Hi all.
Semi-hypothetical question: How do you deal with inaccurate 1099 forms?
I've run into a couple of situation where this was an issue.
1) A client has series EE savings bonds. The bonds reached maturity in 2009 and quit earning interest. The client, not realizing this, failed to liquidate the bonds. They come to us in 2015 and we catch their oversight. We also tell the client that, as per regulation, the interest income was recognized at maturity(2009) regardless of whether or not they were actually liquidated. The next day the client cashes the bonds and a 1099 is generated for tax year 2015. Isn't this 1099 inaccurate? Shouldn't this have been 2009 income that was not reported (no fraud involved) and now protected under the statute of limitations (I'm assuming that the interest was small and the misstatement was not significant)?2) Similar to the above, what if the client's accountant actually did report the recognized income in 2009, but the client forgot to actually liquidate the bonds until 2010? Now we are dealing with a situation where the income was properly recognized in 2009, but the 1099 is (incorrectly) reporting 2010 income.
3) A multi-member "Family LLC" decides, for some crazy reason, to invest in a non-qualified tax-deferred fixed annuity. Annual interest is $4,000. Ordinarily, an annuity of this sort would be owned by an individual and the interest earned is tax-deferred until actually withdrawn from the annuity. Basis would be the initial investment, and nothing more. However, the tax deferral of annuities is only extended to natural persons, not to include corporations. So we now have a situation where the LLC is reporting $4k of interest income each year, and adding that amount to basis. This, by itself, is not problematic, and easy to report. However, what happens when they actually withdraw the money? The insurance company will send a 1099-R that shows ALL of the income to be taxable, when in fact, the only income that had not previously been taxed would have been the income earned during the CURRENT tax year. Again, an incorrect 1099.Assume in all three cases, that there is zero chance that the bank or insurance company is willing to alter their 1099 forms. How would you guys handle it? Is a letter from the IRS an inevitable certainty?
thanks,