Let’s say you’re self-employed, and you get a 1099-MISC from a customer. He notes he paid you $1,200. However, he really paid you $900. What do you do?
First, you contact the customer and attempt for him to correct the error. Hopefully, you can show him a copy of your invoice(s) or other documentation, and he or she will issue a corrected 1099-MISC.
But what if he refuses? Here, practicality must be used. Let’s say the total of your gross receipts is $32,000, and the total of your 1099-MISCs (and 1099-Ks) is $29,000. I’d likely just enter the 1099-MISC as received, and lower the “other” gross receipts by the extra $300. (IRS instructions on information returns state to use the actual number. The problem is that the automated underreporting (AUR) unit will almost certainly send you a notice if you use the wrong number.)
Earlier this week I was faced with a different situation. My client, an amateur gambler from Indiana, entered a poker tournament in Iowa. The tournament had a $300 buy-in, and my client cashed for $2,300. Under federal law, no W-2G would be issued because the amount of his win, $2,000, is less than the threshold for issuing a W-2G in a poker tournament ($5,000). However, under Iowa law withholding on nonresident’s winnings begin at gross winnings of $1,200 (at a rate of 5%). My client received a W-2G for $2,300, not $2,000. What should be done? (My client has excellent records, including the tournament buy-in receipt.)
The amount of the win is $2,000, not $2,300. Indiana does not allow gambling losses to be deducted on their state income tax returns, so this is an issue for my client. (This can be an issue for individuals on federal returns, too. Gambling losses are an itemized deduction, so they don’t impact Adjusted Gross Income (AGI). Many tax items are tied to AGI, such as being able to contribute to a Roth IRA.) However, if I enter $2,000 as the amount won for that W-2G, the IRS’s automated underreporting unit will flag the return.
The solution is to enter the W-2G as it was received, and then subtract out the $300 buy-in just below this. I included an explanation: “Buy-in for W-2G winnings.” Should the IRS, Iowa, or Indiana flag the return, we can respond with a perfect paper trail showing that what we did is to put the income my client really earned on the tax return. Given that this is a fundamental principle of US taxation, all should be well.
The same process can be used for other information returns that are erroneous: Enter the “wrong” numbers, and modify them with an explanation. Do realize that there is a chance that the AUR unit may ask for proof. This is yet another reason why the solution to many tax issues is to document, document, document.
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Russ,
Where do you “enter” a 1099-misc for someone filing a schedule C that the IRS would see it?
For income that’s not attributable to an individual, I usually use “Returns and Allowances” (line 2, Schedule C). The line is labeled, “Returns and allowances plus any other adjustments.” I’ll use a break-out schedule to note exactly what I’ve done and why. The IRS might not read it when the return is filed, and the client still might get a notice, but given that everything has been fully disclosed and the correct people are paying the correct tax, all should be well.
Hey Russ,
Could you please clarify where at/what you mean when you say enter the “wrong” numbers (of a W2G) and then modify them with an explanation? Is there a certain line # or spot I could put such a thing? Perhaps I missed it, but I only see entries for adding things like type of wager, transaction number, etc. Thanks for your help.
The exact method of how this is done depends on the software you use, or if you are doing it by hand. Let’s say you have a W-2G that’s for $2,300, but it really should be for $2,000. With the software that I use, I would enter $2,300 (per the W-2G), and in Other Income (which is where gambling winnings flow) enter “-$300” for “Adjustment- See Explanation.” I would attach an explanation of what I did and why.
Unfortunately, how this is done is very dependent on the exact method you use to prepare your returns.
I have a W-2G (2014 version/logo) from a casino that is dated 1/1/2015. Appears they should have used the 2015 version W-2G. What now? Do I hold the W-2G for my 2015 return or file it this year (2014 return)?
Assuming you won the prize in 2015, it’s a 2015 issue for your 2015 tax return. When you eventually file the 2015 tax return, your tax professional will have to note the W-2G as “non-standard” as the 2014 was crossed off and replaced by 2015. That doesn’t impact you–income earned in 2015 is clearly taxable in 2015.