Temporary easement, 1099 incorrect

[jklcpa]

Client owns the land and building that he rents to his closely held corp that operates a gas station, so this property is already reported as a rental on his personal return.

In 2012 he granted a temporary easement to the state DOT so that they could park their repair equipment on his lot at the end of the day and weekends while they worked on the road and intersection nearby. It was only for a few months and my client received $1900 that I know should be reported as ordinary income in the form of rents.

My problem is that the State reported this on 1099-misc in box 7 for nonemployee compensation. I'm drawing a blank as to how to show this so that the IRS isn't going to send a CP-2000 and assess SE tax. What to do?

[BulldogTom]

Document the rents, put the 1099 on Non-employee comp and then back it out on the return, and report it on rents.

Wait for the letter.

Send in the documentation.

Wait for the response.

Answer questionaire about political affiliations with the payer (OK, maybe that won't happen).

You will spend less time doing it this way than trying to get the 1099 corrected.

Tom

Hollister, CA

[Guest Taxed]

Client owns the land and building that he rents to his closely held corp that operates a gas station, so this property is already reported as a rental on his personal return.

In 2012 he granted a temporary easement to the state DOT so that they could park their repair equipment on his lot at the end of the day and weekends while they worked on the road and intersection nearby. It was only for a few months and my client received $1900 that I know should be reported as ordinary income in the form of rents.

My problem is that the State reported this on 1099-misc in box 7 for nonemployee compensation. I'm drawing a blank as to how to show this so that the IRS isn't going to send a CP-2000 and assess SE tax. What to do?

I would put it under rent. If you get a CP2000 send the documentation that it was rent due to the easement granted and purpose with a note that 1099 was not coded correctly by payer.

[jklcpa]

I've already have it in rents and the return is on extension anyway. The client is coming tomorrow to pick up the corporation's work and he is going to take the 1099 back so that he can call the state to try for a correction. At least the extension gives us time for that.

[JohnH]

Don't expect that to be the end of it. I've seen many corrected 1099 forms wind up duplicated, primarily because the issuer doesn't handle it properly. They issue a second one rather than a corrected one, then they compound the problem by just sending the IRS copy on in. This doesn't delete the first one in the system, so he will now show two in the system with identical amounts in different boxes.

Or else they issue a corrected, properly marked 1099 to the taxpayer with the info in the right box but they don't file the corrected one with IRS at all. This will also cause problems and probably an AUR notice a couple of years down the road.

[Guest Taxed]

The 1099 issuer was the state so perhaps they may correct it. But you are right most payers (especially ocassional payers) do not correct it properly and may compound the problem.

That is why it may be preferable to deal with it at the CP2000 level because then at least the IRS records will be reflected as no change?

[Maribeth]

Put the $1900 on a Schedule C-EZ. Create a deduction for "1099 reported incorrectly". Then put the $1900 on the Schedule E.

You will not get a CP2000 if you do the return this year.

[Guest Taxed]

Put the $1900 on a Schedule C-EZ. Create a deduction for "1099 reported incorrectly". Then put the $1900 on the Schedule E.

You will not get a CP2000 if you do the return this year.

I am not sure this method will always work.

Couple of years back one of my clients received a discrimination settlement from his employer and the employer issued a 1099-Misc with box 7 showing the amount. We tried to get it corrected but the employer was not cooperative. So finally the attorney advised your method and sure enough a CP2000 was promptly dispatched.

We spoke to IRS and they told us to document the facts and they took off the assessment for SE.

I think once the IRS system sees a box 7 amount it is looking for SE and short of an explanation of what is going on it will not go away.

[Maribeth]

Have done this with every, yes every, incorrect 1099 over the last 20 or so years. No IRS notices. I do not even bother to try to get them corrected, just put it on the return & take it back out again.

[Guest Taxed]

Have done this with every, yes every, incorrect 1099 over the last 20 or so years. No IRS notices. I do not even bother to try to get them corrected, just put it on the return & take it back out again.

I just looked at the return that I gave an example. Sch C line 1 had the gross from 1099-Misc box 7 and Sch C line 2 had the same amount to zero out the net profits.

So to avoid CP2000 which line on Sch C do you put the adjustment amount to zero out net profits? Is there any special language for the expense item?

[Maribeth]

You put the offset as an other expense. Don’t reduce the revenues because they will catch that and send a letter. Put as an other expense and title it something like this: “1099 issued incorrectly – s/b rents” or “Amount properly transferred to Sch E”.

[Cathy]

I've also done as Maribeth for over 30 years now and have NEVER had it questioned by IRS. I also use Sch C (not Sch C-EZ) and back out the figure under "other expenses" and give the correct location of the income as it is reported on the return. Has worked each and every time! ;)

[jainen]

>>how to show this so that the IRS isn't going to send a CP-2000 and assess SE tax<<

No CP2000 has ever assessed SE tax, or ever will. It is simply a proposal based on only one side of the story, so you simply tell the other side of the story and it goes away.

Of course that assumes there IS another side of the story, which of course we can't assume. If used correctly, Code 7 suggests the "easement" involved services such as security, refueling, cleaning and maintenance. Seems unlikely, but one can't assume the client's position when the client provides documentary evidence of something else. Check it out.

P.S. If IRS got interested, they would probably consider this a sub-lease and assign the income to the corporation. So even though you also use Schedule E, a goofy treatment like zero-net Schedule C could conceivably attract attention and come 'round to trigger an audit of the corporation with all its cash receipts.