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FINANCIALLY SPEAKING Best Individual Taxpayer Victories of 2001 (Mar/Apr-02)
FINANCIALLY SPEAKING Overlooked Charitable Contributions (Jan/Feb-02)
FINANCIALLY SPEAKING Paperwork Mistakes That You Must Straighten Out Before Filing Your Income Taxes (Nov/Dec-01)
The Seven Deadly Sins of Running a Business (Sep/Oct-01)
Five Tools For Cutting College Tuition Costs (Jul/Aug-01)
Now That You’ve Got All The Numbers … What do They Mean? (May/Jun-01)
Ten Timely Tax Tips (Jan/Feb-01)
Pros and Cons of Revocable Living Trusts (Nov/Dec-00)
Thinking About Improving Your Company? (Sep/Oct-00)
Employee Benefits (Jul/Aug-00)
Have You Thought About the Future? (May/Jun-00)
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FINANCIALLY SPEAKING: Paperwork Mistakes That You Must Straighten Out Before Filing Your Income Taxes

As you know, IRS computers check the information forms sent by banks, brokerage firms, and other outfits that pay you money against the amounts you report on your tax return. If you are missing your copy of one of these information forms; form W-2, form 1099, a Schedule K-1, or if you have a copy of a form with incorrect information and don't report it that way, you will have a problem. The IRS computers will bounce your return because the information it has doesn't agree with what you put on your return.

What happens next? You'll get a notice from the IRS saying that you underpaid your taxes or made some other error. You'll have to explain to the IRS why your return was correct as filed and open yourself up to further questions or possibly an audit. A better approach is to avoid trouble by clearing up any problems with information forms before you file your tax return. Here is how to proceed:

FORM W-2
Employees are supposed to receive a form W-2 showing their earnings for the year by January 31, following the end of the tax year. To avoid problems, check your W-2 closely. Compare the total earnings reported on the W-2 to the amount on your final pay stub for the year. Make sure the two figures agree. Refer to the box indicating whether you are an active participant in a qualified retirement plan. If this box is checked incorrectly, saying you are covered by a plan when you are not, you may be barred from claiming an IRA deduction on your return.

The easiest solutions to these and other kinds of W-2 errors is to ask your employer to make the corrections you require and send the IRS, and you, a Corrected form W-2. The information you put on your return will then agree with your W-2. Sometimes however, correcting a W-2 is not easy.

* You worked earlier in the year for a company that is now out of business and it never sent you a form W-2.

* You moved and failed to give your employer your current address.

* Though you thought you were an employee, a company treated you as an independent contractor and sent you a form 1099 instead of form W-2.

What steps should you take? First ask the employer to send you a W-2. If, despite all of your attempts to get the form, the employer doesn't send the W-2, contact the IRS. The IRS will issue you Form 4852, Substitute for Missing form W-2. You can then attach this form to your return in place of the W-2. Now, the figures will match.

If you move, be sure to notify former employers of your new address, not only for W-2 purposes but for correspondence dealing with your company retirement plans. For example, even if you took a distribution from the plan when you left employment, you may still be entitled to additional benefits if the plan has successful litigation relating to securities it held when you were in the plan. If the company can't find you, these additional benefits may be lost forever.

FORM 1099
You should receive a form 1099 from each payer of interest, dividends, rent, royalties, freelance income, etc. You are not required to attach these forms to your return, since the IRS has been sent a copy. The IRS will check the figures reported on its copy of your 1099s against the amounts you report on your return. To avoid problems:

* Check the forms carefully to make sure the amounts they report agree with your records.

* Compare your year-end bank fund, and broker statements to the amounts shown on the 1099s.

Additionally, make sure the Social Security number shown on the form is correct. A form with somebody else's Social Security number on it may trigger backup Tax withholding on your interest and dividend checks unless you correct the number. If you find a mistake on a 1099, ask the firm to send you and the IRS a corrected one.

Look for other forms of incorrect reporting. You may have donated securities to charity, for example, but the form you get shows the transaction as a sale by you.

If you are a "nominee" you jointly own a bank account or security with someone other than your spouse. You will receive the 1099 if your Social Security number is on the account or security but you're not responsible for paying tax on all of the account's income. What can you do? Report the full amount of the account's income on your tax return. Then write "Nominee Distribution" beside the figure and subtract the portion of the income belonging to the other joint owner. Give a form 1099 to the joint owner showing the amount of income belonging to him/her.

While 1099s are required to be issued no later than January 31 (even by a nominee), you obviously can't issue one to the joint owner before receiving yours. It's better to send one out late than not to send one at all. The IRS probably won't penalize you for lateness in this instance.

Schedule K-1
If you are an owner of what is called a pass-through entity; a partnership, limited liability company (LLC), or an S corporation, the entity must provide you with an information form, a Schedule K-1, showing your allocable share of the company's income and expenses.

If you are a beneficiary of a trust or estate, you may also receive a Schedule K-1 reporting your allocable share of income and expenses from these pass-through entities. Generally, K-1s aren't provided before March 15 when S corporations are required to file their returns, even later for partnerships, LLCs, trusts, and calendar-year estates whose returns are due April 15.

If you don't agree with an amount reported on your K-1 you can not simply ignore what's been reported to the IRS. You can however, report what you think is the correct amount by attaching to your tax return form 8082, Notice Of Inconsistent Treatment or Administrative Adjustment. While attaching this form to your return certainly calls attention to the return, it does not guarantee that you'll be audited.

These are some of the most common reasons returns get bounced by the IRS computers. If you have already filed your return and find that any of the above are potential problems, it's not too late to amend your return. Whether or not there will be an audit depends on the issue and amount involved.

For more information, click on the Author Biography link at the top of this page.

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