1. Keep good records – include details for income, expenses, debts and deductions and keep them for 7 years.

2. Omissions may make the IRS double-check a tax return therefore make sure it is completely filled out AND signed before submitting it.

3. Be sure the income on your tax return matches the income indicated on every 1099, W-2 and K-1 . The IRS gets a copy of every 1099, W-2 and K-1 you receive and their computers will pick up on reports that do not match exactly.

4. Don’t change or mesh cash and accrual accounting methods.  A combination of cash and accrual methods, or changing accounting methods is sure to attract attention.

• Remember you need IRS permission to change accounting methods.
• Remember if you sell inventory you are almost always required to use an accrual method to account for it.

5. Classify employees and independent contractors carefully. An independent contractor can ask for a review to be treated as an employee and many do so to reduce their self-employment tax by half.  If you do not have a contract with an independent contractor, the IRS may claim they are an employee and assess back payroll taxes.

6. Co-mingled books make auditors drool.  Although there is no specific rule for Sole Proprietors regarding co-mingling expenses and income – DO NOT co-mingle business and personal accounts – it makes it very easy for the auditor to suggest a given expense is a personal rather than business expense OR to concluded that a given deposit is business income as opposed to something else.

• Have separate accounts bank accounts,  credit cards,  etc. and keep your personal and business receipts and other records separate.
• Keep a contemporaneous log of vehicle mileage & expenses.
• If you have a home office keep the work area separate, use it exclusively for business and document it.
• If you piggy back vacation and business deduct only expenses related to the business portion of the trip.
• If you plan on taking 100% deduction for any listed property expense: automobile, cell phone, computer equipment and entertainment devices, you had better be prepared to back that claim up; combining a business trip with a trip to a grocery store even once is enough to violate 100%.
• Remember there is no deduction for Meals & Entertainment expenses that are not documented-keep your receipts and annotate them if required.
• Treat your company as you would treat any other separate business relationship – keep all transactions at arm’s length.

7. If your taxes are complex hire a reputable tax preparer or learn to use tax software.  Although you are ultimately responsible for any tax return you sign, you may avoid mistakes if you obtain professional assistance; in the event a mistake does occur relaying on an expert’s advice may help you avoid penalties.

As always, small business services and taxation are our business.  If you need help Please give Art & Business Consulting a call.  We would love to engage you as a client.

The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. The content of this blog generally applies to business and individual taxation in the United States of America.  Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein.  Art & Business Consulting LLC currently does not have a certified public accountant, human resource specialist, or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice. Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.

So what do you do if you get one that is incorrect? Sometimes people do receive interest, income, estate distributions and dividend income statement for income that belongs to someone else. Sometimes the amounts are incorrect.  Sometimes the 1099 issued to the wrong taxpayer identification, e.g. your Social Security Number instead of your business taxpayer identification number.  It could even be fraudulent use of your identity.

The first thing you can do is ask the person or entity reporting the income to fix the 1099. In any case where the name, taxpayer identification, or address is wrong – you should give the issuer a w-9 & advise them to update their records immediately. You should keep records of this contact. Maybe you get lucky and they do reissue the 1099.  Hey, it does happen… so you should ask.

If the issuer does not respond by correcting the information return… then you will have to make the adjustments on your tax return.

Wrong taxpayer ID: If you know the person who actually received the income and you have their taxpayer information: Name, current address and taxpayer identification, you can do a “nominee distribution.”  You accept the income as reported and then deduct it telling the IRS to  whom the income properly belongs.  Be sure to include a nominee distribution statement, which includes the issuer’s name, address and taxpayer ID, the name of the person or entity who did receive the income, including  their address & taxpayer identification number as well a declaration that this income is not yours.  This solution will also work for the situation where the income is reported to your Social Security number but belongs to your partnership or corporation – you would do a 1040 Schedule C reporting the income then expense the entire amount out as an other item referring to the appropriate business tax form including the business’s name, address and tax ID.

To be technically correct you should also report this nominee distribution using the appropriate 1099 form and form 1096 & issue your own 1099 to the payee.

If you are listed as a payee and you do not know who should have received the 1099, then you should treat it using the “wrong amount” procedure listed below.

Wrong amount:  Too little? What’s the problem?  Just report the correct higher amount according to your records.  The IRS is not going to question you reporting more money than they were expecting.  Too much is another story.

If you have a 1099-MISC and you have extra income that was not reported on any 1099s, which is often the case as 1099-MISCs report payments of more than $600 in a tax year and you probably have a few sources that were less than that – in theory the easiest method is to  just soak up the difference with non-1099 income.  But if you want to be technically correct, or if you do not have enough money to soak up the excess, or if income is being fraudulently attributed to you, you will want to report the income as stated and subtract off the excess as an other expense supported by a statement saying why that particular 1099 was wrong; this statement should include the issuer’s information, the correct income …and expenses-if applicable. Realize an incorrect 1099-MISC may happen as a result of the issuer including things that you do not think of as income; for example if part of the money you received was “reimbursements.”  If reimbursement income is included on the 1099-MISC, then you are entitled to deduct the associated expenses – not the 1099 issuer – claim them.

If you suspect someone has stolen your identity, you need to file a police report, report it the credit bureaus and otherwise deal with that issue aggressively. Handling identity theft is beyond the scope of this discussion

There is a different procedure for incorrect w-2 information reporting, whether it is excess or not issued at all.

• But the first step is the same – you must contact the employer and attempt to get them to resolve the issue.  Keep records of the contact including a registered letter receipt (and the letter itself if it is returned).
• If the employer does not respond or does not correct the form, then you will have to call the IRS and file a w-2 Form complaint.
• Then you will have to file a Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. with your tax return.

FYI:  There are many kinds of information returns:

• W-2 (wages) & W-2G (gambling income) is one most people are familiar with
• 1099-INT reports interest income
• 1099-DIV reports dividends income
• 1099-MISC reports rent income, non-employee compensation and other miscellaneous forms of income
• 1099-OID reports income from a certain kind of bond
• 1099-PATR reports farming patronage dividend income
• 1099-G reports government payments such as state tax refunds and unemployment income
• 1099-A reports secured property abandonment or acquisition
• 1099-C reports cancellation of debt income
• 1099-R reports retirement income from annuities etc.
• 1099-MSA reports distributions from Medical Savings Accounts
• 1099-LTC reports Long Term Care benefits
• 1099-B reports broker and barter transactions
• 1099-S reports income from real estate sale
• 1042-s reports US income paid to a foreign person
• 1098 reports home mortgage interest etc.
• 1098-E reports student loan interest
• 1098-T reports tuition
• 5498-reports contributions to retirement accounts

As always, small business services and taxation are our business, if you need help with this issue or any others, Please give Art & Business Consulting a call.  We would love to engage you as a client.

The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in.  Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein.  Art & Business Consulting LLC currently does not have a certified public accountant or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice.  Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.