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  • IRS Procedural Question

    From Rick@21:1/5 to All on Tue Feb 21 12:05:34 2023
    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.

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  • From Adam H. Kerman@21:1/5 to Rick on Wed Feb 22 10:35:46 2023
    Rick <[email protected]> wrote:

    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.

    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.

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2011) - All rights reserved. >>
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  • From Rick@21:1/5 to Adam H. Kerman on Thu Feb 23 10:56:29 2023
    "Adam H. Kerman" wrote in message news:tt5aio$1hrsi$[email protected]...

    Rick <[email protected]> wrote:

    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.

    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.


    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.

    --

    --
    << ------------------------------------------------------- >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2011) - All rights reserved. >>
    << ------------------------------------------------------- >>

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