Bigger Isn’t Always Better When It Comes to Financial Advice

For an individual investor, finding the right financial professional can be a challenge.

To start with, there’s the bewildering array of titles, including broker, adviser, planner, manager and even coach.

And then there’s all those letters (RIA, CFP, CFA and so on) and numbers (Series 6, 7, 65 and 66) that represent certifications and licenses.

By the time they get to the method of compensation (fee-only, fee-based or commission) and the fiduciary vs. suitability discussion, the majority of the people I meet have no idea what it all means. It’s no wonder so many simply opt for the brand-name brokerage they see on TV instead of the small independent adviser who might be the better choice.

But when you go with Wall Street instead of Main Street, you lose a few things:

  • Control: When you work with an independent adviser, you’re the boss. Financial professionals employed by bigger firms often have quotas they have to meet or specific products they’re pushed to sell. Many firms are publicly traded – they answer to shareholders, and that becomes their priority.
  • Personal attention: See if this scenario sounds familiar. Maybe you’ve never seen the need for an adviser – but now you’ve left your job and you want to roll over your 401(k). So you talk to the guy behind one of the desks at your local bank and he tells you, “Don’t worry. I can manage your account for you.”.

He asks you some questions about risk tolerance and your retirement goals, and then he puts your life savings into mutual funds and tells you he’ll keep an eye on it. And because he always waves at you when come in, you believe him. The thing is, that same week, dozens of other people walked in, too, all with the same rollover needs. And he told them the same thing.

The system is flawed. It’s physically impossible for that one guy to watch out for every one of those customers and their accounts. So now, instead of having a managed portfolio, you have what we call a buy-and-hold account – or what some people call buy and hope, because you’re just hoping the market does well. You know, the way they did in 2008.

  • A comprehensive approach: If you’re looking for a holistic approach to financial planning, you’re more likely to get it with an independent adviser who’s taking the time to get to know your needs and may be working with a team of professionals to provide more complete services. For example, we have a new client whose husband passed away more than five years ago. When she came to us, we saw that her adviser (who was with a bank) had her completely invested in mutual funds, and her money was split between two trusts. So for five years, she had this accounting nightmare of doing a trust tax return, and she wasn’t able to move forward or invest the money because she didn’t want to create additional taxes for her kids.

We took her to an estate-planning attorney, who was able to get it all resolved with one meeting – and it cost her just $500 to draw up the document. Because we work under the fiduciary standard, it’s our obligation to look out for the client’s best interests and go above and beyond. (If your financial professional isn’t a fiduciary, you might get that, but it isn’t a legal or ethical obligation.)

Unfortunately, we’re kind of stuck in this David vs. Goliath mode in the financial industry, where the average person on the street doesn’t even know there are different levels of advice and attention.

A lot of that is marketing. All those radio and TV commercials, the golf tournament sponsorships and stadium-naming rights build a brand and get the word out in a way that an independent adviser can’t afford.

But when it comes to minding your portfolio and your plan, bigger isn’t always better.

Do your homework. Research online. Ask friends and colleagues if they have an adviser they like. Attend seminars. Don’t hesitate to quiz people about compensation. And interview multiple advisers until you find one that’s a good fit for you.

Article was written and published by:

Megan Clark, Kiplinger, 2017

Original Article here

 

Corporate Income Tax: Certain Economic Development Income Tax Credits Allowed Different Treatment

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Colorado Gov. John Hickenlooper has signed legislation authorizing the Colorado Economic Development Commission (EDC) to allow certain business that make a strategic capital investment in the state to treat several existing corporate income tax credits as transferable, beginning July 1, 2017, and lasting through June 30, 2020. Once the income tax credits are approved by the EDC as transferable, the business can apply the credit to any tax liability, carry forward the credit for up to five years, or transfer the income tax credit. Under the legislation, the existing credits that are eligible for different treatment include, the Colorado job growth incentive credit; the Enterprise Zone credit for investment in certain property; the credit for new enterprise zone business employees; and the Enterprise Zone credit for expenditures for research and experimental activities. In order to qualify, a business is required to make at least $100 million capital investment for each precertification that the EDC finds will be significant to the state and be productive over time.

Precertified tax credits cannot be transferred until tax year 2019 and the business has five years from when the EDC approved the credits to transfer them. Additionally, if the business chooses to transfer its allowed tax credits, then the income tax credits are freely transferable and assignable, subject to the preapproved amount. The transferee may use all or a portion of transferred income tax credits to offset any tax liability or they may transfer any unused portion to a secondary transferee. The unused portion of the tax credit can be transferred on multiple occasions for three subsequent tax years from when the income tax credit was first transferred. The legislation allows the EDC to precertify $10 million in transferable credits in each fiscal year. Any portion of the $10 million not precertified by the EDC in any of the fiscal years may not be certified in a future year. The EDC may precertify transferable credits for the same business in all three fiscal years.

H.B. 1356, Laws 2017, effective May 24, 2017

 

Article was written and published by:

CCHTaxGroup

Original Article here

17 Reasons the IRS Will Audit Your Tax Return

Ever wonder why some tax returns are eyeballed by the Internal Revenue Service while most are ignored? Short on personnel and funding, the IRS audited only 0.70% of all individual tax returns in 2016. So the odds are pretty low that your return will be singled out for review. And, of course, the only reason filers should worry about an audit is if they are fudging on their taxes.

That said, your chances of being audited or otherwise hearing from the IRS escalate depending on various factors, including your income level, the types of deductions or losses you claim, the business you're engaged in, and whether you own foreign assets. Math errors may draw IRS inquiry, but they'll rarely lead to a full-blown exam. Although there's no sure way to avoid an IRS audit, these 17 red flags could increase your chances of unwanted attention from the IRS.

1. Making a Lot of Money-  Although the overall individual audit rate is only about one in 143 returns, the odds increase dramatically as your income goes up. IRS statistics for 2016 show that people with an income of $200,000 or higher had an audit rate of 1.70%, or one out of every 59 returns. Report $1 million or more of income? There's a one-in-17 chance your return will be audited. The audit rate drops significantly for filers making less than $200,000: Only 0.65% (one out of 154) of such returns were audited during 2016, and the vast majority of these exams were conducted by mail.

We're not saying you should try to make less money — everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you'll be hearing from the IRS.

2. Failing to Report All Taxable Income-  The IRS gets copies of all of the 1099s and W-2s you receive, so be sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.

3. Taking Higher-Than-Average Deductions-  If the deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you actually owe.

4.  Running a Small Business-  Schedule C is a treasure trove of tax deductions for self-employed people. But it's also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don’t report all of their income. The IRS looks at both higher-grossing sole proprietorships and smaller ones.

Special scrutiny is also given to cash-intensive businesses (taxis, car washes, bars, hair salons, restaurants and the like) as well as to small business owners who report a substantial net loss on Schedule C.

Other small businesses also face extra audit heat, as the IRS shifts its focus away from auditing regular corporations. The agency thinks it can get more bang for its audit buck by examining S corporations, partnerships and limited liability companies. So it’s spending more resources on training examiners about issues commonly encountered with pass-through firms.

5. Taking Large Charitable Deductions-  We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.

That's because the IRS knows what the average charitable donation is for folks at your income level. Also, if you don't get an appraisal for donations of valuable property, or if you fail to file Form 8283 for noncash donations over $500, you become an even bigger audit target. And if you've donated a conservation or façade easement to a charity, chances are good that you'll hear from the IRS. Be sure to keep all of your supporting documents, including receipts for cash and property contributions made during the year.

6. Claiming Rental Losses-  Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. This $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000. A second exception applies to real estate professionals who spend more than 50% of their working hours and over 750 hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off losses without limitation.

The IRS actively scrutinizes rental real estate losses, especially those written off by taxpayers claiming to be real estate pros. It’s pulling returns of individuals who claim they are real estate professionals and whose W-2 forms or other non-real estate Schedule C businesses show lots of income. Agents are checking to see whether these filers worked the necessary hours, especially in cases of landlords whose day jobs are not in the real estate business. The IRS started its real estate professional audit project several years ago, and this successful program continues to bear fruit.

7. Taking an Alimony Deduction-  Alimony paid by cash or check is deductible by the payer and taxable to the recipient, provided certain requirements are met. For instance, the payments must be made under a divorce or separate maintenance decree or written separation agreement. The document can’t say the payment isn’t alimony. And the payer’s liability for the payments must end when the former spouse dies. You’d be surprised how many divorce decrees run afoul of this rule.

Alimony doesn’t include child support or noncash property settlements. The rules on deducting alimony are complicated, and the IRS knows that some filers who claim this write-off don’t satisfy the requirements. It also wants to make sure that both the payer and the recipient properly reported alimony on their respective returns. A mismatch in reporting by ex-spouses will almost certainly trigger an audit.

8. Writing Off a Loss for a Hobby-  You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you're in business to make a profit, unless the IRS establishes otherwise. Be sure to keep supporting documents for all expenses.

9. Deducting Business Meals, Travel and Entertainment-  Big deductions for meals, travel and entertainment are always ripe for audit, whether taken on Schedule C by business owners or on Schedule A by employees.

A large write-off will set off alarm bells, especially if the amount seems too high for the business or profession. Agents are on the lookout for personal meals or claims that don't satisfy the strict substantiation rules. To qualify for meal or entertainment deductions, you must keep detailed records that document for each expense the amount, place, people attending, business purpose, and nature of the discussion or meeting. Also, you must keep receipts for expenditures over $75 or for any expense for lodging while traveling away from home. Without proper documentation, your deduction is toast

10. Failing to Report a Foreign Bank Account-  The IRS is intensely interested in people with money stashed outside the U.S., especially in countries with the reputation of being tax havens, and U.S. authorities have had lots of success getting foreign banks to disclose account information. The IRS also uses voluntary compliance programs to encourage folks with undisclosed foreign accounts to come clean — in exchange for reduced penalties. The IRS has learned a lot from these amnesty programs and has been collecting a boatload of money (we’re talking billions of dollars). It’s scrutinizing information from amnesty seekers and is targeting the banks they used to get names of even more U.S. owners of foreign accounts.

Failure to report a foreign bank account can lead to severe penalties. Make sure that if you have any such accounts, you properly report them. This means electronically filing FinCEN Form 114 by April 15 to report foreign accounts that combined total more than $10,000 at any time during the previous year. And taxpayers with a lot more financial assets abroad may also have to attach IRS Form 8938 to their timely filed tax returns.

11. Claiming 100% Business Use of a Vehicle-  When you depreciate a car, you have to list on Form 4562 the percentage of its use during the year was for business. Claiming 100% business use of an automobile is red meat for IRS agents. They know that it's rare for someone to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use.

The IRS also targets heavy SUVs and large trucks used for business, especially those bought late in the year. That’s because these vehicles are eligible for favorable depreciation and expensing write-offs. Be sure you keep detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for a revenue agent to disallow your deduction.

As a reminder, if you use the IRS's standard mileage rate, you can't also claim actual expenses for maintenance, insurance and the like. The IRS has seen such shenanigans and is on the lookout for more.

12. Taking an Early Payout from an IRA or 401(k) Account-  The IRS wants to be sure that owners of traditional IRAs and participants in 401(k)s and other workplace retirement plans are properly reporting and paying tax on distributions. Special attention is being given to payouts before age 59½, which, unless an exception applies, are subject to a 10% penalty on top of the regular income tax. An IRS sampling found that nearly 40% of individuals scrutinized made errors on their income tax returns with respect to retirement payouts, with most of the mistakes coming from taxpayers who didn’t qualify for an exception to the 10% additional tax on early distributions. So the IRS will be looking at this issue closely.

The IRS has a chart listing withdrawals taken before the age of 59½ that escape the 10% penalty, such as payouts made to cover very large medical costs, total and permanent disability of the account owner, or a series of substantially equal payments that run for five years or until age 59½, whichever is later.

13. Claiming Day- Trading Losses on Schedule C-  People who trade in securities have significant tax advantages compared with investors. The expenses of traders are fully deductible and are reported on Schedule C (investors report their expenses as a miscellaneous itemized deduction on Schedule A, subject to an offset of 2% of adjusted gross income), and traders’ profits are exempt from self-employment tax. Losses of traders who make a special section 475(f) election are fully deductible and are treated as ordinary losses that aren’t subject to the $3,000 cap on capital losses. And there are other tax benefits.

But to qualify as a trader, you must buy and sell securities frequently and look to make money on short-term swings in prices. And the trading activities must be continuous. This is different from an investor, who profits mainly on long-term appreciation and dividends. Investors hold their securities for longer periods and sell much less often than traders.

The IRS knows that many filers who report trading losses or expenses on Schedule C are actually investors. So it’s pulling returns and checking to see that the taxpayer meets all of the rules to qualify as a bona fide trader.

14. Failing to Report Gambling Winnings or Claiming Big Gambling Losses-  Whether you’re playing the slots or betting on the horses, one sure thing you can count on is that Uncle Sam wants his cut. Recreational gamblers must report winnings as other income on the front page of the 1040 form. Professional gamblers show their winnings on Schedule C. Failure to report gambling winnings can draw IRS attention, especially if the casino or other venue reported the amounts on Form W-2G.

Claiming large gambling losses can also be risky. You can deduct these only to the extent that you report gambling winnings (and recreational gamblers must also itemize). But the costs of lodging, meals and other gambling-related expenses can only be written off by professional gamblers. The IRS is looking at returns of filers who report large miscellaneous deductions on Schedule A Line 28 from recreational gambling, but aren’t including the winnings in income. Also, taxpayers who report large losses from their gambling-related activity on Schedule C get extra scrutiny from IRS examiners, who want to make sure these folks really are gaming for a living.

15. Claiming the Home Office Deduction-  The IRS is drawn to returns that claim home office write-offs because it has historically found success knocking down the deduction. Your audit risk increases if the deduction is taken on a return that reports a Schedule C loss and/or shows income from wages. If you qualify for these savings, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance and other costs that are properly allocated to the home office. That's a great deal.

Alternatively, you have a simplified option for claiming this deduction: The write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500.

To take advantage of this tax benefit, you must use the space exclusively and regularly as your principal place of business. That makes it difficult to successfully claim a guest bedroom or children's playroom as a home office, even if you also use the space to do your work. "Exclusive use" means that a specific area of the home is used only for trade or business, not also for the family to watch TV at night.

16. Engaging in Currency Transactions-  The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. So if you make large cash purchases or deposits, be prepared for IRS scrutiny. Also, be aware that banks and other institutions file reports on suspicious activities that appear to avoid the currency transaction rules (such as a person depositing $9,500 in cash one day and an additional $9,500 in cash two days later).

17. Claiming the Foreign Earned Income Exclusion-  U.S. citizens who work overseas can exclude on 2016 returns up to $101,300 of their income earned abroad if they were bona fide residents of another country for the entire year or they were outside of the U.S. for at least 330 complete days in a 12-month span. Additionally, the taxpayer must have a tax home in the foreign country. The tax break doesn’t apply to amounts paid by the U.S. or one of its agencies to its employees who work abroad.

IRS agents actively sniff out people who are erroneously taking this break, and the issue keeps coming up in disputes before the Tax Court. Among the areas of IRS focus: filers with minimal ties to the foreign country they work in and who keep an abode in the U.S.; flight attendants and pilots; and employees of U.S. government agencies who mistakenly claim the exclusion when they are working overseas.

Article was written by:

Joy Taylor and published in Kiplinger on March 5, 2017. 

Original article here

IRS Issues Urgent Alert About W-2 Scam

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The IRS, state tax agencies and the tax industry issued an urgent alert today to all employers that the Form W-2 email phishing scam has evolved beyond the corporate world and is spreading to other sectors, including school districts, tribal organizations and nonprofits.

In a related development, the W-2 scammers are coupling their efforts to steal employee W-2 information with an older scheme on wire transfers that is victimizing some organizations twice.

“This is one of the most dangerous email phishing scams we’ve seen in a long time. It can result in the large-scale theft of sensitive data that criminals can use to commit various crimes, including filing fraudulent tax returns. We need everyone’s help to turn the tide against this scheme,’’ said IRS Commissioner John Koskinen.

When employers report W-2 thefts immediately to the IRS, the agency can take steps to help protect employees from tax-related identity theft. The IRS, state tax agencies and the tax industry, working together as the Security Summit, have enacted numerous safeguards in 2016 and 2017 to identify fraudulent returns filed through scams like this. As the Summit partners make progress, cybercriminals need more data to mimic real tax returns.

Here’s how the scam works: Cybercriminals use various spoofing techniques to disguise an email to make it appear as if it is from an organization executive. The email is sent to an employee in the payroll or human resources departments, requesting a list of all employees and their Forms W-2.  This scam is sometimes referred to as business email compromise (BEC) or business email spoofing (BES).

The Security Summit partners urge all employers to be vigilant. The W-2 scam, which first appeared last year, is circulating earlier in the tax season and to a broader cross-section of organizations, including school districts, tribal casinos, chain restaurants, temporary staffing agencies, healthcare and shipping and freight. Those businesses that received the scam email last year also are reportedly receiving it again this year.

Security Summit partners warned of this scam’s reappearance last week but have seen an upswing in reports in recent days.

New Twist to W-2 Scam: Companies Also Being Asked to Wire Money

In the latest twist, the cybercriminal follows up with an “executive” email to the payroll or comptroller and asks that a wire transfer also be made to a certain account. Although not tax related, the wire transfer scam is being coupled with the W-2 scam email, and some companies have lost both employees’ W-2s and thousands of dollars due to wire transfers.

The IRS, states and tax industry urge all employers to share information with their payroll, finance and human resources employees about this W-2 and wire transfer scam. Employers should consider creating an internal policy, if one is lacking, on the distribution of employee W-2 information and conducting wire transfers.

Steps Employers Can Take If They See the W-2 Scam

Organizations receiving a W-2 scam email should forward it to phishing@irs.gov and place “W2 Scam” in the subject line. Organizations that receive the scams or fall victim to them should file a complaint with the Internet Crime Complaint Center (IC3,) operated by the Federal Bureau of Investigation.

Employees whose Forms W-2 have been stolen should review the recommended actions by the Federal Trade Commission at www.identitytheft.gov or the IRS at www.irs.gov/identitytheft. Employees should file a Form 14039, Identity Theft Affidavit, if the employee’s own tax return gets rejected because of a duplicate Social Security number or if instructed to do so by the IRS.

The W-2 scam is just one of several new variations that have appeared in the past year that focus on the large-scale thefts of sensitive tax information from tax preparers, businesses and payroll companies. Individual taxpayers also can be targets of phishing scams, but cybercriminals seem to have evolved their tactics to focus on mass data thefts.

Be Safe Online

In addition to avoiding email scams during the tax season, taxpayers and tax preparers should be leery of using search engines to find technical help with taxes or tax software. Selecting the wrong “tech support” link could lead to a loss of data or an infected computer. Also, software “tech support” will not call users randomly. This is a scam.

Taxpayers searching for a paid tax professional for tax help can use the IRS Choosing a Tax Professional lookup tool or if taxpayers need free help they can review the Free Tax Return Preparation Programs. Taxpayers searching for tax software can use Free File, which offers 12 brand-name products for free, at www.irs.gov/freefile. Taxpayer or tax preparers looking for tech support for their software products should go directly to the provider’s web page.

Tax professionals also should beware of ongoing scams related to IRS e-Services. Thieves are trying to use IRS efforts to make e-Services more secure to send emails asking e-Services users to update their accounts. Their objective is to steal e-Services users’ credentials to access these important services.

Article was written by:

Isaac O'Bannon and published in the CPA Practice Advisor on February 2, 2017. 

Original article here

Hey, My IRS Form 1099 Is Wrong ... Maybe Intentionally

Did you receive any IRS Forms 1099 that you think are wrong? Maybe someone actually paid you $1,000, but reported that they paid you $10,000? The 1099 rules are complex and voluminous, and mistakes happen. But how should you handle it? And what if you think someone intentionally misreported? There’s no easy answer. Some reporting rules (for example, to lawyers and their clients) call for duplicate reporting that can make it seem as if $1,000 was really $2,000.

But more generally, incorrect Forms 1099 are not uncommon. At a minimum, one can read the 1099 regulations broadly, erring on the side of reporting. When in doubt, issue a Form 1099, many say. A few observers may even think of issuing IRS Forms 1099 in a kind of punitive way, to turn the tax tables on someone. If you receive a Form 1099 you think is wrong, you can ask the payor to correct it. They can destroy the incorrect one if they have not already sent it to the IRS. If it's too late, they can issue a corrected form.

Issuers face penalties for errors, but most of those penalties apply to failures to issue the forms. There are a few examples of private lawsuits over tax reporting forms. But the IRS won't get involved, and most such suits fail. So stick to trying to get your situation corrected, or explained to the IRS on your return. Issuing Forms 1099 is something businesses do to verify that payments were made, and to help support tax deductions. Of course, by issuing a Form 1099, you are generally also sticking the recipient with paying taxes on the item. In that sense, some IRS Forms 1099 may conceivably be issued with a kind of punitive intent.

 Last year, boxer Floyd Mayweather Jr. sent an IRS Form 1099 to a strip club to report that he dropped $20,000. Mayweather Promotions LLC sent the form to the Hustler Club for $20,000, mostly cash tips for dancers. The club claimed it didn't see the money paid to the 'independent contractors.' Still, the club must report it. Forms 1099 are critical to tax returns, and you are almost guaranteed an audit or tax notice if you fail to report one. Each Form 1099 is matched to your Social Security number, so the IRS can easily spew out a tax bill if you fail to report one. It matters a lot, especially now that the IRS has six years to audit, not three.

Forms 1099 are supposed to be mailed to the taxpayer by January 31st, though some companies issue the forms throughout the year when they issue checks. Although the initial deadline is January 31, issuers of the forms have traditionally not been required to file copies of all Forms 1099 with the IRS until the end of February. That one month delay was helpful, allowing a window of time to address errors. So contact the issuer if you receive one you believe is in error.

However, there is an important change in 2017 (covering 2016 Forms 1099-MISC). For those forms reporting non-employee compensation in box 7 of 1099-MISC, January 31, 2017 was the due date for sending forms to the taxpayer and to the IRS. For that category, there is no one month reporting delay. Forms 1099 are controlled by your Social Security number, so even if an issuer has your old address, the information will be reported to the IRS (and your state tax authority).

Forms 1099 remind you that you earned interest, received a consulting fee, or were paid some other kind of income. There are many varieties, including 1099-INT for interest, 1099-DIV for dividends, 1099-G for tax refunds, 1099-R for pensions and 1099-MISC for miscellaneous income. These forms are sent by payors to you and the IRS. If you don’t include the reported item on your tax return, the IRS issues a notice.

In fact, apart from wages, whatever you were paid, is likely to be reported on a Form 1099. Companies big and small churn them out. If you’re in business–even as a sole proprietor–you also may need to issue them. The most common is Form 1099-MISC, which can cover just about any kind of income. Consulting income, or non-employee compensation is a big category.

If you don't receive a Form 1099, you may not want to ask for it. If you don’t receive a Form 1099 you expect, just report the income. Reporting extra income that doesn’t match a Form 1099 is not a problem. The IRS does not consider that a mismatch. Only the reverse is a problem.

If you call or write the payor asking for a Form 1099, the payor may issue it incorrectly. Alternatively, you may end up with two, one issued in the ordinary course (even if you never received it), and one issued because you asked for it. The IRS computer may think you had twice the income you really did.

For example, if you settled a lawsuit, don't ask for a Form 1099. Just report it, if it is income. Generally, everything is income, including money for settling a lawsuit. One of the few exceptions is lawsuit recoveries for physical injuries. Damages for physical injuries are tax-free under Section 104 of the tax code. Yet only physical injuries and physical sickness qualify, one of 10 things to know about taxes on legal settlements.

Article was written by:

Robert W. Wood and published in Forbes on February 1, 2017. 

Original article here