Tax paper chase

One of the drawbacks of being your own boss is you also have to be your own HR person (and hassle with getting your own health care coverage) and your own bookkeeper. Thank goodness I have the hubby as my intern!

Part of my ad hoc office accountant job is making sure that my records agree with those of my various clients. This is critical in tax season, since most of what I report to the IRS can be verified by those numerous 1099 forms from assorted companies.

I've been working on my own full-time for two years now, and for the second straight year, I've had to resolve a discrepancy in taxable payments with a company.

Fortunately, when it comes to money, I'm pretty obsessive about record keeping. So when one client sent me a 1099 that said I got about $5,000 more than I did, I was able to shoot a note right back, along with documentation, to show that they were counting some bills that I sent in December, but that the company didn't pay until January. Many mea culpas later and a new 1099 was sent out.

Unfortunately, I had to follow up a second time with the company.

Although the second 1099 had the correct amount, it didn't have that box "Corrected" checked. I just wanted to make sure that the IRS didn't get two 1099 copies for me from this one company and think I got paid more than twice what I actually did.

This is of special concern this year, since the IRS has already said it's going to be looking more closely at small businesses to help close the Tax Gap.

No problem, said the company accountant. She hadn't sent the IRS a copy of the first 1099. That paperwork's not due to Uncle Sam until the end of February.

I recount my personal payment paper chase as an example for anyone who's been collecting tax statements for the last week or so. As soon as you get any 1099 or other such document labeled "Important Tax Information," you need to check it immediately and thoroughly.

While I paid special attention to this particular 1099 because it was the largest one I get, I must admit that I wasn't so diligent about checking some of the smaller ones, both from employers and investment companies. But after this mistake, I did go back and verify them.

Confirmation of correct data also applies to your W-2. Computer programs sometimes aren't set up properly and miscalculate your tax financial information. Sometimes a minor numerical error, a transposed amount, messes up your actual tax liability.

So if you've just been stacking up those statements on a corner of your desk or stuffed them in a box or drawer until you're ready to file your return, get them out now. If you're getting them by e-mail, don't just ignore the notice that the documents are available for download. Print them out.

Then look them all over. Check them against your year-end statements. And if you see a discrepancy like I did, call the company and get it explained or, if you're right, corrected. You still have plenty of time right now to set things straight so that you don't have to explain any differences to an IRS examiner. 

If you wait until April to check and find a problem then, you'll likely have to file for an extension while you wait for the corrected paperwork to be sent to you and copies to the IRS. And that means you have to keep dealing with your taxes for longer than you really wanted.

Follow the forms: Below are some of the common (and a few not-so-common) tax statements that have been showing up in mail boxes and what they tell you and the IRS.

W-2: Wages, tips and other compensation; allocated tips; advance Earned Income Tax Credit (EITC) payments; dependent care benefits; adoption benefits; employer contributions to an Archer Medical Savings Account (MSA) or a Health Savings Account (HSA)

W-2G: Gambling earnings

1098: Mortgage interest and loan points

1098-C: Charitable contributions of motor vehicles, boats and airplanes

1098-E: Student loan interest

1098-T: Qualified tuition and related expenses

1099-A: Acquisition or abandonment of secured property

1099-B: Earnings on stocks, bonds, other investments; also bartering income

1099-C: Canceled debt

1099-DIV: Dividends; qualified dividends; capital gains

1099-G: Unemployment compensation; state or local tax refunds, credits, offsets

1099-INT: Interest income; early withdrawal penalties; investment expenses; foreign tax paid; tax-exempt interest

1099-LTC: Long-term care and accelerated death benefits

1099-MISC: Rents, royalties and other income; nonemployee compensation; excess golden parachute payments

I guess ol' Bob Nardelli, former Home Depot CEO, will be getting one of these. Of course, I'm assuming that his excessive, at least to me, golden parachute payout was an excess one in the eyes of the IRS.

1099-OID: Original issue discount and other periodic interest; early withdrawal penalties; investment expenses

1099-PATR: Patronage dividends and other distributions from a cooperative; domestic production activities deduction

OK, maybe I spent too many years in Washington, D.C., but I see the word patronage and my mind's eye automatically envisions old-school politicians in smoke-filled rooms.

1099-Q: Qualified education program payments

1099-R: Distributions from IRAs, pensions, annuities, etc.

1099-S: Gross proceeds from real estate transactions

Hmmm. I've never gotten one of these in connection with any of the houses the hubby and I have sold.

1099-SA: Distributions from health savings accounts or medical savings accounts

Late-arriving forms: There are a few statements you might need for your tax records, but because of the intricacies of the financial arrangements they cover, these documents don't always arrive before the April filing deadline. They include --

5498: Contributions to any individual retirement accounts. Because you have until the tax-filing deadline to put money into these accounts, Form 5498s aren't due to taxpayers until May 31.

5498-ESA: Contributions to Coverdell Education Savings Accounts, formerly known as Education IRAs. The child named as account beneficiary should get a copy of this document by April 30.

Schedule K-1: Distributions from an estate, trust, partnership or an S corporation. Because of the complexity of many of these arrangements, account managers tend to send out K-1s later in the tax season, sometimes not until after the April filing deadline.

But since you need to know this K-1 income amount to file your return, consider filing Form 4868, Application for Automatic Extension of Time to File, to give you six more months to get all your tax statements in hand.

You also can read more about these forms in this story.

Comments

[H. Busch]

Ran into your article when I googled National financial services is reporting your income twice to the IRS.
In reviewing my 1099's and comparing them to what is on the IRS transcript.
It popped out that this reporting agency for many brokerage firms, probably forgot to check the box that this was a corrected 1099 and IRS reflecks this twice by including both of these corrections as income.
You file your return and about 2 years or less you will get a notice stating you have underreported your income. You or your accountant would never know of this double reporting unless you got the IRS transcript and compared. How many taxpayers are being assessed on fantom income that they didn't receive?
Have you run into this problem before?
and this could be the reason for a taxpayer to be subject to the new backup withholding rules.

[dimes]

It seems like 1099-S only *really* matters if you're selling a home you've owned less than two years and the gains are taxable. Otherwise, while you should get them, I don't think they're vital.

[Denise]

Great post. I'm an independent contractor, too, and always have to solve some sort of 1099-MISC with my clients every year. It typically has to do with one or both of two things: 1) invoice date vs. payment date (I run on a cash basis). 2) re-imbursable expenses which I don't think should be logged as income. For the first case, since I don't have that many clients, and most of them I have over tax years, I just adjust my books to match if it's a clear cut case. I'm not that particular. (Hope this isn't a huge deal with IRS to show more income on the current tax year and less on the next when it's a close one. I mean, I don't even always cash the checks I do receive until the following month anyhow. Probably shouldn't adjust my books, but is the path of least resistance to be sure). The second one my accountant tells me I could just use as business expenses, but I worry about meals and such being subject to only a 50% deduction. If I'm gone for a week and the client re-imburses me for expenses directly, it should be a wash. If they want to claim the deduction, it's theirs to take. They probably prefer it to be a capitalized expense or some such thing I don't understand, but at the end of the day, I don't want to be taxed on pass-through income. Any advice on that front?