1099 Recipient Misconceptions

During this time of year, as people are receiving their 1099 and W-2 forms and preparing to give everything to their tax preparers, it's a good time for a refresher on some of the most common mistakes made regarding these documents.

First is the perception many people have, that if they do not receive a 1099 or W-2 from payers, the income is tax free. With the legal requirement for 1099-MISC forms to be filed when annual payments exceed $600, the common belief is that any income below $600 is tax free. Not true. All income received for services is taxable, whether or not a 1099 is received.

In the unlikely event that you are selected for an IRS audit, the auditor will come prepared with a listing of 1099s that have been received reporting income that you were paid. The auditor will also demand to see all of your bank statements for the year under review, plus the statements for the previous December and subsequent January. The auditor will total up all of the deposits shown on the bank statements for the year under audit. S/he will then try to match up the total deposits to the gross income you reported on the various schedules of your 1040. While some kinds of deposits are not technically taxable or reportable income, such as transfers from other accounts, loan proceeds or gifts, the burden of proving their tax free source is on you. That is why I have always advised making photo-copies of each and every deposit you make. If you can't prove that a deposit is from a tax free source, IRS will consider it unreported taxable income. Trying to defend not reporting compensation with the argument that there was no 1099 received will get you nothing more than a laugh from the auditor.

Accuracy: Believe it or not, information on 1099s and W-2s is often wrong. The burden of verifying their accuracy is also on you. You should never accept the amounts as gospel before you have gone through your records and matched up the totals. This is another reason why it is crucial to have all of your personal accounts set up on QuickBooks. If the amount is wrong, notify the payer ASAP to correct it. If you do this before the payer has sent the IRS its copy (which isn't due until February 28), it will save everyone a lot of grief later on. If the change is made after the original forms have been sent to IRS, there will probably be a mis-match with IRS computers now having two 1099s, even though one may have the tiny "CORRECTED" box checked.

Attaching: I constantly hear people complain that they can't finish their tax returns because they haven't yet received all of their 1099s. This is a bogus excuse for a couple of reasons. First, the amount of income you received and will be reporting on your 1040 is not dependent on what shows up on the 1099. Your records (ideally QuickBooks) will have those amounts. Second, 1099s are not required to be attached to 1040s. W-2s are required to be attached to 1040s if there has been any Federal income tax withheld. Same thing with the States. They will not give you credit for those withholdings without the W-2s attached.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/01/2003 01:21:00 PM Send this post: