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1099-MISC (2012), box 1, Rents $6,xxx was received in the SS

of an individual member of...
1099-MISC (2012), box 1, Rents $6,xxx was received in the SS of an individual member of an LLC, which reported the said rental income on its Form 8825 attached to Form 1065 (2012). In filing Form 1040 (2012) of the individual, how to report the said 1099-MISC (2012), box 1, Rents income?
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Answered in 12 minutes by:
10/11/2013
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,160
Experience: Taxes, Immigration, Labor Relations
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Lev :

Hi and welcome to our site!
I assume that the partner is reported the rent which was actually received by the partnership.
So such situation is classified as nominee income. A nominee is someone who receives, in his or her name, income or interest that actually belongs to another individual or entity.
If the individual receives a Form 1099 for amounts that actually belong to another person or entity - that person is considered a nominee recipient. It may be necessary to file with the IRS and furnish to the other owners the same form Form 1099 for that amount.
Because the IRS expects to see that amount reported on the taxpayer's individual tax return - I suggest to attach a note with explanation of facts and mention that was a nominee income which actually was reported on the partnership tax return and provide the tax ID of the partnership. In this case - no need to report that amount on 1040.

Customer:

Thank you for your prompt reply.

Customer:

What about the increase in audit risk if such an explanation is written to the IRS?

Lev :

In this case - you may contact the payer and ask to change 1099MISC form - so it would be reported to the partnership. And the form issued to the individual would be corrected to zero amount.
Otherwise - we may not affect IRS audit selection procedure.

Lev :

The fact of reporting income incorrectly is the audit factor - not the note with explanation of that fact. So if we want to reduce the possibility of the audit - the issue with reporting must be targeted.

Lev :

However - if that is actually rental income of the partner - not of the partnership - the situation is different. In this case both tax returns should be amended and rental income should be correctly reported by the recipient.

Customer:

SO if the 1099-MISC was wrongly issued to the member, should the member issue the 1099 to LLC or should the member just explain the situation to the IRS. LLC return has already been filed.

Customer:

The rental income belongs to partnership having several partners.

Customer:

>I suggest to attach a note with explanation of facts

Lev :

If the form 1099MISC reports to the individual income which belongs to another entity like the partnership in your situation - that individual is a nominee. I would only attach a note with explanation of facts why this income is not reported on 1040 - because the IRS would ask that question anyway - so the note should prevent possible questions.
Filing another 1099 to LLC might be more clear way - but because we are late with that form - I would not do that - just would use a note.

Customer:

What Form is used to write the note? Form 8275?

Lev :

There is no special form to write a note...
We do not disclose the position for the form 8275 - you just explain facts - use a plain paper.

Customer:

the return is efiled.

Customer:

no paper return with which to attache the plain paper (explanation).

Lev :

First of all - The IRS accept notes with e-filing. I know that not all e-file providers allows to send a note - but that is a different issue.

Lev :

If you e-file and have to send additional documents, forms that may not be e-filed, etc - the form 8453 is used - http://www.irs.gov/pub/irs-pdf/f8453.pdf

Lev :

However - you may send a note separately. If you simply do not report that income - you may expect a note from the IRS -- and then - you will provide the note anyway.

Customer:

You said to write explanation without showing 1099MISC income, that might trigger a letter from IRS as it would not match its records.Of course, with explanation the taxpayer may never receive the letter. However, to stay on the safe side, how about showing the 1099 MISC amount on Schedule E, then writing the same amount as Other Expense, reducing income to zero. Then writing an explanation to the IRS about why other expense amount is the same as 1099 MISC amount.

Lev :

If that is not taxpayer's income - reporting such income would not be correct - not sure how 'safe' that would be... What about next year? Rental income will disappear? What about the property being rented?
When you report rental income on schedule E - you confirm that income is reported correctly and received by that individual. Then - you will need to proof expenses.
Instead - you want to write a letter telling that were not actual expenses but a trick to shift the tax liability to another entity... What reaction do you expect from the IRS person who will read that explanation?
What your reaction would be if the IRS will simply disallow deduction because these are not expenses paid? That might be the worst case scenario and I wish never happens ...

Customer:

>If that is not taxpayer's income - reporting such income would not be correct -

Customer:

The above is correct. The rental income should go to EIN, not to SS#. Since the IRS computer matches 1099-Misc with SS#, how about issuing 1099-MISC to LLC from the individual nominee, even though late now? It is just an information (1099-MISC) form.

Customer:

how much is the late filing penalty of 1099-MISC?

Customer:

When the IRS computer prints out a mismatch of 1099-MISC, dos it refer to the explanation statement?

Lev :

If the rental income should go to the partnership - the simplest way would be to contact the payer and ask for correction.
If that is not possible - such income is considered as nominee income and may be reported as above.
That are correct ways to handle the situation.
Workaround as you suggested is possible to report rental expenses as payment to the partnership - but in this case - you agree that income was correctly reported to the taxpayer. Adding explanation with an opposite statement will contradict and itself may attract IRS attention. I do not think you need any explanation in this case - but you do need supporting documents for that payment.
The late filing penalty for 1099-MISC is $50.
The IRS computer does not refer to the explanation statement - that requires manual entry by the IRS employee.

Lev :

Specifically for penalty - see page 14 in instructions - http://www.irs.gov/pub/irs-pdf/i1099gi.pdf
The penalty is:
$30 per information return if you correctly file within 30 days (by March 30 if the due date is February 28);
$60 per information return if you correctly file more than 30 days after the due date but by August 1;
$100 per information return if you file after August 1 or you do not file required information returns;

Lev
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