This is a follow-up to the previous discussion about the 1040-NEC form. >Consider the scenario where a taxpayer receives a 1099-NEC, decides it is
for hobby income and reports the income as Other Income on the 1040 without >doing a Schedule C. The IRS questions this and after communication with the >taxpayer decides that the activity is a business which requires a Schedule C >and possible payment of SE Tax. What happens at that point? Does the IRS >somehow calculate the SE tax on the assumption there are no business
expenses that would reduce the income, or is the taxpayer given the >opportunity to submit a revised 1040 with the requisite Schedule C? Just >wondering procedurally how the IRS handles this.
Rick <rick@nospam.com> wrote:
This is a follow-up to the previous discussion about the 1040-NEC form. >>Consider the scenario where a taxpayer receives a 1099-NEC, decides it is >>for hobby income and reports the income as Other Income on the 1040
without
doing a Schedule C. The IRS questions this and after communication with >>the
taxpayer decides that the activity is a business which requires a Schedule >>C
and possible payment of SE Tax. What happens at that point? Does the IRS >>somehow calculate the SE tax on the assumption there are no business >>expenses that would reduce the income, or is the taxpayer given the >>opportunity to submit a revised 1040 with the requisite Schedule C? Just >>wondering procedurally how the IRS handles this.
The IRS may recalculate taxes owed and send a bill, yes, and will not
infer that there were business expenses till the taxpayer claims them. The >taxpayer still has an opportunity for an administrative appeal to make
the argument that it was income from a hobby and not a business, but the >deadline to appeal is short. After all administrative appeals have been >exhausted, then the taxpayer can file in district court, but that's way
too expensive given the dispute.
The taxpayer doesn't lose his opportunity to submit an amended return
with Schedule C if he's accepting the government's position that it's >business income and not hobby income.
Here's a suggestion for filing your 2022 return. Put a note next to
the box for reporting other income. "$1329 gross aggregating multiple
1099s. This is not business income subject to self-employment tax." Then >report the net income in the box. Make sure "not subject to self-employment >tax" is in very large type to encourage the clerk entering data not
to recharacterize the income.
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