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Posted by Bill on March 1, 2007, 9:08 pm
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baltork@hotmail.com posted:
> Ok here is the situation. I received a letter
> from the IRS a couple of days ago stating that
> I owe them $11,000. $1,700 of that is
> penalties. I have had my own business for
> many years and thought I was pretty good at
> doing my own taxes until 2005. In 2005 I only
> worked for about 4 months out of the year.
> The rest of the year my wife and I were out of
> the country, travelling (we sold our house and
> backpacked for a year). About 90% of my
> business comes from company X. While I was
> gone I let a friend (who also does home
> repairs) take the business from company X
> with the understanding that he would give it
> back when I returned. And he did. The
> problem was that I received I recieved the
> 1099 from company X for the whole year but
> when I filed, I only claimed the income that I
> received personally. And I didn't account for
> where the other money was. Now the IRS
> wants their taxes on the rest of the money and
> of course is operating on the assumption that
> it is all profit.
> There are a few complications though. My
> friend is isn't too interested in me giving his
> name to the IRS. And I feel like I owe him (but
> not $11,000) for keeping my business going.
> What kind of documentation do I need to send
> to the IRS to clear this up?
This is really more an ethical and personal relations
problem, than a tax problem.
It seems you have properly reported and paid the taxes that
you owed. But you have a friend who _didn't_ report the
portion of the 1099 income which he received. Probably, you
should have contacted the paying customer in early 2006 when
the 1099 was issued, to request a revised 1099 for yourself,
and a separate one for the payments which went to your
friend.
At this point, your straightfoward action would be to advise
your friend that you're going to tell the paying customer
what happened, request a belatedly-revised 1099, and that he
should file a "late" return (from what you say) and report
his income. You might offer to pay the interest charged
him, as a gesture of good will (though I don't believe you
really _owe_ it) -- but not the penalty, since it isn't your
fault he didn't file.
> Will this trigger an audit?
Not necessarily.
> If I tell them that the other money went to my
> friends business, will they be contacting him?
Most definitely, if he doesn't proceed to file a return for
2005 which accounts for that "missing" 1099 income,
especially if the paying customer issues a revised form
naming him as the recipient.
> I know I have paid the taxes I owed on the
> money I received. I know my friend had to run
> that money he recieved through his books,
> though he informed me that has yet to file for
> 2005.
Those are the facts which I addressed above.
> Am I ultimately responsible for the
> unaccounted for money?
This is where the ethical issue gets tricky: Did you have
your friend "pretend" to be you, in order to maintain the
business relationship while you took an extended vacation?
If that were the case, then your obligation is much greater.
If you simply turned the assigned work and associated
income over to him, without any pretense, then that's not an
issue.
> Any help would certainly be appreciated. I
> want to have all my ducks in a row before I
> respond to the IRS.
A good idea.
Bill
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