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What to do if your 1099 is wrong

If you're self-employed or freelance on the side, you should have received 1099s from all your clients by now. If those numbers are wrong, it's important to have them corrected.

By MSN Money Partner Feb 7, 2013 12:53PM

This post is by Robert W. Wood of Forbes.com.

 

It’s 1099 time so your mailbox may be full of the little tax reports. All that data is going into an IRS computer to be matched against your tax return when you file it.

 

But what if you receive a Form 1099 you know to be wrong? Say you’re paid a consulting fee of $30,000, but the 1099 you receive is for $300,000. What should you do?

 

Promptly contact the issuer, show you really were paid $30,000, and ask the issuer to reissue it correctly. Ideally, do this before the issuer sends the 1099 to the IRS. Forms 1099 should be sent to taxpayers by Jan. 31 and to the IRS by Feb. 28. So if you call and write the issuer of the 1099 as soon as you receive it, the issuer may be able to simply destroy the incorrect one and issue a new one.

 

Ideally, get a letter from the company saying that it erroneously issued a Form 1099 for $300,000, destroyed it, and then properly issued one for $30,000.

 

Why keep this? Because you may find that the company did transmit the incorrect Form 1099 to the IRS after all. This way you’ll be able to explain it.

If the issuer of the 1099 has already sent the erroneous form to the IRS, ask for a "corrected" Form 1099. The "corrected" box on the form tips off the IRS not to simply add up the figures on the two Forms 1099. What happens if the issuer won’t cooperate? There’s no good answer.

 

You'll want to address this on your return. For example, you could show the $300,000 payment on your return (on line 21, or on a Schedule C), and then explain the $270,000 overstatement. You might do this in a statement or footnote, as by showing $30,000 on line 21, but adding "see statement" to explain it.

 

Does this make your audit risk higher? It may, and that’s an argument for doing all you can to make sure the Form 1099 is correct in the first place. But you probably don’t have much choice about this. After all, you practically guarantee yourself an audit if you merely report the $30,000 figure and don’t explain it. In that event, the IRS will likely send you a notice asking for tax on the $270,000.

 

Whatever you do, pay attention to Form 1099. The IRS sure does.

 

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