Schedule C and including an explanation of where it will be reported. Which is a Schedule D.

3. Client is not doing any evasive maneuvers. Not sure how you concluded that. He knows the income from the land sale must be reported. I am trying to figure out the best way to report a land sale that was put on a 1099-MISC instead of a 1099-S.

My thought is that by doing as I said in #2 it would help get the return processed quicker and would also go through the IRS matching program as far as the incorrect 1099-MISC. The quicker the return is processed the more likely they will not levy any assets.

[newbie]

1. How did you ever conclude the income was "wrong" albeit perhaps not reported in the proper manner??
Sounds like the income was right but reported on the wrong form.

2. Why are you averse to reporting it on a Sch D (most likely correct place) and simply proceeding??
Sounds like it's reported and deducted on schedule C to zero out 1099MISC and then correctly reported on schedule D

3. Does the client really think such continued evasive maneuvers will change anything with the IRS overall re a 2005 tax return with apparent unreported income??
Why do you say the income will be under reported??

Edit: Oops - must have been typing at the same time. Geekgirldany, I think you are on the right path.