Client was VP of small corporation. He and the president (president was also secretary and treasurer) parted on bad terms. President just issued my client a 1099 with 2K added in for stock (2000 shares/$1.00 per share) that was "given" to VP at start of company. The VP never received the stock certificate and repeated attempts to do get a certificate have been met with stubborn resistance. There is no chance my client will ever get that certificate or have a chance to sell the stock. In addition to that, 3K of pay on that same 1099 has gone unpaid to my client. Basically, the president is using my client's 1099 to give himself more deductions while at the same time not paying and/or fulfilling his obligations. We've been informed that this is not the first time he's done something like this. Question: can I show this as a deduction for non business bad debt? My client is a cash basis taxpayer so I can't show it as bad business debt. My client is showing income and stock value on a 1099 that he's never physically received, and has no real chance of receiving. Thanks in advance.
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Incorrect 1099
Was this reported in box 7 as SE Income? I so, I would report the full amount on
Sched. C then show the amount not received as an expense.
This could possibly be done even if reported as other income. Report the full amount
on line 21 then report the uncollected amount as a deduction. -
Its not a bad debt.
Report the amount actually received as income. TTB, page 5-9, "If the total amounts that were reported on Forms 1099-MISC are more than the total reported on Schedule C, attach a statement explaining the difference."
There is no need to play games here. There is no need to do funny bookkeeping just to right a wrong. Simply report income constructively received on the tax return on the appropriate line. Since it is less than the amount listed on the 1099, attach a detailed explanation with all of the information you just posted on this message board, including the president's name, address and ID numbers.
If IRS squawks, stick to your guns and defend your client against 1099 fraud. If the payee never paid the money, it is fraud to put it on a 1099. If it is fraud, it is fraud. Don't try to cover it up with funny bookkeeping or fake deductions.Comment
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Bad debt?
Thanks for the advice. I wondered why none of the "bad debt" options seemed to fit the scenario. Fortunately, this client keeps detailed paper trails (certified letters, e-mails with return receipt, etc.), so documenting all that he's been through will be a piece of cake. Thanks again!Comment
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