1099 Misc

[Diane]

I have a client who received a 1099Misc for more than what she was paid. She has copies of the checks she received and they add up to less than the 1099. She has tried to get a corrected 1099, but they refuse to do so. Can I just report the amount on the 1099 as income, then deduct the difference as an expense? She shouldn't be paying income tax/self employment tax on monies she did not receive.

Diane

[Maribeth]

Yes, just enter the 1099 as revenue and then show the difference as an expense. If she has more income than just what is on the 1099, you could also show it as a "refund".

Maribeth

[Diane]

Yes, just enter the 1099 as revenue and then show the difference as an expense. If she has more income than just what is on the 1099, you could also show it as a "refund".

Maribeth

Thank You,

Diane

[jainen]

>>show the difference as an expense<<

I disagree. There is no justification for claiming an expense that can't be documented and in fact you know it didn't exist. Although the taxpayer could claim logic or ignorance, the tax preparer can't make excuses like that.

What would you do if the 1099 showed LESS, or there was no 1099? You would report the income correctly using the client's own records. That's what you should do in this case too. You can either file a disclosure to explain why you are not following the 1099, or wait for an IRS letter to respond to.

[JohnH]

Page C-3 of the Schedule C instructions simply states that if you are reporting less than the total shown on your 1099-Misc form(s), you should attach a statement explaining the difference. That's what I would do, and maybe include a listing of the checks as a part of the statement. There's no justification for recording an expense that doesn't exist, although as a practical matter I wonder if it would be an issue if ther return wre audited (provided the net income on the Sched C is correct).

[taxxcpa]

Page C-3 of the Schedule C instructions simply states that if you are reporting less than the total shown on your 1099-Misc form(s), you should attach a statement explaining the difference. That's what I would do, and maybe include a listing of the checks as a part of the statement. There's no justification for recording an expense that doesn't exist, although as a practical matter I wonder if it would be an issue if ther return wre audited (provided the net income on the Sched C is correct).

Here is the ultimate solution:

Report the gross amount on the 1099 as income on Schedule C.

Issue a 1099 to the person who overstated the 1099 for the amount he overstated what he paid.

You could justify it as an amount he 'WITHHELD" as a fee of some kind when he paid you

[jainen]

>> the ultimate solution<<

"Ultimate," as in "last or final"? I doubt it. I think this approach would be the gift that keeps on giving.

[OldJack]

Well... in all likelihood the payer has issued a correct 1099 and the client is wrong. Its probably an end of the year payment that the client didn't cash until the next year.

[jainen]

>> the payer has issued a correct 1099 and the client is wrong<<

Good for you, OldJack. I am of the same mind. The payer didn't just make up a random number; it reflects something specific. That's why the IRS won't let you do a substitute W-2 just based on paystubs until the employer has a chance to issue the real thing.

As a preparer I can accept a client's P&L records in lieu of 1099's but when he gives me conflicting information it must be reconciled in a legitimate way. Claiming expenses or refunds that were not actually made is, frankly, irresponsible.

[Nighthawk]

I have a client who received a 1099Misc for more than what she was paid. She has copies of the checks she received and they add up to less than the 1099. She has tried to get a corrected 1099, but they refuse to do so. Can I just report the amount on the 1099 as income, then deduct the difference as an expense? She shouldn't be paying income tax/self employment tax on monies she did not receive.

Diane

From past experience and some 1099s we issued, the payer probably withheld backup taxes withheld, but they should be listed on the 1099 too (They could have had an inexperienced person filling out the 1099.

I would list the whole 1099 with an explanation, or fax the payer with the taxpayers check figures and ask why? I hope this helps.

[kcjenkins]

Right. Just because the client says, 'these are all the checks I got from him' and shows you a list, does not mean that there was not other income, for example. I had one like that a couple of years ago, where the client told me that he did not know why the 1099 was wrong, but that it was for 6K more than he got paid. I knew the payor, so I went ahead and called him, to ask about the discrepancy. Turned out, the amount of checks was correct, BUT what my client had 'forgotten' to mention was that he also got a backhoe 'in trade' for some work, which they had both agreed at the time was worth .......you guessed it, 6K.

Mystery solved, although the client did not like learning that he had to pay taxes on that equipment. Of course, he also had a new asset to depreciate, so once he understood how it all worked together, he felt better about it. And he really had not meant to mislead me, he really did not realize that the backhoe was a payment. Well, not a taxable one, anyway. We had a nice talk about 'barter' and he's been careful about telling me about those deals ever since.

[taxxcpa]

Well... in all likelihood the payer has issued a correct 1099 and the client is wrong. Its probably an end of the year payment that the client didn't cash until the next year.

The client is always right.

[Lion EA]

Well, if she's really, really sure...she must have some other clients that didn't send her 1099s, so use the amount she claims she earned, and have her sign your engagement letter. If she and you think her amount is right, you won't be raising any red flags if her total is as much or more than the total of all the 1099s she does receive. Is her total income per her the same as her total bank deposits for the year? And, did you ask her if she received any reimbursed expenses, repayments of out-of-pocket costs, etc.? I've had clients that knew how much the project paid, but forgot that their total payments from a client(s) were higher due to reimbursements on top of the project cost. She needs to report the full amounts she received, because she'll be deducting her expenses, including reimbursed expenses, on her own schedule C.

[Diane]

The client has hired an attorney to get the money she is owed. The contractor DID NOT pay her the full amount of their contract, but DID put it on the 1099. So, right now, there is a lawsuit pending. Since I'm on the subject, will her legal fees be deductible if she receives the additional income?

[BulldogTom]

Legal fees for the collection of income are an ordinary and necessary business expense. No actual collection is required, just the bona fide attempt to collect amounts owed to the company justify the expense.

Tom

Lodi, CA

[SCL]

The client has hired an attorney to get the money she is owed. The contractor DID NOT pay her the full amount of their contract, but DID put it on the 1099. So, right now, there is a lawsuit pending. Since I'm on the subject, will her legal fees be deductible if she receives the additional income?

more of the story comes out. i know from my own experience that disclosing all the information in a question is difficult - but more info offered gets a better response.

my question about info not offered: is this 1099 the only source of income?

the irs does not match individual 1099's. if total income reported on this year's return is more than 1099 slips, then no problem.

if the lawsuit gets more money later, report it later. overstating a 1099 for a deduction is the other party's problem.

[Diane]

This was her only contract for the year. She has had nothing but trouble from these people. So, this would be her only 1099 for the year. I still don't know if I should report the 1099 as shown and then record a subtraction for the difference under either Refunds or Other Expenses.

[JohnH]

Why wouldn't you follow the directions on Page C-3 of the Schedule C instructions?

That's why they printed them.

[SCL]

Why wouldn't you follow the directions on Page C-3 of the Schedule C instructions?

That's why they printed them.

i'm in john h's line now.

how much money are you talking about?

[Diane]

OK, I'll follow the instructions. We are talking about $2,000/$3,000. I'm just trying to avoid any letters from IRS about the mismatch. Attaching a statement explaining the difference may or may not avoid IRS sending a letter.

[RoyDaleOne]

Normally, 1099 Misc are based on the checks written by the payor. In all cases this may or may not match the correct reportable income by the payee.

1. If the payee is on the accrual method.

2. If the amount differs because of timing issuses of when the checks are prepared by the payor and when the payee receives the checks. The timing issue can happen at the start of the year and at the end of the year.

The system has many flaws.

As far as the instructions to Schedule C, if I don't record my income, say by customer, and I have more than one customer, how am I to know whether the 1099 Misc matches my reported income or not? Now, if I have only one customer that is a different story as to knowing id there is a match.

[taxxcpa]

OK, I'll follow the instructions. We are talking about $2,000/$3,000. I'm just trying to avoid any letters from IRS about the mismatch. Attaching a statement explaining the difference may or may not avoid IRS sending a letter.

There won't be any mismatch if you report the gross and deduct the unpaid amount on the 1099. The IRS only matches gross. Of course the return could be audited and questioned, but it would not be an automatic inquiry like you would get if you reported a lower gross amount.