Tax Guru – Ker$tetter Letter

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Archive for the ‘1099’ Category

Do not send 1099s & W-2s to IRS too early

Posted by taxguru on January 24, 2014

Every year at this time, I need to remind people that being quick to prepare and send 1099s to IRS can lead to problems, such as in this email I sent to a client.

In regard to filing W-2s and 1099s, a common mistake people make is sending them too soon to the IRS and State.  The due dates are staggered for a very good reason.

By January 31, you are supposed to send copies of the W-2s and 1099s to the payees.  If they see any problems with any of the info on the forms, they need to get back to you and have you correct them.

It’s not until Feb 28 that the IRS and DFA are supposed to be sent their copies.

Big problems happen if you send in W-2s and 1099s with errors on them too soon.  You will then have to prepare Corrected forms and send those in.  What often happens is that IRS misses the checked Corrected box and sees two 1099s or W-2s for the payee and sends them tax due notices for not reporting the income from both the original and corrected forms.  I have seen this happen a lot.

The best way to avoid this is to only send IRS and DFA one original form and try to avoid sending in corrected ones.  When I send out 1099s, I include a note to the payee to get back to me ASAP with any corrections.  If they wait until after Feb 28 to notify me of mistakes, the hassles they will face with IRS mishandling of corrected forms will be their fault.  Also, to make it easier for them to see how the amounts were determined, I include a printout of their payments from my QuickBooks file.

I hope this helps.  Let me know if you have any other questions.

Kerry

 

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Posted in 1099, IRS, W-2 | Comments Off

Slow down with 1099s and W-2s

Posted by taxguru on January 24, 2013

It’s time for another reminder to not be so quick sending IRS its copies of 1099s and W-2s.  I just sent this message to client after he sent me copies 1099s that he had already mailed to IRS.

Thanks for sending me the copies of the 1099s you submitted to IRS.  I have printed them out and put them in the corp’s tax file folder.

In the future, it would be a good idea to wait until some time in February to send IRS its copies.  The recipients are supposed to be given their copies by January 31; but IRS doesn’t need its copies until Feb 28.  The reason for the extra month is to give everyone a chance to spot any errors prior to sending the IRS copies in.

If you do later send in a Corrected 1099 to correct an already filed erroneous form, IRS will often miss the “Corrected” box entry and will show both of the forms as valid ones in their computer and expect to see the total of both of the amounts on the payee’s tax return, creating a mess to straighten out.

Let me know if you have any questions.

Kerry

 

Posted in 1099, IRS, W-2 | Comments Off

Working with erroneous 1099 amounts

Posted by taxguru on January 12, 2010

Q:

Subject:  Taxable Prizes

Hi Mr. Kerstetter,
 
I won a prize during July 2009.  The official rules posted in June stated the value of the prize to be $5,084.  I received part of the prize in October 2009 and on that day I priced that model at a nearby store to be $3,010.  About a month later I received the final part of the prize and I again valued it at the same store, $599.  A total fair market value of $3,609.  I contacted both the sponsor and the fullfillment company regarding the 1099 they will send me later this month.  Both stated it would be for the amount posted in the rules and that if I disagreed I could dispute it with the IRS. I requested a copy of the invoices to see the actual fair market value of what the spent and they declined. The 1099 instructions state the FMV of any prizes should be used.  So I am not sure how they are getting away with the fraud using average retail value when they had to actually order these items.  Is my only recourse to wait to have the 1099 in hand and call the IRS to issue them a 4589?
 
Thank you

A:

You must either be trying to prepare your own tax returns or are working with a new inexperienced professional tax advisor because this is a very easy situation to deal with.  I have had several similar cases over the years exactly like this.

There is no need to get into a fight with the company that awarded you the prizes over the 1099.  It is standard practice for them to use as high a value on the prizes as they can justify for their own publicity purposes.  They couldn’t care any less about any tax problems this may cause you.

Only fools accept the figures on 1099s as gospel and use them unchanged on tax returns if there is good reason to suspect that they are incorrect.

As you should know, the legal burden of proving the accuracy of the figures on your tax return is on you.  If you have done your homework and properly documented the true fair market value of the items you won as of the same dates, you can use those figures as your actual prize income.  In fact, I would even attach copies of the documentation to your 1040 to avoid any IRS need to ask for it later on.

The way you avoid any problems with IRS not matching up their 1099 figures to your tax return is to use a backup schedule for Line 21 (Other Income) of your 1040.  On it, your professional tax preparer should enter the full amount shown on the 1099 you received as a positive number.  Below that, enter “Adjustments to reflect real world retail values per attached documentation” and enter negative numbers that will bring the net value into line with what you have determined to be reality.

I have done this literally dozens and dozens of times on client tax returns over the years, and IRS has never once disputed our adjusted values.

What you didn’t mention or ask about are the deductions that you can claim due to your reporting this prize income.  Prizes of the kind you received are in the same category as Gambling income.  When you report gambling and prize income on Line 21, you are eligible to deduct gambling losses on Schedule A of up to the amount of the reported net winnings.  Of course, these have to be legitimate and reasonable.

You can count all different types of gambling losses, including office pools, lottery tickets, raffle tickets, casinos, race tracks, as well as any entry fees for the drawing you won and other similar ones during the year.  If you do a thorough enough job of documenting your losses, you may well be able to completely offset the income you are reporting on Line 21.

Again, you should be working with an experienced professional tax advisor who can ensure that these items are all properly shown on your tax returns.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Thanks Kerry – this is a great big help!

 

Sincerely,

 

 

Posted in 1099, gambling | Comments Off

1099 Forms

Posted by taxguru on January 20, 2008


Q:

Subject: 1099 forms

Kerry – I was going to run off the 1099-Misc form off the web, but they said that I’m not to copy the red form (copy A), the one that I send in.   Do you have these forms or where can I get them?  I have the red (1096) they sent thru the mail. 

A:

Those red forms are a pain in the butt to line up properly in printers, so you should buy some extras to test on.

Most office supply stores are selling them right now.  I saw them in Staples in Mt. Home last weekend.

You should remember that the 1099 forms are only required to be given to your unincorporated workers by 1/31/08.  The red forms that are required to be sent to IRS don’t have to be postmarked until 2/29/08.  It’s not a good idea to rush the IRS’s copies in until all of your 1099 recipients have had a chance to review their copies for mistakes.  A big mess will ensue if you send in an incorrect 1099 to IRS and then later send them a corrected one.  It’s much better for everyone to only send in one accurate form per payee during February.

Good luck. 

Kerry

 

 

Posted in 1099 | Comments Off

 
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