If a 1099-MISC (1099) is filed with the IRS and a taxpayer doesn’t report that income, the IRS computers may detect the under reporting and send out a notice. Similarly, a Revenue Agent will reconcile the 1099s to the reported income on the return. What happens if the 1099 is incorrect? What is the best way to resolve the matter with the IRS?
§6201(d) provides guidance on the matter. It reads –
In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary…by a third party and the taxpayer has fully cooperated with the Secretary (including providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested by the Secretary), the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.
Even though it says “In any court proceeding”, the IRS follows this rule in its examination process. IRM 126.96.36.199.2 reads –
In determining income on a nonfiler case, the examiner should be aware of the impact of IRC 6201(d) and IRC 7491.
- IRC 6201(d) was enacted to address perceived problems with respect to determinations of unreported income based on information returns (IRP documents). IRC 6201(d) creates a legal requirement to contact third parties to verify income where the taxpayer reasonably disputes the income and fully cooperated with the IRS. If the taxpayer does not respond or raises a frivolous dispute, the taxpayer has not made a reasonable dispute; there is no legal requirement for further verification with third parties, and an income adjustment based on the IRP document is appropriate.
If the taxpayer fully cooperates and asserts a “reasonable dispute”, the IRS may make a “third-party contact” with the 1099 issuer to gather evidence. If the 1099 issuer provides sufficient evidence to support the 1099 (cancelled checks, credit card statements, etc.) the IRS will go ahead and add the income to the taxpayer’s return. If not, there’s nothing they can do (or should do).
In practice, it’s best to resolve incorrect 1099s with the issuer shortly after they’re issued. If the issuer doesn’t want to fix it, it’s a good idea to document what happened and pull together your information to assert a “reasonable dispute” if the IRS comes calling in a couple of years.