major tax mistake and the IRS scares me!

This is really more an ethical and personal relations problem, than a tax problem. It seems you have properly reported and paid the taxes that you owed. But you have a friend who _didn't_ report the portion of the 1099 income which he received. Probably, you should have contacted the paying customer in early 2006 when the 1099 was issued, to request a revised 1099 for yourself, and a separate one for the payments which went to your friend. At this point, your straightfoward action would be to advise your friend that you're going to tell the paying customer what happened, request a belatedly-revised 1099, and that he should file a "late" return (from what you say) and report his income. You might offer to pay the interest charged him, as a gesture of good will (though I don't believe you really _owe_ it) -- but not the penalty, since it isn't your fault he didn't file.

Not necessarily.

Most definitely, if he doesn't proceed to file a return for

Those are the facts which I addressed above.

This is where the ethical issue gets tricky: Did you have your friend "pretend" to be you, in order to maintain the business relationship while you took an extended vacation? If that were the case, then your obligation is much greater. If you simply turned the assigned work and associated income over to him, without any pretense, then that's not an issue.

A good idea.

Bill

No doubt. They had to fire their psychics because of budget cutbacks.

I'm shocked.

You need to correct your Schedule C to show the payments to your subcontractor. The IRS will tell you whether you should file the 1099-MISC that you should have filed showing the payments to your friend.

It already has. That's what's going on in the correspondence.

We can hope so.

Shocked again.

Not if you can account for it as a legitimate business expense, which from your description it is. What you cannot do is avoid both paying the tax and implicating your friend.

-- Phil Marti Clarksburg, MD

When you left the business under this "caretaker's" direction, did you also leave your business checking account with him? What kind of ownership was your business, proprietorship? partnership? corporation? If single ownership (proprietorship), were those checks made out to you? And if cashed, who cashed them and how? These are facts you need in order to best determine how to explain things to IRS. You might also considering hiring local competent tax help in your area, either an Enrolled Agent (EA) or Certified Public Accountant (CPA), one who is experienced with dealing with the IRS and representing taxsayers. uh... tax Payers. ChEAr$, Harlan Lunsford, EA n LA

What you appear to have done is assign income to him. However, tax law does not let us do that so easy, both legally and factually. What you should have done is enter into a written contract with this individual, letting him receive receipts under you business name, incur his own expenses, and do his own tax reporting. You should have thus also issued a 1099 to him, backed up with clear records of what he indirectly rec'd from Company X. In any event, the gross income money he rec'd is a deduction to you, maybe offsetting the effect of IRS notice, but can you now prove it? Will this individual furnish you a letter acknowledging the receipt of the money? Perhaps so if sees a tax pro over his nonfiler problem, gets "religion" as preached, and thence you might easily resolve your IRS matter, probably a no-change on raw facts as you posted. Posting add'l details here may not work all that well, as you really need a tax pro, CPA or EA exp in IRS enforcement procedures, to resolve this, and much more so does your (nonfiler) friend. In "three-way" tax disputes, IRS at best sympathizes, but in the end they can cite the rule of law as to either t/p, a/k/a the initial t/p burden of proof in factual matters. Fred F.

Thanks for the replys!

He had access to my business account, but ran all the money through his own account under the same business name. What kind of ownership was your business,

sole prprietorship, although i was once parnters with this guy in the past.

They were made out to the business

And if cashed, who cashed them and how? He cashed them in his bank account under my business name

I'm not a tax professional, and I'm pretty sure my suggestion isn't the technically correct way to handle this, but I'll make it anyway. Why not ask your friend to give you the $11,000? If he were to report this on his 2005 taxes he'd presumably owe this much (or more, if he keeps putting it off and the interest accumulates), so what difference does it make if he pays it directly to the IRS or to you, and then you pay it to the IRS? Since the 1099 was issued to you, he should be able to get away without reporting it to the IRS on his taxes. The biggest danger in this is if he's audited and they wonder where all the money in his bank account came from.

-- Barry Margolin, snipped-for-privacy@alum.mit.edu Arlington, MA

You've gotten some good advice from the professionals here. I'd just like to add that, over the years, from time to time I've had income reported in my name that was really for someone else.

--ron

If his SS# was on that account, that should help you.

Seth