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Finding Surprise Income on Your 1099

A client of mine told me she had just finished filing her corporate tax return when an unexpected 1099-MISC—which reports miscellaneous income–arrived in her mailbox. Normally, that wouldn’t have been a problem since she meticulously records all of her income throughout the year.

The problem? The amount on the 1099-MISC was several thousand dollars more than the income she had received from the form’s issuer. Upon investigating the discrepancy, my client found the difference to be a payment the company had issued on December 31st.

Since the check was issued and mailed out on December 31st, it’s absolutely impossible for my client’s corporation to have received it in 2010, right? That’s pretty obvious to anyone.

That’s why there is something called the Doctrine of Constructive Receipt. Here’s what IRS says about it:

“Income is constructively received when an amount is credited to your account or made available to you without restriction. You need not have possession of it. If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations.”

As a result, my client’s corporation doesn’t need to pay tax on that income. The catch: IRS computers attempt to match all 1099 income to a respective taxpayer identification number. If the taxpayer doesn’t report enough income to cover the 1099s sent to IRS, the agency’s system generates a letter proposing additional taxes on the unreported income.

So, how do business owners avoid paying tax on income not yet received?

Step 1. Report ALL income from all 1099s, even if the amounts don’t correspond to income received.
Step 2. Deduct the income that you haven’t received on one of the “other” expense lines, describing it as either “Not Constructively Received in 2010” or “See Statement.”
Step 3. On the “Statement” explain clearly why the amounts on the 1099s should not be considered income in the current year. Here are some sample explanations:

a)     The check was not received until January 2nd. (Try to keep the envelope with the postmark in your file.)
b)     The payor made a math error and has not yet corrected it. (Include a printout of the income you did receive. Keep it in your files.)
c)      You reported the income in your corporation tax return, or on your Schedule C, or partnership return. Enter the employer identification number (EIN) where you reported the income.
d)     Or whatever other error it could be. Though you should keep documentation to prove your case, you don’t need to include it with the tax return.

Step 4. Make sure you include the income in question in 2011.

Folks who keep proper books won’t have a problem accounting for the income. Folks who rely on 1099s to generate the income for their tax returns could have a problem. Set up a 2011 tax file now and include the reminder.

The same principal applies to all sorts of 1099s like dividends, interest income, etc.

No doubt, you have received CP-2000 notices from IRS. Those are the notices that say you have unreported income. Did you ever have to pay extra money because the IRS says you had income you say you didn’t get?


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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (, retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at