It's Almost That Time of Year Again...

Author: Keith Huggett

If you've received money from just about any source other than work, you'll probably be receiving a 1099 form this year. These forms are informational returns that let you and the IRS know how much money you received, and since the IRS gets a copy, they are major audit fodder. 

Here are three major red flags for which you should pay close attention. 

1. Write-offs - If your 1099s come from self-employment income and you file a Schedule C, your return is more likely to be audited. The IRS audits small business people because they expect to find overstated expenses. As such, you should be very careful to ensure that you can document all of your write-offs.
2. Ensure that every 1099 is reflected on your return - A few years ago, the IRS invested in new computer technology that automatically matched returns to 1099s. This technology makes it very easy for them to spot discrepancies and flag your return for an immediate audit. Reporting more gross income than comes in on 1099s will usually not be a problem, since the IRS knows that you might receive income from payers that don't send a 1099.
3. PayPal fee deductions - Third-party payment services like PayPal are now required to file 1099s for income that they send you. Because of this, you may not be receiving a 1099 from vendors that pay through PayPal. Where the problem occurs is if you've been recording your income after PayPal takes its fee. PayPal will report the income that they paid you before their fee, and you will need to subtract those fees as expenses. If you don't, your return won't match your 1099.

Whether or not you pay close attention to these considerations, the IRS will. Given the large number of different 1099s and their complexity, keeping them straight can be hard. The Tax Office, Inc., knows how to handle them, report them and protect you from an unpleasant and expensive audit. If you expect to be receiving a 1099 form this year, it's a great time to contact us and get started on your taxes. If you would be interested in learning more about 1099s in general there is an informational white paper available, entitled Form 1099-Misc, The Good, The Bad, & The Ugly.