In years past, it may have been common for individuals to receive a single W-2 from their employer. This made filing taxes relatively simple and straightforward even in the days before tax preparation software had reached today’s levels of sophistication. However, taxpayers in today’s economy rarely have as simple and straightforward tax filings. Many individuals have become their own boss by starting their own business. This can create an array of business entity and tax considerations. Furthermore, and more commonly, many taxpayers have taken on second and third jobs where they work part-time as a contractor. Contractors receive a 1099 rather than a W-2 and typically owe additional self-employment taxes.
The above only captures a small degree of the potential complexities introduced by 1099 income obtained through work. 1099s can also be issued for an array of other reasons. Unfortunately, taxpayers who fail to report all income regardless of its nature can set themselves up for painful tax audits and penalties. If you have been audited due to failure to report 1099 or other income, tax attorney Robert Hoffman can help.
What Types of 1099s can I Receive and What do they Mean?
There is a vast array of 1099s a taxpayer can receive. Some 1099s, such as the extremely common 1099-MISC, are issued when the taxpayer earns more than $600 while working as a contractor for one individual or business. However, even if the $600 threshold is not met, the taxpayer still has an obligation to report and pay taxes on the income.
For taxpayers who have significant investments or savings, they may receive other versions of the 1099. For instance, they may receive a 1099-INT detailing interest income they received in the tax year. A 1099-DIV states the dividend payments received by the taxpayer. The taxpayer may also receive a 1099-R if he or she is fortunate enough to have income from a pension plan. Other 1099s the taxpayer may receive are:
- 1099-G for state and federal income tax refunds
- 1099-G also for unemployment benefits received
- 1099-S for real estate transactions
- 1099-B for broker transactions
In short, taxpayers can receive an array of 1099s and the above is only a partial recitation of all the versions. Needless to say, things can get complex quickly and it can become difficult to keep track of every 1099 if you happen to receive a significant number.
What Can Happen if I Fail to File Some or all 1099s with my Taxes?
Unfortunately for taxpayers who may have lost a 1099, misplaced it, or otherwise failed to include it on their tax filing this is one of the easiest filing failures for the IRS to detect. The reason for this is because the IRS engages in processes known as form matching and information matching. What this means is that both the recipient and issuer submit a copy of the 1099 income report to the IRS. The report is filed under the Social Security number of the individual named on the 1099. The IRS has sophisticated computer systems that ensures that two corresponding copies of the 1099 income are received. If the two copies of the 1099 income are not received, the IRS knows that either the taxpayer or the issuer of the 1099 failed to report correctly.
In some cases, the individual that failed to report the 1099 will simply receive a bill from the IRS for the unreported income. This may include penalties and interest. In other cases, the consequences can be significantly more harsh. If the amount you failed to include is significant, the IRS may attempt to levy a civil fraud penalty at 75% of the amount of underpayment that can be attributed to fraud. If it appears that you engaged in willful steps to conceal income or avoid taxes, you may even face charges for tax evasion. A conviction for tax evasion can result in up to a prison sentence of up to 5 years and significant fines and penalties. Penalties of this magnitude are fairly rare, but if badges of fraud are present, the IRS may elect to pursue felony charges of this nature regardless of your actual intent.
Work with an Experienced Los Angeles Tax Attorney When Facing an Audit
If you have been contacted by the IRS regarding unreported income and an audit or examination, it is essential that you protect yourself from the worst-case scenarios. California tax attorney Robert Hoffman of the Hoffman Tax Law Offices can provide representation for IRS and California Franchise Tax Board audits. To schedule a free and confidential consultation call 800-897-3915 or contact us online.