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Sunday, February 6, 2022

Dealing with 1099 Errors - Input Desired

Tax season has started and by now (February 6) we should have our 1099s and W-2s and perhaps a few other reporting forms. We need to review them for accuracy, even forms from the IRS, such as Letter 6419 on the advance Child Tax Credit (see IRS Fact Sheet (FS-2022-5) on possible errors).

Some forms, such as Form 1099-C on cancellation of debt might be correct from the issuer's tax requirements, but not correct for the recipient. For this 1099-C issue, I've blogged on it before (4/13/13 and 6/21/21). The 1099-C instructions also remind the recipient that their debt might not have really been discharged and they should not report the income until the year it has truly been discharged. The IRS doesn't tell the recipient what to do with the 1099-C that isn't reportable. That's too bad because when the recipient figures out it isn't reportable for the year printed on the 1099-C, the IRS doesn't know.

I'm working on a paper for a longstanding activity of the Tax Section of the California Lawyers Association to propose that the IRS create a new form to allow taxpayers to reconcile erroneous reporting forms. Beyond the 1099-C issue, I have the following examples of why a form would help.

Form 1099-K that is way out of line with the recipient's business receipts. Also, starting for this year, there will be more of these forms issued due to the change in the de minimis filing threshold for third party settlement organizations.

Form 1099-INT when the account is owned by more than one taxpayer but only one form was issued.

Form 1099-R for a qualified charitable distribution. While QCD gets noted on the 1040, an explanation on a form might help too.

Form 1098 where the mortgage debt belongs to more than one taxpayer.

What do you think? Any examples you'd like to share with me to support the need for a tax form for reconciling information reports to avoid or hopefully at least lessen the number of notices issued by the IRS asking why the form wasn't fully reported.



Anonymous said...

Hi Annette, I think this is a brilliant topic - and one that is very timely for the IRS. As they begin to build out a new 1099 system that is supposed to launch in January, 2023 - it would be prudent for them to consider how to structure the technology around a more efficient tax administration process.

Form 1099-NEC is similar to the K - the 'gross' reporting requirement is extremely confusing to taxpayers because those amounts can exclude credits or refunds or fees that were deducted - and does not represent the true business receipts. These nuances create confusion and often results in back and forth customer service type issues between the payees and the issuers of the Form who believe it should be corrected.

These gross amounts do not represent a true picture to the IRS of business receipts - so this also can lead to follow-up audit issues as the taxpayer struggles to reconcile the amounts through the income tax return process, in order to create the picture of the true income the business actually received.

Anonymous said...

I would not limit the usefulness of this to "errors" which the issuer has a duty to correct. Timing issues are a common cause of adjustment for funds in transit at year end. The reporting may be on a cash basis while the recipient is on an accrual basis. The payment may be passthrough nominee income to someone else, or prorated to a trust in the partial year of a taxpayer death. When the secretary of state declares a business VOID for nonfiling, the expenses, income, AND TAX WITHHOLDINGS, of that void business EIN are properly reported on sch C, but currently there is no way to redirect withholdings. I am sure other situations are possible for which such a new form would be useful to both taxpayers and auditors.

johnnycarolina said...
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