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IRS Procedural Question

This is a follow-up to the previous discussion about the 1040-NEC form. Consider the scenario where a taxpayer receives a 1099-NEC, decides it is for hobby income and reports the income as Other Income on the 1040 without doing a Schedule C. The IRS questions this and after communication with the taxpayer decides that the activity is a business which requires a Schedule C and possible payment of SE Tax. What happens at that point? Does the IRS somehow calculate the SE tax on the assumption there are no business expenses that would reduce the income, or is the taxpayer given the opportunity to submit a revised 1040 with the requisite Schedule C? Just wondering procedurally how the IRS handles this.

Reply to
Rick
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The IRS may recalculate taxes owed and send a bill, yes, and will not infer that there were business expenses till the taxpayer claims them. The taxpayer still has an opportunity for an administrative appeal to make the argument that it was income from a hobby and not a business, but the deadline to appeal is short. After all administrative appeals have been exhausted, then the taxpayer can file in district court, but that's way too expensive given the dispute.

The taxpayer doesn't lose his opportunity to submit an amended return with Schedule C if he's accepting the government's position that it's business income and not hobby income.

Here's a suggestion for filing your 2022 return. Put a note next to the box for reporting other income. "$1329 gross aggregating multiple

1099s. This is not business income subject to self-employment tax." Then report the net income in the box. Make sure "not subject to self-employment tax" is in very large type to encourage the clerk entering data not to recharacterize the income.
Reply to
Adam H. Kerman

That's an interesting suggestion. I would have thought writing anything with the words "business income" and "self-employment tax" might draw someone's attention and have the opposite effect of intended, but I do see your point.

Along those lines, it's interesting the IRS will often challenge someone's Schedule C (especially if there are losses) and require the taxpayer to prove it's not hobby income, while in this case you have the reverse situation where the IRS might challenge an assertion of hobby income and ask the taxpayer to prove it's not a business. I wonder which occurs more often.

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Reply to
Rick

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