Please Audit Me Form

[Snaggletooth]

I've never used Form 8275 - used to disclose preparer unacceptance of positions taken by taxpayer. I threatened to use it a couple times and the client changed his tune. I've always called this thing the "Please Audit Me" form.

Question:
Can Form 8275 be used to disclose differences between the preparer and issuers of information returns sent to the client? (e.g. client receives 1099-MISC for $5000 in nonemployee compensation when in reality it should have been for rent)

Question2:
If so, will the IRS respond with the same fervor as they would if the disclosure had been against the taxpayer?

[Koss]

Form 8275

I would not use Form 8275 for the scenario you have described. I would simply attach a generic statement explaining that the amount entered in Box 7 is rent and that it is not self-employment income.

If there is an adequate paper trail to support the taxpayer's claim that the income was rent and not self-employment income, then I cannot see how any type of penalty could be imposed upon the taxpayer or the return preparer.

If there is no paper trail to support the taxpayer's claim, then... well, I'm not sure I would prepare the return at all. I think I would need a lot more information in order to make a decision.

Form 8275 is meant for cases where the taxpayer is taking a position that conflicts with the IRS position. My understanding is that this refers to situations where the taxpayer is using an interpretation of the law, or perhaps even an interpretation of the facts, that is different from the interpretation adopted by the IRS.

That's not what you are describing. If the paper trail, such as cancelled checks, bank statements, lease agreements, etc. clearly shows that the payment in question was rent, then the IRS and the taxpayer have the same interpretation of the facts and the law. The fact is that the payment was rent; the law is that it is not subject to SE tax.

An error on Form 1099-MISC does not change the underlying facts, and it does not transform the payment from rent to self-employment income.

Someone once said:

It is not the reporting document, or the information return, that determines the taxation of an item. Rather, it is the nature and character of the transaction that determines its treatment under the tax law.

You may find it interesting to review the recipient's instructions for Form 1099-MISC. The verbiage has changed each year for the last three years, in some curious ways. I have provided links to these instructions below. I am directing your attention to the instructions to the recipient for Box 7.

http://sgaweb.net/1099_Inst/2009.pdf

http://sgaweb.net/1099_Inst/2010.pdf

http://sgaweb.net/1099_Inst/2011.pdf

Despite the rather odd changes from year to year, one thing remains constant: The form contains instructions to the recipient on how to report income in Box 7 if the recipient feels that it is not SE income. And there is never any reference to Form 8275.

The text for 2011 is the one that most strongly supports my approach. Under certain circumstances, it explicitly directs the taxpayer to enter the amount from Box 7 on line 21.

That would not be appropriate for your client. Clearly, for your client, the amount belongs on Schedule E. But my point is that the IRS instructions explicitly acknowledge that not all income in Box 7 is self-employment income.

I worked on a return several years ago where the client had received a 1099-MISC with an amount in Box 7 that was not SE income. The payment was from the city where he lived. The city had cut down some trees on his property, in order to... well, I don't even remember. Maybe it had to do with power lines or something. It wasn't eminent domain; it wasn't an easement. The size of his parcel of real estate was not reduced. But the trees were part of the real estate; they were not personal property. He was compensated for the loss of the trees, or perhaps for some loss of value on the real estate.

We came to the conclusion that the payment was not taxable at all, and that it would simply reduce his basis in the house. We reported it as a sale on Schedule D, with a basis equal to the amount, so that the net gain was zero.

Whatever it was, it wasn't self-employment income.

I spoke to someone fairly high up in the city's finance department in an effort to get the form corrected. It was like talking to a brick wall. The woman insisted that it had to be correct, because the city had been audited by the IRS, and they didn't find anything wrong with how they were filing the 1099 forms.

We filed a simple, narrative explanation as an attachment to the return.

I wish I could tell you what the outcome was. But I left the firm, so I never heard anything about it.

What about cases where the amount on Form 1099-MISC differs from the amount reported on Schedule C because the payer issued a check right at the end of the year, but the payee, who is a cash basis taxpayer, didn't actually receive the check until the following year?

Here again, the taxpayer is not taking a position that conflicts with the views of the IRS. If the facts are clear and undisputed, then I don't see how a penalty could possibly be applicable.

This is probably a much longer answer than you were looking for. But I just don't think this is what Form 8275 is meant for.

BMK

[Snaggletooth]

Form 8275

Thanks Burton, I believe you did answer the question.

Just came from an NATP seminar where one of the classes had a surprising emphasis on the futility with dealing with errant information statements. Imagine dealing with a 1099-R that you KNOW is wrong, but it is from TIAA-CREF. Or a 1099-MISC from Prudential Insurance. Or a 1099-A from Bank of America.

Mr. Koss correctly responds that the facts and circumstances supercede an errant 1099. However, the IRS will not accept these facts and circumstances except after much gnashing of teeth, and tell you to "work it out with the payer" which is even more futile than dealing with the IRS itself.

[Gary2]

In addition to BMK's superb post, be aware of the relatively new section 6201(d), which shifts the burden of proof in court to the IRS with regard to informational returns (such as the 1099), but only if the "taxpayer has fully cooperated with the Secretary (including providing ... all witnesses, information, and documents ... reasonably requested...."

In other words, there's a sound basis for filing when you disagree with a 1099, but if questioned, you need to be prompt and reasonable in responding to any IRS requests, and you need to be prepared to go to court to enforce this. See the Fitzpatrick case for an example where the IRS got burned for behavior more commonly associated with taxpayers.

[S T]

Hmm

Many thanks to BMK for his ever so precise lengthy reply -----I don't think I would file the 8275 form on this issue for 1099 forms.

The major problem with 1099 forms is that the "readers" of the forms at IRS are looking for the amount to be on a certain form and subject to "SE" - they just know that is what they are suppose to look for - without any understanding of the reporting.

So far, what I have done - if I can determine that the 1099 form is in error and we can not obtain a corrected 1099 form - is to report the amount on the form that I think IRS will look for it to be on - then a notation to reverse that same amount and See schedule **** and enter the income on the "determined correct schedule"

Read those 1099 rules - as a professional - sometimes I even have a difficult time understanding which block the amount belongs in and whether we are to issue or not issue.

If you are dealing with prior to 2010 - just wait 2011 and 2012 will be even more challenging

Sandy

[appelman]

Just a personal take

I have found that no one at the IRS seems to read preparer's notes or statements attached to e-filed returns. Therefore I routinely use 8275 as a catch-all document for every sort of irregularity that needs explanation, including errant 1099's and community property allocation issues for RDP's. It's an "off-label" use, but it seems to work pretty well. Incidentally, I recently ran into an unusual twist. Self-employment income was incorrectly reported as "other income" on a 1099-misc. It was included in business income on the return, but the taxpayer received a CP2000 asking about the missing "other income." Some days you can't win!

[JG EA]

It just doesn't matter!

I think it doesn't matter much what you do. Just prepare the return properly and realize that some of them are going to be questioned. I've had a few this year where the information was right there on the return - clearly visible - and yet the IRS made an inquiry.

I think all this 'put it here and put it there' just confuses the issue. Keep things simple and clear. People that think it has avoided them problems - well, I just just think that it is the luck of the draw.

I'm still mind-boggled by my client getting a bill for his relative's (same name) income and they had it listed under my client's social security number! It never was under his number. Someone just looked at the name and sent the bill to my client! Not that it was hard to clear up or that it took huge amounts of time. Also they apologized generically for the inconvenience. It's just that it boggles one's mind.

[WhiteOleander]

I think some of these incorrectly issued report forms would stop if there were penalties for issuing them incorrectly.
An example in our office this year: A client had a power company pay for an easement to run power lines over some of his/her land. The power company issued a 1099MISC with the payment in box 7, non-employee comp. This was income in 7 figures. So, we had to put the return on extention so the t/p could get it corrected. The company didn't want to bother. It took the t/p until Sept. to get them to do it. And then, it still wasn't right. They put it in "other income" box 3. That's only slightly better. It should have been on a 1099S. So, the t/p has elected to go ahead and file his/her tax return using the info on the corrected 1099. If, (or better still, when), he/she gets a letter, we will start down that road to get the IRS to see the income is correctly reported on Sch D.

If the issuers had to pay penalties for issuing these forms incorrectly, I think they would be more diligent about what they do. There's really no consequence to them. But, it costs us and the IRS hours of time.

I think most preparers of these 1099s have no clue what they are doing. I think they see box 7 "non-employee comp" and think, ":Well, it's compensation and they aren't an employee so I'll put it there." There needs to be a penalty for "due diligence" for this info also.

[Corduroy Frog]

Payers and Attitudes

Oleander, I couldn't agree with you more. However, many of these errant 1099s come from companies like the aforementioned Bank of America, Prudential Insurance, TIAA-CREF, or maybe from Pacific Energy & Gas.

In order to enforce such a penalty, IRS must first determine that the payer is wrong and the taxpayer is right. The burden of proof is on the taxpayer. And then the next step would be to bring cause of action against these giant companies.

The companies complain to their lobbied Congressman/Senator that it is unfair to begin with that they are having to do the government's work for them by issuing these information returns.

IRS can continue to keep their heavy foot on our middle-class clients, or they can tangle with the General Electrics of the world. Sorta a no-brainer.

[RitaB]

Yep

So far, what I have done - if I can determine that the 1099 form is in error and we can not obtain a corrected 1099 form - is to report the amount on the form that I think IRS will look for it to be on - then a notation to reverse that same amount and See schedule **** and enter the income on the "determined correct schedule"

This is what I do as well, except I have quit trying to get corrected 1099's.

I have one gentlemen whose 1099-R has had Code 1 every year forever. He's in his 80's. You'd think it would be easy to talk em into changing that. You'd be wrong.

[New York Enrolled Agent]

Form 8275 is meant for cases where the taxpayer is taking a position that conflicts with the IRS position. My understanding is that this refers to situations where the taxpayer is using an interpretation of the law, or perhaps even an [i]interpretation of the facts


BMK

A couple of comments on this thread. There are two different 8275 forms. The 8275-R form is when the taxpayer is taking a position which conflicts with a regulation (the official IRS interpretation of the law). The plain 8275 is used as disclosure form, generally to protect the taxpayer or the preparer from penalties. This form will not stop the IRS from issuing a CP2000 when the IRS computers detect a mismatch of an information document and the entry on the tax return.

This form is not an invitation for an audit. It simply gives the preparer a defense against possible penalties. It is especially useful to use for non-filers when estimated figures are often needed.