Whenever you earn money, whether it's through a freelance job or interest on a savings account, you're required to report that income to the IRS and pay taxes on it as well. That's why you should be on the lookout for 1099 forms in the months leading up to the tax filing deadline.
Continue Reading Below
You should get a 1099 any time you receive interest from a bank, dividend income, or compensation for freelance work totaling $600 or more. Usually, the amounts listed on your 1099s will match your records. But what happens when you get a 1099 that's just plain wrong? Any time you receive an inaccurate 1099, it's essential that you reach out and ask the issuer to amend it. Similarly, if a 1099 is issued to you in error, you can't just ignore or throw it away. Rather, you'll need to correct the issue so you don't run into trouble with the IRS.
Image source: Getty Images.
You can't neglect an incorrect 1099
Here's something you may not know about 1099s -- their purpose isn't just to summarize your earnings and make the tax filing process easier on you. Any time a company or entity issues you a 1099, it's required to file a copy with the IRS as well. The IRS then checks your tax return against the 1099s it has in its system to make sure everything matches up. If it doesn't, there's a good chance your return will be flagged for an audit. That's why you can't just ignore an incorrect 1099. If you don't address the problem, you'll have a lot of explaining to do when the time comes to file your taxes.
How to fix an incorrect 1099
Getting a 1099 form corrected isn't always an ordeal, but the key is to act quickly once you discover a mistake. Though issuers generally have until the end of February to file 1099s with the IRS, that deadline is extended to March 31 for forms that are filed electronically. So if you act quickly enough, you might manage to catch the issuer before that form reaches the IRS in the first place.
If you're dealing with a situation where an incorrect 1099 has already been filed with the IRS, then you'll need to request that the issuer submit a corrected form. In fact, there's a box on the form that the issuer can check to indicate an amendment.
As long as you have adequate proof that the issuer's original form was incorrect, there's a good chance you'll get your 1099 amended and avoid trouble. But if the issuer fails to cooperate, you may need to take a few extra steps.
Disputing an incorrect 1099
If the issuer of an erroneous 1099 refuses to correct its mistake, you'll need to include an explanation on your tax return and attach documentation in support of your assertion. Let's say you receive a 1099 showing you were paid $20,000 from a given company, when in reality you were only paid $15,000. You can't just list that $15,000 on your tax return and call it a day, because the IRS will notice the discrepancy and most likely go after you for the difference. At the same time, you shouldn't simply pay taxes on an extra $5,000 you never received.
Instead, what you'll need to do is list the $15,000 but attach a statement explaining the overpayment. That statement should include documentation in support of your claim, such as copies of canceled checks and invoices. You should also include proof that you attempted to reach the issuer, and that the issuer either failed to respond or refused to comply.
While the latter steps clearly require a bit of extra legwork, you'll need to take them if you want to avoid getting audited or improperly taxed. Unfortunately, when it comes to 1099s, mistakes do happen, but if you don't address them, you'll be the one who ultimately loses out.
The $16,122 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.