I am looking at a case that reminded me of a very
recent telephone call with a client.
Let’s talk about the client first.
It is tax season here at Galactic Command as I type this.
The client sent me the paperwork for the joint return. She included a note that she had withdrawn
from her 401(k) but had not received a 1099.
“Do I have to report it, then?” she asked.
This is a teaching moment: “yes.” The answer is “yes.”
One is required to report his/her income fully and
accurately, irrespective of whether one receives a 1099 or other information
reporting. I, as a tax CPA, might not even be able to sign as preparer, depending
upon the size and consequence of the numbers.
I had her contact the investment company and request a
duplicate tax form. It was for the best, as the company had withheld taxes on the
distribution.
Let’s look next at the Legoski case.
During 2017 John Legoski (John) had a job and a side
gig. His gig was buying stuff online and selling said stuff via drop shipments.
He was paid via Amazon Payments. He in turn paid for stuff using PayPal. He received
a 1099 from Amazon Payments for $29,501.
Which he did not report.
The IRS caught this, of course, because that is what
computerized matching does. That notice does not even go past human eyes before
the IRS mails it.
His argument: he thought that his gross receipts did
not meet the minimum reporting threshold for third-party payments.
COMMENT: For 2017, a third-party settlement company was required to issue John a 1099-K if (1) gross payments to John exceeded $20,000 and (2) there were more than 200 transactions.
I presume that John had less than 200 transactions, as
he certainly was paid more than $20 grand. But it doesn’t matter, as he is required
to report all his income whether or not he received a 1099.
The IRS wanted taxes and penalties of $9,251 on the
$29,501.
Seems steep, don’t you think?
That is because the IRS did not spot John any cost of
goods sold.
Push back, John. Send the IRS your PayPal account activity.
That is where you bought everything. It may not be classroom accounting, but it
is something.
John … did not do this. He did not provide any
documentation to the IRS, to the Court, to anybody.
John, John, … but why?
Bam! The Court disallowed him a cost of goods sold
deduction.
Next were the penalties on the unreported income (which
was not reduced for a cost of goods deduction).
The Court wanted John to show reasonable cause for
filing his tax return the way he did.
John, listen to me: you are not an accountant. You are
barely a novice gig worker. You didn’t know. This was undecipherable tax law to
you. You botched, but you did not do so on purpose.
However, his failure to provide a PayPal activity
statement where he paid for EVERYTHING HE BOUGHT FOR RESALE did not put the Court
in a forgiving mood.
The Court decided he was responsible for penalties,
too.
And I would bet five dollars and a box of Girl Scout
Thin Mints that John made little to no money from his gig – heck, he probably
lost money - but this escapade cost him over $9 grand.
Let me check. Yep, John appeared before the Court pro
se. As we have discussed before, this does not necessarily mean that he showed
up in Court without professional representation. From the way it turned out,
though, I feel pretty confident that he winged it.
COMMENT: For 2022 the 1099 reporting for this situation has changed. The $20,000/200 transactions requirement is gone. The new law requires a 1099 for payments over $600. Yep, you read that right.
Our case this time was Legoski v Commissioner,
T.C. Summary 2021-15.
