What happens when you receive a Form 1099-MISC, but you never received the income shown on the information return? You don’t include it on your tax return—after all, you didn’t receive the income, so you don’t owe tax on it. But then the IRS sends you a notice saying you do owe tax on the money.
That’s the situation that the Tax Court faced today. A Colorado insurance agent accepted a new client, and assigned the commissions to the client. (Why he would do that is not known, but the evidence in the case showed that the checks from the insurance company were deposited into the clients’ accounts.) The IRS sent a notice to the insurance agent, and the case ended up in Tax Court.
Normally, the petitioner in Tax Court has the burden of proof. However, when the underlying issue is a dispute over an information return (such as a 1099-MISC), and the petitioner cooperates with the IRS (as was the case here), then the burden of proof shifts to the IRS.
That’s very important here, because there was no evidence of any money ending up with the insurance agent. After the IRS admitted that the commissions ended up with the client (it was hard not to admit that, given that the checks were deposited into their bank accounts), they still contended that the insurance agent must have received some income. “Respondent nevertheless determined that petitioner had unreported income, around $2,000 to $3,000, which respondent asserts was the amount petitioner received from Investments for the use of his license in selling the insurance policies that generated the commissions reported by NACOLAH.” (“Investments” is the client and “NACOLAH” is the insurance company.)
There was only one thing missing for the respondent (IRS) to prove their case: any evidence. Without any evidence, the Court ruled for the petitioner. “Accordingly, the Court finds that petitioner is not liable for the 2003 deficiency and section 6662(a) accuracy-related penalty because respondent has failed to satisfy his burden of production with respect to the deficiency and the Form 1099-MISC under section 6201(d).”