Erroneous 1099

"hifalutin'

ChEAr$, Harlan Lunsford, EA n LA

I think it probably sums up as; if you got more back from Sears than you deserved, it is taxable. But it is hard to see how the IRS could prove that. If you have documents and a good explanation it will probably cover you in the unlikely instance that the IRS wants an explanation. Any disagreement with that?

Seth wrote: (snip)

There seems to be a lot of misuse of 1099's by firms to claim a tax write-off.

In my case in past several years, twice I was sent dubious 1099's

1) A Realtor paid me a rebate on a home purchase which was in reality a return of a portion of my cash deposit at closing. A $2K 1099 for wages" was sent.

2) Blue Cross Blue Shield after much wrangling compensated me for out of pocket medical expenses and then turned around and sent a 1099 "for interest payments".

In each case, I paid taxes on my own money.

Why so? Imagine two transactions: 1) Sears who does a shoddy job for $12,000 and returns half of it to the customer. 2) Local AC guy Sammy Sharp can do same work properly for $9,500 including parts and agrees to fix the Sears installation for $3,500. Why shouldn't Joe Customer put the savings back into his pocket without double taxation of his money? Why is the IRS any part of this deal at all?

It wasn't worth $12,00 as evidence of Sears refunding his (customer own) money.

By this logic if I go to Circuit City for a large screen TV, Pay them $5,000 and then the next day find the same set at Best Buy for $4,000, and subsequently get a $1,000 refund from Circuit City on their price guarantee I have a taxable gain of $1,000. This makes no sense morally or fiscally.

Assuming at the end of the day he gets a unit with a market value of $12,000 for less, what is the balance for? If the unit had an actual value of $6,000 when he first bought it, then you're right, he got what he paid for.

But if the difference is based on anything else, such as inconvenience, business down time, etc., it represents an accession to wealth, otherwise known as taxable income.

Stu

No, those are completely different situations. In your example the market value was actually $4,000, so the rebate to reflect actual value is not taxable.

Stu

Of course it wasn't worth $12,000. Nobody argued that it was. The issue is, at the end of the day what did he pay and what was the value of what he got. If he received substantially more than what he paid, the balance may well be taxable.

Stu

What if the difference is due to bargaining ability, or getting 20% off by getting a Sears credit card during the right promotion, or something similar? Those aren't taxable.

Seth

A friend of mine walked into a used bookstore and found a book that was worth at least $500 (maybe a lot more). The store sold it to him for $5. The difference isn't taxable.

When he sells it, the profit is.

Seth

Because they reflect actual market value.

Stu

At that time it was the market value. Because he could sell it for more somewhere else is not relevant.

Stu

In the first case, you shouldn't have, at all. You'd just have to explain to the IRS that it was a rebate on a purchase (which would be just as deductible to the Realtor, but perhaps not liked by the Realtor's employer).

In the second, it might be correct: if they didn't pay a $10,000 bill for two years, and then paid you $10,500, the $500 is taxable interest. Again, if the 1099 was for more, you shouldn't have paid taxes on it.

I believe the IRS has a unit that deals with incorrect 1099s.

Seth

In the first case; I went to have my taxes prepared by a preparer who advertised that he was a retired IRS agent, implying he was an "expert" in these matters. When I explained this erroneous 1099 to him, he commented that this must be "some kind of illegal payoff" because "HE never heard of a Realtor giving a rebate to a buyer" (although happening all the time in 2005). When I pressed him about the issue he became very irate and said he wouldn't do my taxes. I insisted he shred the personal information/notes he had gathered before I left the office. I was intimidated that he would report me for an "infraction". Can you imagine?

In the second case, BCBS said they agreed to pay me about $700 for specific out of pocket expenses and then sent me the 1099 for that amount. It has crossed my mind that the also owed me interest (for a large hospital bill) and simply paid my OOP with those funds also owed to me.

It's the tax preparer's perogative to take and/or stick to a position if they're signing the tax return. However, at the end of the day, the tax return is the taxpayer's representation to the government that the return accurately reports all items of income and properly allowable deductions. The rebate sounds much more like a purchase price adjustment than taxable income, (i.e., if you bought the house for $610,000 and received a "rebate" from the realtor of $10,000, then your adjusted purchase price is $600,000 and you recognize no taxable income on the transacation) The taxable income created by this transaction is actually recognized on the eventual sale of the property because your basis is 600k, not the 610k stated purchase price).

If you did pay taxes on the "rebate" and it's a material amount of money you may want to consider filing an amended return.

The $700 may or may not have been taxable income to you. There's something called "the tax benefit rule". Lets say that your AGI for the year you incurred the expenses was $100,000 and your out-of-pocket medical expenses (those NOT reimbursed by insurance) were $5,000. None of your out-of-pocket medical expenses would have been deductible in that year due to the 7.5% threshold you must overcome to have any deductible medical expenses. Therefore, even if the insurance company refunded money for your out-of-pocket costs in a later year, none of of the money received in that later year would be subject to tax because you did not receive benefit (i.e., deductions that survived the 7.5% limitation) on your tax return in the year the expenses were paid. However, if your out-of-pocket costs for that year were $15,000, then you did receive benefit for the medical expenses and when you recovered a portion of them in a later year, that amount would be included on your reutrn as "Other Income" and subject to tax. In either case, the insurance company did the right thing in issuing the 1099.

In both cases given, the 1099's appear to have been appropriately issued. However, the simple act of issuing a 1099 does not make the amount magically subject to ttax. It's up to the 1099 recipient and/or their tax preparer to properly apply the rules to each type of income received. What you don't want to do is have a 1099 issued to you and simply ignore it. The income is being reported for a reason (sometimes erroroneous reasons but that does not appear to be the case above) and should be dealt with on the return or by having the issuer issue a corrected 1099.

| >>> 2) Blue Cross Blue Shield after much wrangling compensated me for out of | >>> pocket medical expenses and then turned around and sent a 1099 "for | >>> interest payments".

(big snips)

| In both cases given, the 1099's appear to have been appropriately issued.

Is compensation for out of pocket medical expenses really "interest payments?" If not, which box should they be in?

Dan Lanciani ddl@danlan.*com

No, it's not interest. While the original message said it was "interest payments", a later msg by the original poster said simply that a 1099 was issued. I find it unlikely that Blue Cross would be issuing a 1099-INT, they're clearly not in the business of banking or investments. I assumed that the 1099 was actually a 1099-MISC in which case it would probably have been in Box 3 or 7 for "Other Income" or "Non-Employee Compensation".

At first, I thought if you got back more than you paid Sears it would be taxable. But even that need not be the case.

Suppose Sears sent an installer and everything just didn't work at all. So you told them to take it out, and hired a contractor to fix your house back to the status quo ante. Sears refunded your full purchase price plus the cost of your competent contractor. I don't think any of that should be taxable, since both your house and your bank account are restored to their previous condition.

#insert Kipling.quote.on.the.subject.of.deserve

Seth