1099 Valuation Issues

[ZoomnFinancial]

Summary

Client (NEW to me) received a 1099 from former employer. Items included on the 1099 are for time and equipment that owner purchased as part of job. Client agrees with the "time" amount but disagrees with the equipment evaluation.  

Details

Client worked for company since 2016 and left in 2018 for what I believe is a competitor of p;f employer. Company is an outdoors marketing company from what I gather. Client never received a 1099 for "equipment" in the past nor are current employees receiving one for equipment. Some of the equipment was fishing gear, camera and a 4 year old computer. Much of the equipment being recorded was given / used in 2016 & 2017. Former employer is also attempting to 1099 client for one of the business trips they took to a large marketing convention (again was never done in past) as he was accused of using the convention to find new employer. Left the company 3 months after and client said he was doing the work he was assigned not on a "recruiting" trip. Employer was there the entire time and said nothing before hand. Client's old e-mails were deleted immediately upon leaving company.

I'm thinking employer is recording as such out of spite especially since it's a change to how historically it's been handled.

In the end it's ~$6k of additional income (from what I have heard) but doesn't seem right to me. Client has a worksheet from former employer to match values on 1099. 

   

  

[ILLMAS]

Has the person notified the notified the issuer of the discrepancy?  I would recommend for him/her to submit proof of payments he/she received.

[ZoomnFinancial]

1 minute ago, ILLMAS said:

Has the person notified the notified the issuer of the discrepancy?  I would recommend for him/her to submit proof of payments he/she received.

Yes. Owner basically said talk to my accountants as he wasn't sure. Finally received the worksheet from them. Agrees to receiving the items but most of the "equipment" was from prior years. Plus why would the methodology change? No signed documents stating as such.  

[ILLMAS]

This stinks, former employer is probably including the full-cost of the equipment, which he also benefited from, your client should of received the FMV of the equipment, not the full cost.  I would report the FMV of the equipment he kept as other income and not subject to SE.

[Lion EA]

Did he return the equipment when he left? If your client still has the equipment, then I agree it would be at FMV when he left.

[Medlin Software, Dennis]

"Employer" and "1099" do not mix.  Whatever amount is legit, go through the process of getting a corrected W2, which puts the "trouble" back where it belongs, incorrect classification by the employer.  For your client, I "think" (it has been more than a decade since I did one like that, and I no longer do tax returns other than my own) you can file with the information as is, adjusting wages as needed (and telling the IRS why the 1099 is wrong, and what the correct wages should be) hopefully without waiting for contact from the former employer.  The employer will eventually get a nasty gram to fix/dispute their incorrect reporting, and the resulting penalties, interest, and make up taxes on the amount not properly reported as wages.

Apologies if I have the steps wrong, but I hope I expressed my thought well enough to trigger whatever the current procedure is.  It is a personal pet peeve when employers cheat their de facto employees, and I have no issue with "sticking" them with the unpaid taxes, or even if they somehow win a dispute, the cost of defense.

[ZoomnFinancial]

6 hours ago, Medlin Software said:

"Employer" and "1099" do not mix. 

Yes I know. Haven't seen the rest of the information but from the sounds of it he gets paid as a contractor all through the 1099. Employer in this case is used lightly.  Thank you for the feedback.  

[JohnH]

It might be practical to report the full amount of the 1099 on schedule C, back out the convention expenses as T&E, then enter an adjustment to the amount allocated to equipment as an "other" expense with an explanatory note attached. If the total overstatement is $6K, then there's a pretty good chance it will sail through with no questions asked.  That way you've disclosed everything and the chances of a CP 2000 are minimized. 

[DANRVAN]

It's a waste of time to battle over 1099's.  As JohnH suggested report the full amount and back out any excess.

 

[JohnH]

From the limited amount of background info given, I'm guessing either the individual did some things while an employee that were questionable, or else the former employer believes some questionable things were done even if there's no direct evidence.  In any event, the former employer wants to use the 1099 as a way to retaliate.  It's wrong on a number of levels, but that's the situation the client & tax preparer must deal with.

The fact that the employer is tossing this back to the accountant, who is most likely trying to run interference, means it's unlikely they will amend the 1099.  Even if they send a corrected copy to the client, there' no guarantee they will follow through with correcting the original filed with IRS, which is already in the system. SO there are plenty of ways for this to get sideways, beginning about 18 months from now when everybody's memory has faded.

With $2,400 to $3,000 (at most) in taxes in play, it's an exercise in futility to get things corrected at the source.  The path of least resistance is to handle it on the Schedule C with some brief documentation.  Paper file it and hope it slowly makes its way through the system.  BTW, I'd keep the explanation very simple and short.  No sense writing an epistle explaining how and why you think the former employer is being a jerk.  Just give enough information to increase the probability the problem will go away.  

That's what I would most likely do,  ASSUMING I agreed to take on this shaky situation in the first place, which is not a given.  My response would be quite different if the overstatement is $60,000. 

 

[ZoomnFinancial]

Thanks to all who replied. I really appreciate the ideas on how to handle if I do choose to take this on. 

[GingerM]

If he received both a W2 and a 1099 he should file form 8919 with code H.

[JohnH]

Form 8919 probably won't help in this case.  He will wind up reducing the self-employment tax by half,  but he will be paying income tax on the $6K overstated income. Plus, it invites further scrutiny, which is the opposite of what he's looking to accomplish. You're not wrong to suggest the Form 8919, but I think he really just wants to get this behind him and move on.