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Taxable Non-cash Prizes

1/31/2012

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One of the reasons I love preparing taxes is all the interesting tax situations people find themselves in.  I like the challenge, it lays the groundwork for me to learn more about my profession.  Last night was no exception.  My client waited until I was completely finished preparing the 2011 tax return and then told me why there was such a concern about not receiving a refund from the IRS.

During 2010 the client had received a prize valued at $5000.00 and (wrongly) assumed that because it was not cash, it was not taxable.  The company that had given away the prize did, in fact, provide my client with a 1099-Misc to file with the 2010 tax return.  Subsequently, the IRS sent out a notice to the taxpayer advising them of additional taxes owed.  The client should have immediately consulted a tax professional, but did not.  Instead, they believed the IRS assessment and agreed to pay the additional tax!  Basically, since there was tax owed, my client thought that the IRS would garnish the refund due for 2011.  It is entirely possible that may happen, but we can still try to rectify the situation before it does.

Now, I'm not saying that there isn't tax owed, but never just take the IRS's word for it on how much you owe.  They don't know your individual tax situation.  All they know is you had unreported income and they want their share of the taxes from that income.  The right way to handle this is to amend the tax return from 2010.  This way you will be sure to pay only what you have to pay, not what the IRS says you owe them.

I had a long conversation with my client about this particular situation and advised that they contact the IRS immediately to notify them that an amended 2010 return will be submitted shortly.  I also advised that they contact the company that awarded the prize to receive a duplicate 1099-Misc as we would need to attach it to the amended return.

So, if you ever find yourself in a similar situation immediately contact your tax professional and be sure to show them the notice from the IRS.  Do not pay more than you owe. EVER!  In fact, if you receive any notices from the IRS or your state agency, contact your tax professional as soon as possible.
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February

1/25/2012

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Its almost here. The second month of tax season.  So far so good, have you filed your taxes yet? No? Thats ok!  While some of us have already received our W2s, the rest of you should have them no later than next week.  But before you rush to find out what your refund is be sure to have all your important documents ready.  There's no fun in having to wait an extra day to file.  Especially when that extra day translates into waiting an additional week for your tax refund.  If you owe, then no worries, you have until April 17 to pay.

If you have any investment accounts there is a possibility that you won't receive your 1099s until mid-February (or later).  If you have already filed a return and later receive a document that needs to be included with your tax return, you will need to amend.  Unfortunately amending a return is required to be filed by paper (no e-file available) and will take 8-12 weeks to process, possibly longer during peak season.

So, bottom line for February, make sure you have all your documents before you go see your preparer (ME!).  Have an excellent end to January and wonderful start to February!

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