1099 Discrepancies

A common situation when setting up a new corporation is discrepancies with 1099s by customers. They are required to be submitted to IRS for unincorporated payees, but no 1099 reporting is required for payments to corporations. What often happens is a customer includes payments that were made to one's corporation or deposited into the corp's bank account under the person's unincorporated ID number. While it would be best to have them correct the 1099, that isn't always possible and in fact is not even a big deal.

Some people think this means they have to pay the much higher personal and self employment taxes on this erroneously reported income. Not true. As I mentioned earlier, the amount of income you pay tax on is not dependent on the 1099s. I have had this situation hundreds of times with clients and have worked out a simple way to avoid any IRS problems. To avoid a nasty-gram from IRS when they match up 1099s with 1040s, it's essential to report gross receipts at least as high as the amounts reported as income to you personally on 1099s. Then, in either the Cost of Goods Sold or Other Expenses section of the Schedule C, include an entry for "Income Deposited Into Corporate Account and Reported On Its 1120" to back out that income and avoid double taxation of it. I usually include another attached statement explaining about the newly formed corporation (giving its FEIN) and how erroneous 1099s are being handled. IRS has never had a problem with my reporting these in this manner.

As I have mentioned on several occasions, this kind of additional self defense info is one of the reasons I refuse to accept electronic filing of income tax returns. There is no place to explain such discrepancies in that format.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2003 01:01:00 PM Send this post: