Tax and Financial News for March 2017

Wait a Minute - My 1099 Doesn't Look Quite Right

how to fix my 1099The rules around Form 1099s are long and can be complex. So what are you supposed to do if someone sends you a 1099 that doesn’t look quite right? Perhaps they made a mistake and put an extra zero on it, taking your income from $2,000 to $20,000! Worse yet, what if it looks like they intentionally put down the wrong amount? Mistakes and fraud both happen, and we will look at how to handle each situation below.

First, let’s start by understanding why 1099s are so important. They are sent out by payors to both you and the IRS. They act as your record of the interest, fees or other income you earned that year. The types of 1099s include:

Since these forms go to both the IRS and you, the IRS will match up any 1099s they receive as sent to you against what you report on your return when you file. Failing to report a 1099 all but guarantees you will receive a tax notice.

Unfortunately, incorrect Form 1099s are not uncommon. The first thing you should do if you know or suspect the 1099 you received isn’t right is to ask the payor to correct it. If they haven’t sent the corresponding copy to the IRS, then they can simply destroy it and reissue a new one; if they’ve already sent it to the IRS, they can issue a corrected version. Remember that 1099s are supposed to be mailed out to recipient taxpayers by Jan. 31, but issuers have until the end of February to send the IRS their copy. So if you check your form and act promptly, it can potentially save you a lot of hassle.

The type of error also matters. If you don't get a 1099 at all, for example, you can simply report all the income since over-reporting income doesn’t create a “mismatch” issue with the IRS. The IRS’ only concern is people trying to hide income – never the opposite.

Be extra careful if you contact the payor to issue a corrected 1099 or because you didn’t receive one you think you should have. They could end up issuing two 1099s to you and the IRS because of timing overlap between the original issuance and your request to correct. If this happens, the IRS’ computer system will think you have double the income you actually do.

At this point, you are probably thinking, “Wow! This is a lot of work on my part for someone else’s mistake.” If so, you are correct. And the IRS agrees with you, so they created penalties for 1099 issuers to ensure they are timely and accurate. However, this is not the IRS’ main motivation for these rules. Most penalties apply to failures to issue the forms since the most important thing to the IRS is that no one can skip out on reporting income. Issuers have little motivation to not issue a 1099 at all as well since this helps substantiate expenses and deductions.

In the end, the best thing you can do is to check out your 1099s as soon as you receive them to make sure they are accurate – and contact the issuer right away if they are not to avoid the IRS receiving double 1099s. Also, remember that you can always over-report income above and beyond a 1099 received or never received at all if the error falls that way.