Matching vs reality, which one should we follow?

[Pacun]

I have a client who was owed a refund from the state (let's say) for $14,000 but the state didn't issue a refund when requested but a couple of years later. When the client got the refund, the check was for $15,000 which included $1,000 of interest income.

At the beginning of next year, tax payer got form 1099-G showing state refunds for $15,000 in 20XX. In the fine print, you can read that $1,000 was interest.

Since this client itemizes every year, you have to include that refund but if you enter it on the 1099-G form, the state will not calculate that as income.

What do you do? You split that and enter $1,000 in interest income or do you enter the whole amount on form 1099-G. Remember the IRS matching because they get form 1099-G.

By the way, have you noticed that the IRS doesn't issue form 1099-int to people when the IRS pays them interest? I am always careful with that but most of the time, people don't make a copy of the check. I always include that as interest income but usually my clients are paying a credit card interest because the refund was not issued in time.

[joanmcq]

Yes, the IRS does issue 1099 s. maybe only if the interest is over $10. I've had a few of them when we amended back years.

[BulldogTom]

Entered one taxpayer with 1099Int from the IRS this year. We amended some some of his prior year self prepared returns and they paid him interest on the refunds. The 1099 from the IRS was in his documents for me this year.

Tom

Hollister, CA

[Don in Upstate NY]

Yes, the IRS does issue 1099 s. maybe only if the interest is over $10. I've had a few of them when we amended back years.

The one I'm looking at right now says "Form 1099 (Rev 9-07)". It does NOT say "1099-INT" The text makes clear that this is "interest on an overpayment of federal tax", and "must be reported as income on your tax return."

[grandmabee]

I also get 1099 for the interest from the IRS and also from the State. My 1099G is only for tax and then 1099 int for interest. Which state are you talking about?

[Pacun]

I am talking about DC. I deal with VA, MD and DC. I have only seen DC to hold refunds for long. I think VA and MD are more organized and the refund is issued in time before paying interest kicks in.

[jklcpa]

I have one in front of me right now like what Pacun is asking. The client received an explanatory statement along with their refund check last Sept that the total refund including interest was $1431.12. Separately stated on that notice is the interest portion of $7.12. The remainder is $1424 that agreed with the refundable tax on the 2011 state return that was filed. The 1099G from State of DE is for the higher amount of $1431.12 that includes the interest income.

This is a new client to me this year. Their return was filed on time but it seems there were missing documents that didn't get filed with the return last year. The taxpayer had telephone calls and followups notated, and in the end got the filing straightened out with the State, and the return was not adjusted or changed. The delay in issuing the refund had nothing to do with the state, but was entirely a problem that was caused by the former preparer. The State paid the interest on the refund being delayed by 5 months.

So, like Pacan, do I show the $1431 reported on 1099G as the state refund or the $1424 with $7 on Sch B?

[grandmabee]

I would show the correct amount of the tax refund and put interest where it goes.

[joanmcq]

The IRS ones don't say 1099-int, but that's what they are. Just report it as interest.