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PDtax
PDtax, CPA firm owner
Category: Tax
Satisfied Customers: 1980
Experience:  32 years tax experience, including four years at a Big 4 firm.
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I have a question about interest expense. How is that reported

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I have a question about interest expense. How is that reported to the IRS? For instance if I give a buy a piece of equipment for a company (not mine), but enter into an agreement that the company is to make monthly payments to me for 36 months after-which they have to pay back the principal. How does the company treat those interest payments from a tax perspective...I know I should treat the interest payments as interest income, but does the company submit a accounting of some sort to the IRS saying that they company has been making these interest payments to me? How is it recorded? For instance if I do contract work I receive a 1099...I have some interest payments that I didn't record on this years taxes and I wanted to figure out if I should do so. In speaking to the company, they mentioned that they didn't have an itemized accounting of all the interest expense that they paid throughout the year, so the IRS would flag those payments. Long story short the payments only lasted 5 months and then they paid me in full for the cost of the equipment, so there will be no future payments.

I don't want to go back and amend my tax return...can you give me some insight?
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.

PDtax :

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Expert:  PDtax replied 1 year ago.
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Expert:  PDtax replied 1 year ago.
Hi Shawn,

Let me understand what you did. You sold a piece of equipment to a company, who agreed to pay you interest then principal. The company paid you some interest payments, then paid the note off. I am assuming this was all done in 2012.

I assume also you are not an equipment dealer nor a regular lender. I also don't know how much interest income you earned.

IRS would normally require you as the lender to issue a 1099-INT to the company for the interest they paid, and send a copy off to IRS. You didn't. You also didn't report the interest income.

Since you are not in the business of lending or financing, you need not file Form 1099-INT. That would normally be your burden.

You should report the interest income on your tax return, even if you have to amend. Some people choose not to if the amount of extra tax due to the government is not a lot, but that is your call.

Thanks for asking your question at Just Answer. Please advise if you need anything else. Positive feedback closes out your question, and tells management you are happy with the service. I'm PDtax.
Customer: replied 1 year ago.

I guess I am more concerned about how it would be reported on their end. They told me that they didn't report the interest payments, but from their perspective how should it have been accounted for.

Expert:  PDtax replied 1 year ago.
Since you sold them equipment, one might guess they just reported the entire amount as the price of the equipment, and no interest. They would then record depreciation on the equipment over time, and no interest expense.

It should have been recorded by the buyer with some interest expense, and the remainder as purchase price.

Thanks again.

PDtax

Customer: replied 1 year ago.

Would they have itemized the interest expense, so it would have shown my name and company? I trying to figure if there is any way the IRS would find out about this other than doing an indepth audit? I know I am taking a gamble on this. Is there anything else that would trigger the IRS to find out about these interest payments? Perhaps anything that they reported on their side? Thanks.

Expert:  PDtax replied 1 year ago.
The key is what you stated earlier, that they did not keep track of the interest paid. They would not report interest they did not track.

If not a lot of money, the company likely did not claim interest. IRS likely has bigger issues. Even if they did audit, the company likely reported the purchase price, including all money paid to you, as the cost of the equipment. It is likely your involvement or reporting will never be matched up with this transaction.

That doesn't mean you shouldn't pay the tax on the interest. You should. But exactly how much interest are we talking about here?

Customer: replied 1 year ago.

$140K

Expert:  PDtax replied 1 year ago.

Then, even if the interest is only a fraction of that, amend your return and report the interest income. Pay the tax and be done with it.

 

Thanks again from Just Answer.

Customer: replied 1 year ago.

140,000 was the interest.

Expert:  PDtax replied 1 year ago.
Then reporting the income and paying the tax makes even more sense.

IRS has to present as an agency capable of overseeing much smaller levels of income, but their best 'manpower return' is large transactions like yours.

Report the income, pay the tax.

If this answers your question, please accept the answer provided to close out your question. Thanks again from Just Answer.
Customer: replied 1 year ago.

What are the fees associated with not paying this tax if the IRS was to find out? Penalties? Could I plead ignorance?

Expert:  PDtax replied 1 year ago.
Shawn,

My answer to your question remains report the income and pay the tax.

The problem with the size of the income you are trying not to report is that the IRS can assert fraud statutes, with an unlimited statute of limitations on examination. Fraud adds a 50% tax penalty, on top of the failure to report, failure to pay, and interest charges. In three or four years, if IRS asserted fraud, you would owe them the amount of the unreported interest. Many states take a similar position, that is, if the income was not reported to them, they can claim an unlimited statute to assess a tax, and add penalties and interest. Think hundreds of thousands of dollars in total taxes, penalties and interest.

You can contest the claim, if it is ever made. Tax attorneys or CPAs for your criminal tax defense can cost hundreds of dollars an hour above and beyond the tax cost.

Thanks again from Just Answer. Please provide positive feedback for the assistance provided.

PDtax

PDtax, CPA firm owner
Category: Tax
Satisfied Customers: 1980
Experience: 32 years tax experience, including four years at a Big 4 firm.
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