Incorrect 1099

[YoungCPA]

After filing my client's 2018 & 2019 1040 (yes, she was behind), and getting ready to prepare her 2018 & 2019 C corporation return, I find out that my client was issued 1099's to her social security and to her old Sole Prop EIN in addition to her C Corp EIN.  This is the case for both 2018 and 2019.  She was incorporated in 2017 and asked all Payers to use the new EIN.  Do I ask them to issue corrected 1099's to the corporation (even though corps don't need 1099's), or ask them to issue corrections with a zero balance in box 7?  Are they not allowed to correct 1099's for 2018 and 2019 at this time?  We've already sent a 1040 amendment in for 2018 for another reason and don't want to send yet another amendment showing the 1099 income that was reported on 1099 b/c it will be very difficult to match expenses to that income.  What to do? 

[qbteachmt]

Why would you do the 1040, if the C 1120 for that same year was yet to be prepared?

[YoungCPA]

Hi,  because the 1099's are issued to my client's personal SS# and one to her old Sole Prop EIN (when it was supposed to be Corporate income).  I'm concerned the IRS will issue a CP2000 for that income for the 1040.  Isn't there  a disconnect there for the IRS?  

[sjrcpa]

They will issue a CP200. If you don't want to amend, you can explain the circumstance when you respond to the letter.

And why didn't your client notice the incorrect 1099s before?

@qbteachmtSince an 1120 is not a flow through tax entity, theoretically the 1120 and owner's 1040 have no bearing on each other.

[TaxGuyBill]

Personally, I would report that amount on Schedule C, then enter an equal amount as an "other expense" (I might call it "Nominee Income" and include the EIN of the corporation).

That will avoid the IRS notice.

As Susan said, "theoretically" you don't need to do the corporate return first, but I suspect it is usually a good idea to do the corporate return first, especially for late-filers that tend to do things wrong (money taken out of the corporation without showing wages, dividends or loans).   😁

[YoungCPA]

TaxGuy...Thank you!  yes, that is another issue when they do things incorrectly.  I find there are plenty of owners out there of C's that completely don't have an idea of how money should flow in and out, noone has told them either.

Anyway, I've already sent in an amendment to the 2018 1040.  Would you send another amendment in to reflect the amounts on Schedule C as you suggested with an offset to expense?  Or, can I ask the issuers of the 1099's to issue corrected 1099's with zero balance in Box 7 for 2018 and 2019, or is it too late to do that?  Trying to do this the cleanest way possible.

Thank you for your help.  I'm new to C filings and trying to get them right the first time!

[YoungCPA]

I don't know about you, but I probably have several clients that don't notice these kinds of things, but I'm teaching them to look/review!

When we receive the CP2000, I would explain that we included the income on the C Corp return and that the issuers of the 1099's filed them incorrectly?  Would they accept that?  I'm afraid they won't and will go ahead and assess self employment tax, etc. and my client ends up paying tax on the same income twice (once on C return and then again b/c of the CP2000 on the 1040). 

[sjrcpa]

I don't think I would ask the 1099 issuers to do corrected 1099s. For all they know, they did not make a mistake. Did your client inform them when he incorporated and ask them to pay his corporation?

[qbteachmt]

It seems there is more trouble than just: issued a 1099-Misc to the SSN. Look at this statement:

"I find out that my client was issued 1099's to her social security and to her old Sole Prop EIN in addition to her C Corp EIN"

Are you stating some things are double-reported? Are you stating there is a Mix of reporting? The Sole Prop EIN is just an alias for the SSN, so unless that is double-reported or self-overlapping, those two, in itself, isn't part of the problem here.

And your client needs to be counseled on Contracting, because the SSN should never be provided; she is an Employee. Imagine if any employer is revealing employees' SSN to their own customers.

"She was incorporated in 2017 and asked all Payers to use the new EIN"

By issuing a Letter on letterhead, for the new corporation, and including a W9 when asked for, so that the client has it all on file? It is likely your client isn't signing legally as "President" or some other title indicating that the corporation is a separate entity from herself, which is done for legal and protective purposes. Why form a corporation when you don't honor the purposes?

This person needs legal and financial counseling. Have you considered what her insurance policies, vehicle titles, debt obligations, etc, all look like from the perspective of Name and Title of the responsible party? Has she been using her personal car for business and letting the corporation pay for all operating costs, for instance?

And the reason I would never work on the 1040 until the 1120 is done is specifically because of common mismanagement and commingling issues as you see happening here.

[YoungCPA]

I agree with you re: preparing the 1040 first .  Lesson learned.

Income was not double reported.  What I know is that some 1099's were issued to her SS and some (different from the SS ones) to her Sole Prop EIN when they shouldn't have been.  

I'm doubting that she issued a letter on corporate letterhead.  She's not honoring the purpose of the corporation.  I realize that and am trying to clean this up for her so she can move forward.  She doesn't want the complications of managing a C corp and would like to dissolve the corp and go back to sole prop or single member LLC.

Yes, she is using her personal car for business and letting the corporation pay for all the operating costs.  

Thank you for all your input.  It's appreciated!