Although it shouldn’t happen in theory, we often see incorrectly issued 1099s. And with the increased 1099-K reporting coming up, we’re expecting to see many additional 1099s that are not correctly reported. For example, you may have received a 1099-K and 1099-NEC reporting the same income, or you may receive a 1099-K for personal reimbursements rather than business income. We have also seen 1099s accidentally sent twice to the IRS, and they are both on file, showing double the amount of income that you actually received.
What Should I Do If My 1099 Is Incorrect?
The first thing you should do if you receive incorrect 1099s is to add up the total of your 1099s and see if it exceeds the gross income you’re reporting on your federal return. If you have a lot of clients and the total amount on your 1099s does not exceed your total gross income, you shouldn’t have an IRS notice issue. However, if you do end up under audit, you want to be ready with your book and proof of income received.
If you have a few larger clients, and one of those issues a duplicate 1099 or includes a substantial amount of payments that are also reported on a 1099-K, then you are more likely to be in a situation where your total 1099s exceed your true gross income. Another common situation we’ll see is when the income deposited into your bank account is lower than your 1099-Ks because the bank deposits are net of the merchant service fees.
No matter why your total 1099s add up to more than your actual gross income, you should be proactive and fix it on your return rather than waiting for the IRS to correct it in a notice letter. For example, a common issue we see is that the 1099-K received will be greater than your gross receipts since your gross receipts are net of merchant service fees. If your 1099-Ks are greater because the bank deposits are net of merchant service fees, then you would want to put your total 1099-Ks for gross income and then show the merchant service fees as an expense even though those expenses were removed directly from your provider.
If a 1099 you received was inaccurate, you can apply the same strategy by inputting the total 1099s on your return but reversing the incorrect item and fully disclosing the issue. This way, you’ll prevent an IRS notice and also explain the item upfront so that if it is further looked into later, it’s clear that you stayed consistent. Your books and bank records should also provide further support on the true income of your business.
For example, if you have one big client and that client issues you a 1099-NEC for $200,000, but $50,000 of those payments were paid by credit card, you’ll also be receiving a 1099-K for $50,000. So your total 1099s are $250,000 when you only actually received a gross income of $200,000. The strategy would be to input the $250,000 on your income tax return, and you can even show that you’re matching the 1099s specifically with a detailed description, then show a $50,000 reversal and disclose with an explanation in the footnotes.
Can Your Customer Amend an Incorrect 1099?
Yes, if your customer is willing to correct the 1099, then it can be amended. At the top of the Form 1099-NEC, there is an option to select “corrected.” The amended 1099s should be mailed to the IRS and the forms can be ordered here. While the general statute of limitations to amend is three years, you’ll want to request your customer to revise the 1099 at least before the time you file your return. The longer you wait to have your customer amend the 1099, the more likely that you would have already received an IRS notice for the additional income.
Are There Any Penalties for Filing Incorrect 1099s?
Yes, though we do not usually see penalties from the IRS when the amount issued on the 1099 is incorrect. The penalty is for information returns and a 1099 is one type of information return. The penalties are shown here. The information return is supposed to be reported correctly and timely, otherwise it is subject to a penalty; however, the IRS is unable to double check whether the amount reported is correct. As a result, the primary reasons we see penalties issued are for late filing and incorrect name and social match.
Hire an Experienced Tax Professional
If you are concerned about an inaccurate or misreported 1099, an experienced tax professional can help you avoid getting audited or facing other consequences such as penalties and fees. At DiLucci, we can help you in reviewing your tax documents, determining whether you need to file amended returns, as well as helping you prepare and file any amended returns.
Our team offers a full suite of tax services, including:
- Individual and business accounting
- Tax return preparation
- Internal Revenue Service (IRS) tax resolution
- Business bookkeeping
- Financial analysis
- Cashflow management
- Tax planning
As always, we’re here to help. Click here to schedule a consultation with our office and we’ll follow up with you promptly.