Ask Me Help Desk - Apparent canceled debt and 1099-MISC

Apparent canceled debt and 1099-MISC

Hello.

Recently, my wife and I received a notice from the IRS for taxes due for unreported income from 2005. We were married in Ocotober of 2005 and filed jointly for that year.

She has many medical bills and one of the clinics she visited a few years ago filed a 1099-MISC form for $3000 of "nonemployee compensation" with the IRS. She did not receive anything (1099, etc.) directly from the clinic. This does not seem correct to me.

The clinic apparently changed names at some point durning 2005 (the services she received were several years ago) and I assume they cleaned out their past due accounts by canceling the debts. However, is this the correct process? I thought that any canceled debt had to be reported on form 1099-C. The instructions for 1099-MISC explicitly state that forgiven debt cannot be claimed on that form.

I know that there are only certain entities that MUST send the person a 1099-C, but the fact that this was a 1099-MISC has me stumped. Additionally, the IRS is stating that the $3000 in nonemployee expenses results in $1500 in additional taxes owed. Seems like there are some miscalculations on the forms they sent us.

She is attempting to get information from them but it looks like it's going to be difficult. One of her friends said that she's tried to get some records from them since after the change and they claim that the records were lost. Since she received nothing until being blindsided just now (April 2007) tracking records is going to be very difficult.

Any direction one of you gurus could give me would be greatly appreciated.

Thanks

Steiner

Steiner:

Contact the IRS and discuss the matter with them. You CAN contest the validity of the Form 1099-MISC, and that will make a difference in the amount of tax due.

Quote:

Originally Posted by AtlantaTaxExpert

Steiner:

Contact the IRS and discuss the matter with them. You CAN contest the validity of the Form 1099-MISC, and that will make a difference in the amount of tax due.

Thanks for the reply. We are definitely contacting the IRS, no question. The letter came in the mail on Friday so we have to wait until Monday to speak to a person. I'll probably get an ulcer between now and then.

Reading all the publications, I don't see how on earth the clinic could possibly claim bills (which my wife is still paying on) as nonemployee compensation. Furthermore, she would have to claim self-employment and come up with a code to put on Schedule C just to claim the "income". I didn't see "surgery patient" as an occupation in the tax book.

By the way, we just moved to SC from Sugar Hill and the clinic is up in . She'll be down there next week to spend as long as it takes at that clinic to get information from them.

Thanks again.

Steiner

Steiner:

The person who prepared the Form 1099-MISC simply dod not know the difference between 1099-MISC and 1099-C.

Happens all the time.

Quote:

Originally Posted by AtlantaTaxExpert

Steiner:

The person who prepared the Form 1099-MISC simply dod not know the difference between 1099-MISC and 1099-C.

Happens all the time.

Just an update if you're interested or have any input as to whether you think we may get this dropped:

My wife drove down to for a few days to see what is going on with that clinic and get copies of their records. The clinic that sent in the 1099-MISC is no more... the owner closed the doors, took all computers and records, and shut down at the end of 2005. The current owners of the clinic told my wife that they have no records for patients prior to January 2006 and that they've had several people in recently (many in a rage) who have been audited for the same thing: a 1099-MISC filed against them for 2005 with nothing received on their part and the IRS wanting self employment taxes. The current owners also told her that they didn't even know who the former owner's attorney for contact was anymore so I take that to mean he has some legal troubles.

So, apparently the original clinic owner took all the records, shut down, and wrote off as much as he could (incorrectly) without trying to even bill former patients. There are no agreements for cancelled debt between him and what seems to be a growing number of irate former patients. Furthermore, my wife found some cancelled checks to the clinic from mid-2003 so the 36 month "nonpayment testing period" had not expired on her account since the owner filed for 2005.

I'm calling the IRS again tomorrow to give them this new information. They already said they would give us whatever time we needed to get it straightened out. We'll be drafting a letter along with copies of my wife's documents and a letter from the current clinic owners stating what they told her, as well as a nice red flag to put on forms filed by the former clinic.

Hopefully it'll all work out. Thanks.

Steiner

Sounds like you have a plan. With the documentation that you provide to the IRS, I'm sure that they will make the correction. They were just doing their job in notifying you of the discrepency of reported income. Be patient and the situation will be resolved.

In dealing with the IRS, anything you send to them in the Mail send Certified Mail with return receipt.

They are famous for stating they never got it, and you are guilty until proven innocent>

Take Mr. Yet's advice, plus keep copies of EVERYTHING you send them.

However, do not be paranoid about it. The IRS was merely responding to incomplete information. Once all of the facts are known, they IRS ruling will be adjusted accordingly.

Quote:

Originally Posted by AtlantaTaxExpert

Take Mr. Yet's advice, plus keep copies of EVERYTHING you send them.

However, do not be paranoid about it. The IRS was merely responding to incomplete information. Once all of the facts are known, they IRS ruling will be adjusted accordingly.

Not paranoid, pass dealing with the IRS on a matter just like this. Provide proof of their error and It took 13 months for them to admit they were wrong, but only after numerous letters and phone calls.

A LOT depends with whom you deal. I am currently working with an IRS agent who readily admitted her error when I cited the appropriate revenue letter to her.

Well, we just received the notice of closure from the IRS. They were fairly quick (around three weeks) in closing out the matter and notifying us. We did not have to pay any additional taxes. I would not like to be the former owner of that clinic right now...