Stock sale reported on 1099-MISC instead of 1099-B?

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Stock sale reported on 1099-MISC instead of 1099-B?

Postby 2quik6 » Tue Jan 29, 2013 9:16 pm

I sold my shares of a business I owned along with 3 other people, actually 2 of us sold our shares back to the remaining 1 person. Shares were purchased with $$ from the company account that equaled 1/3 of the net worth.
Now I received a 1099-MISC with the stock purchase amount reported as "Nonemployee Compensation", which is totally incorrect.
We have many pages of signed and notarized documents clearly stating this was for stock buy back, and we have the copies of the cancelled / bought back stock shares which were signed back over.
My question is, if the remaining owner refuses to submit the needed paperwork to have this mistake corrected, what are my options?

Obviously by the owner reporting it as nonemployee compensation, that would be expenses against his current/future revenue and give him tax advantages on the revenue he made after the sale, which is completely illegitimate. Stock buyback I suspect are not considered expenses. Nor do we have any kind of agreement to do any sort of contract labor back to him for compensation.
I've heard that I could report it in my tax return as simply stock sale proceeds, and write a short letter explaining that the amounts were incorrectly reported on 1099-MISC, and also provided copies of the pertinent pages of the company board meeting minutes that clearly state stock buy back and are signed by all 3 board members/owners. This may create an audit flag, which is fine with me as I have nothing to worry about, but the remaining owner should be the one being worried since he reported it as a tax advantaged expense.

Hope this is in the right place to post, I'm in the very early stages and just have no confidence that the owner will change it, he was very sore we were leaving but understood our circumstances as he had became engrossed in his family and had put aside the growing of the company and the 2 of us that left had better opportunities to grow.

Thanks
Rob
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby MarkNYC » Tue Jan 29, 2013 10:36 pm

If the payer refuses to issue a corrected 1099, your primary concern should be preparing your tax return properly knowing that the IRS will receive incorrect information. In this situation, I suggest you list the 1099 nonemployee compensation amount on line 21 of your 1040, along with the name and tax id number of the payer. On the same line, list the item as a negative amount, with a brief statement for Line 21: "closely-held stock sales proceeds incorrectly reported on 1099-MISC as nonemployee compensation - properly listed on Form 8949." Then list the sales transaction properly on Schedule D and 8949. Don't attach a separate letter or any documentation pertaining to the sale. I think reporting the transaction in this manner will minimize the likelihood of an IRS notice, but you should certainly save all supporting documentation in case a notice arrives.
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby Calm Man » Wed Jan 30, 2013 2:04 pm

I have no expertise in this area. But can a business issue a 1099-B? I thought that was only for brokers. Also, this is one of those cases that came up in another thread where it would be very well worth your while to use a CPA who has experience in business sales.
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby 2quik6 » Wed Jan 30, 2013 9:01 pm

Calm Man wrote:I have no expertise in this area. But can a business issue a 1099-B? I thought that was only for brokers. Also, this is one of those cases that came up in another thread where it would be very well worth your while to use a CPA who has experience in business sales.

That may be a very good point. I've been trying to contact a CPA/Tax Attorney I have used before, but so far our schedules have not agreed to reach him on the phone or I have been in meetings at work. My other partner that left said his tax gal told him to see if the owner would change it to a 1099-MISC box 3 for "Other" Income.
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby Leesbro63 » Wed Jan 30, 2013 10:50 pm

MarkNYC wrote:If the payer refuses to issue a corrected 1099, your primary concern should be preparing your tax return properly knowing that the IRS will receive incorrect information. In this situation, I suggest you list the 1099 nonemployee compensation amount on line 21 of your 1040, along with the name and tax id number of the payer. On the same line, list the item as a negative amount, with a brief statement for Line 21: "closely-held stock sales proceeds incorrectly reported on 1099-MISC as nonemployee compensation - properly listed on Form 8949." Then list the sales transaction properly on Schedule D and 8949. Don't attach a separate letter or any documentation pertaining to the sale. I think reporting the transaction in this manner will minimize the likelihood of an IRS notice, but you should certainly save all supporting documentation in case a notice arrives.


I am interested in this "LINE 21" thing. There are two lines for description(s) but only 1 line for "the number".
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby MarkNYC » Wed Jan 30, 2013 11:29 pm

Leesbro63 wrote:
MarkNYC wrote:If the payer refuses to issue a corrected 1099, your primary concern should be preparing your tax return properly knowing that the IRS will receive incorrect information. In this situation, I suggest you list the 1099 nonemployee compensation amount on line 21 of your 1040, along with the name and tax id number of the payer. On the same line, list the item as a negative amount, with a brief statement for Line 21: "closely-held stock sales proceeds incorrectly reported on 1099-MISC as nonemployee compensation - properly listed on Form 8949." Then list the sales transaction properly on Schedule D and 8949. Don't attach a separate letter or any documentation pertaining to the sale. I think reporting the transaction in this manner will minimize the likelihood of an IRS notice, but you should certainly save all supporting documentation in case a notice arrives.


I am interested in this "LINE 21" thing. There are two lines for description(s) but only 1 line for "the number".

Prior to this year, there was only one line for description for the Line 21 amount. If you had more than one item, they would be listed in the back of the tax return as a statement and the sum of the items would appear on Line 21. The description line would say "see statement." Whether you can now list two items on page one of the 1040, or have three or more that are shown in a statement is not that important. Remember,in this situation, the IRS matching program will be looking for the nonemployee compensation amount either on Schedule C or line 21, so what's important is to (1) list the improper 1099-MISC amount on the return, (2) back it out so it is not taxed incorrectly, then report the item on the return where it belongs, and (3) include a statement that gives a brief,concise explanation of why you are backing-out the 1099 item from a specific line on the tax return.
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby Leesbro63 » Wed Jan 30, 2013 11:45 pm

I get it that you want to show the gross amount to agree with what was reported to the IRS. But how do you report it then back it out if there is only one line?
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby 2quik6 » Wed Jan 30, 2013 11:49 pm

Leesbro63 wrote:I get it that you want to show the gross amount to agree with what was reported to the IRS. But how do you report it then back it out if there is only one line?

There may physically be only one line on the 1st page of the 1040, but a person could have worked multiple contracting jobs and actually have multiple 1099-MISC box 7 values to input, in that case, the one line on the 1st page will refer back to a list on the back, or further back page in your return with the itemized amounts and descriptions.
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby Leesbro63 » Thu Jan 31, 2013 12:05 am

Yeah, that example will work fine in matching the IRS, as the sum of the 1099-Misc forms will agree. But I'm interested in the case of backing out something. I believe you need a second line, which does not exist. Because you need to show the gross amount AND the net (lesser) amount. So again I wonder how to do this?
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby 2quik6 » Thu Jan 31, 2013 1:09 am

I know in the past, my tax software has always required you to enter a separate line item of every 1099 form you have or income item, depending on what the line is for, it will sometimes just place a *note something on the front page, then the tax software prints a report page of all the entries that made up that total and indicates to attach it to the back of the return. I used to have some property rental income of multiple things, like boat/jet skies etc, and I itemized the rent of each piece, then had expenses against them and it would do this.
I see that the net amount on the front in this case will be $0 though and that might be a concern..not sure till I do it, but plan to still talk to a CPA in the coming days.

And quit frankly, I'm not scared of being audited, I have nothing to hide and have a ton of proof indicating what the sale was for and it was signed by all board members of the company, including copies of the cancelled shares of stock that I owned, the original cancelled check from the purchase of the stock, and audio recordings of the entire board meeting when this was discussed.
The now company owner should be the one afraid that I'll trip off an audit since he has recorded the sale as expenses against revenue and thus a tax break for him, he is the one that recorded it this way.
Rob
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby Leesbro63 » Thu Jan 31, 2013 1:41 am

I'm not afraid of an audit either, but I certainly don't want the hassle. For 2 years I got nasty grams assuming that the earnings portion of the money taken out of my daughter's 529 plan was unreported taxable income (it was used to pay for freshman and sophomore years). Those got straightened out, but only after more than one back and forth letter. For year 3, I reported the amount on the description part of Line 21 then put "taxable portion zero". So far no nasty gram. My guess is that the computer may still kick it out, because they still have not refined 529 distribution reporting to be reconcilable. Their computers just think it was unreported income. But maybe a human will see my description and "get it". By mentioning this I didn't mean to resolve how to report a gross number that gets reduced, but am just reporting an anecdotal story that's similar and may work in another situation.
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby 2quik6 » Mon Feb 25, 2013 11:37 pm

This all finally got sorted out after the company CPA was consulted and informed the ex-partner that he had completed the forms incorrectly. A corrected 1099-Misc was issued for $0, and the right 1099-B forms were completed!
So yes, a company, not a Brokerage can issue a 1099-B apparently.
Rob
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby Gus » Wed Feb 27, 2013 9:52 am

I realize that this has been resolved, but I'm going to add my experience because it may help others who find this thread in the future.

Years ago my wife owned stock in a private company. The company had the right to buy back the stock and did so. They reported the buyback as non-employee compensation on a 1099-MISC (similar to the OP's situation). They refused to issue corrected forms. I sought the advice of a CPA who told me to file our return as if the company had reported the buyback correctly. In our case, that meant leaving Line 21 blank and reporting the sale on Schedule D. He said that the IRS would catch the unreported 1099 income in about 18 months and would send us a letter demanding payment. The letter arrived as promised. I responded with a detailed letter explaining what had happened and how we reported the buyback. In short order we received a letter in return stating that the IRS was satisfied with our explanation, the matter was closed, and we did not owe anything. Everything went exactly as the CPA had said it would. The point is that you should file an accurate return even if the forms you received are not accurate. Do not, as was advised above, try to shoehorn incorrect data into your return to try to outwit the IRS or its computers.
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby Leesbro63 » Wed Feb 27, 2013 10:11 am

In the above case, might it not have made sense, on line 21, to report "$1x,xxx 1099-Misc Reported on Sch D", with a $0 in the amount column. Might have saved the inquiry.
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Re: Stock sale reported on 1099-MISC instead of 1099-B?

Postby MarkNYC » Wed Feb 27, 2013 2:07 pm

Leesbro63 wrote:In the above case, might it not have made sense, on line 21, to report "$1x,xxx 1099-Misc Reported on Sch D", with a $0 in the amount column. Might have saved the inquiry.

Yes, it would have made sense and may very well have prevented the IRS inquiry. The method Gus used worked out for him and I'm glad it did, but not all IRS inquiries are resolved as quickly and easily. The procedure I suggested above, contrary to Gus' assertion, does not involve filing an inaccurate tax return or attempting to outwit the IRS or its computers. It's simply a manner of filing an accurate tax return that contains a disclosure regarding an incorrectly prepared 1099. Preparing and filing the return with this type of disclosure may prevent an IRS matching notice, and thereby avoid unnecessary and potentially time-consuming and stress-inducing correspondence back and forth between the taxpayer and the IRS.
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