IT AIN'T NECESSARILY SO

Many taxpayers believe that if you do not receive a Form 1099 (MISC, DIV, or INT) from the payer you do not have to report the income on your income tax return. 

This is one of the reasons for the $350 Billion “tax gap”.  The most recent study had determined that a large percentage of this gap is a result of underreporting of income by small business owners.  And this is why Schedule C businesses with minimal income or consistent losses have become an audit “red flag”.

Read my lips!  You must report taxable income if your received taxable income – regardless of whether or not you get a Form 1099.

Businesses that pay at least $600 to an independent contractor for services during the year are required to send that contractor a Form 1099-MISC.  But the independent contractor must report all income received for providing services during the year, from dollar one, whether or not they have received a Form 1099.

Some banks tell customers, when asked, that one does not have to report interest income on an account if the total for the year is less than $10.00.  This is an outright lie!  Banks are not required to issue a Form 1099 INT if the interest earned is less than $10.00, although I have seen 1099s issued for 6 cents.  But, again, bank interest is taxable from dollar one.

Just because you have not received a Form 1099 in the mail does not mean that one was not issued, and a copy sent to the IRS.  It could have been lost in the mail, or sent to a wrong address.  Do not rely on Form 1099s when determining what income to report - use your own records.

Conversely, just because you receive a Form 1099 does not mean that the income is taxable.  States will issue Form 1099-G for state tax refunds.  But the refund is only taxable if you received a “tax benefit” for it in the prior year.  Individuals who did not itemize, or who claimed a deduction for state sales tax instead of income tax, do not have to claim the refund as income. 

Many states have stopped mailing out Form 1099-Gs, and require the taxpayer to go online to download the form.  So many taxpayers, not receiving the form in the mail, do not report taxable state income tax refunds – and will very likely get a bill from the IRS down the road. 

And while we are on the subject of 1099s - do not automatically accept that the amount reported on a Form 1099 is correct.  Check it against your own records.  A few years back a client received a Form 1099 from his bank listing interest from several accounts.  One of the accounts reported on the Form 1099 belonged to another depositor, and not my client. It was included on the Form 1099 by mistake.  In such a situation contact the bank immediately and request a corrected form.

Businesses that receive payments via bank credit or debit cards, or third-party payers like Pay Pal, began to receive a 1099 series form this year (for payments made in 2011), and in the future will have to separately report the income from these 1099s on their Schedule C or entity tax return.  But the entire amount reported on the 1099 as paid by the bank or third-party is not necessarily taxable income.  Again you must rely on your own records to determine the correct amount of gross receipts to report on the total income line.

All the more reason to keep good, contemporaneous records of both income and expenses – and why you may need the help of a competent tax professional.

TTFN