Under Reporting Income

[bruja]

I have a client that in 2021 "forgot" to give me a 1099K for 50K+. I asked at the time why her income was so low.  She told me she sold the said business. 3 hair salon, kept 1.  She got letter CP22A.  She owes over 23K.  She got me the bank account statement for such business to reconstruct the books and receipt. Should I do it? What will be the consequesnces for me if I do the amendment.

[JRC]

I was in the same position last year. Client ended up blaming me for not having the 1099K (I REQUESTED) but never received. Client also did their books themselves and I reported using their numbers. After our initial meeting on the issue I haven't heard from them since.

This past year, new client with a Schedule C filing for 2023 but not for 2022. Client received CP2000 for 2022 for not reporting Nonemployee compensation of nearly $30000.00. All from 1099-Nec forms reported to IRS. I haven't heard back from them either as of yet.

[qbteachmt]

"in 2021 "forgot" to give me a 1099K for 50K+."

That, by itself, is not the issue of under-reporting income.

A 1099-K is issued because of cash flow, not income. It is as simple as the number of transactions (200) and/or the total $ amount ($20k) reached a reporting threshold. For instance, she could have sold a car for $20,000 and ran sales including sales taxes for the various businesses all through Venmo, so Venmo issues a 1099-K.

What you would need to know is, the amount reported as business needs to either explain the 1099-K or the tax return shows which amount(s) are excluded from the business reporting. It's the same concept as the 1099-NEC. When it reaches the informational reporting threshold, the IRS gets a copy and so does the taxpayer, and the IRS then expects the taxpayer's tax return to include or clarify this amount as part of their overall return. If there is a 1099-K for $35,000 and the business reports $10,000, there is a mismatch in the reality. But if the business factually has $450,000 gross and only one 1099-K for $35,000 the business return needs to report the $450,000 as business. If the business is subject to 1099-NEC reporting, and no one customer paid $600 or more, there might be no 1099-NEC at all, but there still needs to be a tax return filed for that business.

"She owes over 23K"

Does she? It appears there never was good info from her for the true financial activities.

"She got me the bank account statement for such business to reconstruct the books and receipt. Should I do it?"

First, banks report the date a payment cleared, not the date incurred, unless everything the taxpayer does is an electronic transaction. Even then, there are clearing delays, such as her credit card processing agent will have float days when something in the business didn't clear through the bank right away. How will you be able to account for that delay, for proper tax period reporting? What about the credit card terminal processing dates? What about sales and excise taxes? Salons have a lot of this reporting, so how was that being done, and can you get these reports? Or, is she delinquent on all of that? What about payroll? Is it only chair rentals?

Only you know if you will have enough records to do this job, and the bank statements are only a small piece of the picture.