Fix a Tax Bill From an Unfiled or Underreported 1099

If you get an unexpected tax bill or collection notice from the IRS that’s the result of unreported 1099 income, you have two main ways to fix this problem. The approach you take depends on why you had unreported 1099 income.

If the underreported income is due to not filing a tax return, then you should file the missing tax return. If you filed a tax return that didn’t properly document all of the 1099 income earned, then you’ll need to either pay what you owe or explain to the IRS why you disagree.

In this article, we’ll explain both approaches and discuss what you can do if 1099 issues result in an unmanageable tax debt. If you need assistance, 20/20 Tax Resolution is here for you. Póngase en contacto con nosotros today to schedule a free consultation.

Key Takeaways

The IRS knows about self-employment and other forms of taxable income because third parties must file 1099 forms with the IRS.
If a taxpayer underreports 1099 income, the IRS will typically send the taxpayer a CP2000 notice.
If a taxpayer doesn’t file a return, the IRS may use numbers from 1099 forms and other income and wage documents to generate a tax return for the taxpayer.
Depending on the situation, you may need to accept the IRS’s changes, amend your return, or file a return.
If there’s a large amount of money in dispute or the taxpayer doesn’t fully understand what went wrong, it’s a good idea to get the help of a licensed tax resolution professional.

Why Unfiled or Unreported 1099s Resulted In a Tax Bill

Unreported 1099 income can lead to a surprise tax bill from the IRS because the IRS expected you to report income, but you never did. To best explain why this happens, let’s take a step back and explain IRS 1099 forms.

What Is an IRS 1099 Form?

There are many different types of 1099 forms (1099-MISC, 1099-K, 1099-DIV, 1099-NEC, etc.), and they largely differ based on the type of taxable income reported and who’s filing the 1099. Most 1099s originate from employers and third-party financial institutions, like banks. These entities are required to file the appropriate 1099 form with the IRS when they make eligible payments to taxpayers.

When the IRS receives a 1099, it indicates that the taxpayer may have taxable income and may have a filing requirement. Unfortunately, in the absence of any other information, the IRS may assume that you have a filing requirement or that you failed to report taxable income. At that point, they may reach out and tell you to file or adjust your return – and depending on the situation, you’ll either need to file a return, explain why you aren’t required to report that income, or take other actions as needed.

Common IRS Tax Notices Sent In Response to 1099s

The type of tax notice the IRS sends you depends on what happened.

You Didn’t File a Tax Return

If you should have filed a tax return that included the 1099 income, you can expect one or more of the following notices:

CP59: The IRS has no record of you filing a tax return for the prior tax year.
CP2566: The IRS has proposed a tax assessment against you.
CP3219N: You have 90 days to file a petition with the U.S. Tax Court or file the missing tax return. (This notice is often sent via Certified Mail.)

When the IRS prepares an SFR, it’s not doing this out of kindness. Rather, the IRS prepares the return with incomplete information relating to things that would lower your tax bill, such as deductions, credits, and exemptions. As a result, the SFR often results in a tax bill that shows you owe more than you actually owe.

The IRS Expected You To Report More 1099 Income

If you filed a tax return that was missing (or underreported) the income reported to the IRS through 1099s, then you can expect the following notices:

CP2000: The IRS is aware of an inconsistency between the reported 1099 income and the income you included on your tax return.
CP3219A: This is a Statutory Notice of Deficiency that the IRS sends when it has a proposed change to your taxes. However, this is not a bill.

The key here is that the IRS was expecting you to report more 1099 income. This could happen if the tax return you filed didn’t include income from a 1099 that the IRS received. It might also occur if the 1099 income you reported on your return doesn’t match the amount listed on the 1099 sent to the IRS from the third party.

You Owe the IRS Money

Whether you’re missing a tax return or you allegedly misreported your 1099 income, if the IRS assessed a tax against you, then you can expect the following notices:

- CP14: This is one of the first notices the IRS sends if you have an outstanding tax bill.
- CP501: This is a reminder notice about your tax debt.
- CPT503: Another IRS reminder notice about your tax debt and one of the last you’ll receive before the IRS takes more drastic action.

CP504: The IRS will seize your state tax refund for the unpaid tax. This notice also warns of other levies and wage garnishments.
Final Notice of Intent to Levy: This exacción fiscal notice, which may have a range of different numbers, advises you of your right to request a Collection Due Process hearing. If you don’t do that or make payment arrangements within 30 days, the IRS can and will move forward with wage garnishments, bank levies, or asset seizures.

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How To Fix Your IRS Tax Bill Resulting From 1099s

If you disagree with the tax bill, there are several steps you need to take to address the situation. But for your protection, you may want to reach out to a tax professional, especially if there’s a lot of money at stake.

Step 1: Review Your Tax Information

If you disagree with the IRS’s calculations, you’ll need to provide evidence to support your claims. You can do this by reviewing relevant paperwork, such as invoices you may have sent to your clients or financial statements that reflect your investments. If you think your financial institution or employer made a mistake, you can contact them to investigate.

If you filed a tax return that the IRS says has incorrect 1099 income information, you should also review that return for errors.

Another important part of this review process is to look at your personal tax records that the IRS has on file. You can do this by requesting your IRS tax transcript. Your transcript will show what income information the IRS received from various third parties, as well as basic tax return information, such as claimed deductions and credits.

Step 2: Respond to the IRS

If you’re responding to an SFR, this step will require you to prepare and file your missing tax return. If you’re responding to a CP2000 notice, you’ll need to explain why you disagree with the IRS and provide sufficient documentation to support your position. If you discovered the problem originated with a prior filed tax return, you may want to file an amended tax return.

Step 3: Follow Up With the IRS

After filing your missing tax return, filing an amended tax return, or explaining the income inconsistency reported on the CP2000 notice, you can check on the status of your response. If your response involved an amended tax return, you can check the status of your amended return online. If you submitted a different response to the CP2000 notice, you can call the IRS using the number listed on your CP2000 notice. If you filed a missing return, you can create an online IRS account to check its status.

Step 4: Consider Professional Tax Help

If your attempts to fix your 1099 tax problem have failed or appear to have stalled, consider talking to a tax professional. They may be able to better explain what’s going on or provide advice on what you need to do next. They can also offer guidance on what to do if you end up with a tax debt you can’t fully pay.

Ways To Resolve Your Tax Debt

A lot of taxpayers can’t pay their full tax balance all at once, especially when they receive an unexpected tax bill. Therefore, the IRS has several tax settlement options that can offer more time to pay off your tax debt or lower the total amount owed:

No matter which option you choose, you need to be current with your tax return filings. Any missing tax returns will typically make you ineligible for IRS tax relief options.

20/20 Tax Resolution Can Help With 1099 Tax Problems

If your surprise tax bill is the result of a basic error with a 1099, you may not need to consult with a tax professional to fix the problem. But if your tax bill involves a significant amount of money or you don’t know how to prove to the IRS that it’s wrong, it’s time to start thinking about talking to someone with experience handling complicated tax problems. The IRS starting the tax collection process is also a sign you might need help from a licensed tax relief professional.

Get started by contacting 20/20 Tax Resolution for a free consultation.

Unfiled or Underreported 1099 FAQs

Why is my IRS bill so high if I didn’t file a tax return?

It’s often because the IRS filed a substitute for return (SFR) for you. SFRs usually result in a tax bill that’s bigger than what you really owe because the IRS doesn’t apply all the credits, deductions, or exemptions you’re entitled to claim.

What is an SFR, and how do I replace it?

An SFR is a tax return that the IRS files for you. The IRS uses SFRs to take the first steps in assessing a tax against you. The good news is that you can respond to the SFR by filing the missing tax return that claims all your deductions and credits so that you pay the right tax liability.

How can I dispute a CP2000 notice?

When you get a CP2000 notice, there should also be a response form where you can indicate your disagreement and attach any additional information and documents in support of your position. If there’s no response form attached, the CP2000 notice should include instructions on how you can challenge the IRS’s conclusion that your previously filed tax return contains incorrect income information.

How can I lower my tax bill if I forgot to report 1099 income?

Depending on how you earned that 1099 income, you might be eligible to claim certain deductions that can minimize any tax increase you might face.

Can I settle a tax debt after the IRS files a tax return for me?

Sure, but you probably don’t want to, as the IRS likely calculated a larger tax bill than you actually owe. What you should do is file the missing tax return, which will likely lower your overall tax debt. From there, you can look into negotiating with the IRS to settle your tax debt with them.

What happens if I ignore an IRS tax bill?

The IRS will send you several notices or letters asking you to pay your tax bill or make arrangements with the IRS to settle your tax bill. If you continue to ignore the IRS, interest and penalties will continue to accrue. Eventually, the IRS will begin the tax collection process, which can include tax liens and levies.

Sources

– https://www.irs.gov/businesses/small-businesses-self-employed/filing-past-due-tax-returns

– https://www.irs.gov/newsroom/what-to-expect-after-receiving-a-non-filer-compliance-alert-notice-and-what-to-do-to-resolve

– https://www.irs.gov/individuals/understanding-your-cp2000-series-notice

– https://www.irs.gov/individuals/understanding-your-cp59-notice

– https://www.irs.gov/individuals/understanding-your-cp2566-notice

– https://www.irs.gov/individuals/understanding-your-cp3219n-notice

– https://www.irs.gov/individuals/understanding-your-cp501-notice

– https://www.irs.gov/individuals/understanding-your-cp503-notice

– https://www.irs.gov/individuals/understanding-your-cp504-notice