"There's an app for that!" applies to how the Internal Revenue Service checks your tax bill. The application it uses takes information from two documents -- your W-2 wage report and any 1099 forms you get -- and compares it to your tax return. A 1099 tells the IRS what money you made from sources besides your employer. Because the bank, broker or business that sends you one also gives the IRS a copy, Uncle Sam can keep tabs on what you owe.
You don't attach a 1099 to your tax return like you do your W-2; however, the IRS knows what any 1099s you received say. When income and deductions on your return don't jive with your 1099s and W-2, the IRS computer matching system raises a red flag. That's when it sends you an automated notice of under-reported income called a CP-2000. If you get a CP-2000, you have 30 days to tell the IRS your side of the story. Nearly 5 million taxpayers got one in 2011. A common mistake, according to global tax specialist CCH, is forgetting to list interest and dividend income from 1099s.
The IRS's series of 1099 information returns includes 17 forms differentiated by letters that identify income type. For example, the letters "INT" indicate interest income. If you earned any interest on a checking or savings account during the year, you'll get a 1099-INT. Expect a 1099-DIV if you made money selling stock or received dividends. States report your unemployment benefits or tax refunds on a 1099-G. Self-employed taxpayers get 1099-MISC forms from their clients. Lottery winners get a 1099-MISC, too, so if you were lucky, report your take on that tax return because the IRS knows what you won.
Watch Your Mailbox
Your 1099s should arrive in your mail by Jan. 31. However, businesses have until the last day in February to submit them to the IRS. Make sure anyone you expect to send you a 1099 has your correct address; the IRS gets its copy even if yours gets lost in the mail. When you receive a 1099, don't be like most people and tuck it away with other tax papers until filing time. Look at it to make sure it's accurate. Contact the company if you find any errors and get a corrected 1099. Corrected versions have a box checked so the IRS computer doesn't count them twice.
You shouldn't rely on 1099s to stay out of tax trouble. Keeping track of your earnings throughout the year lets you prepare an accurate tax return and sleep well with or without them. That goes for your state taxes, too. State departments of revenue also receive 1099s. Both state and federal penalties and interest charges can quickly eat a hole in your wallet if you ignore 1099 information.
- National Federation of Independent Business Research Foundation: 1099 Requirements Cribsheet
- MSNMoney: W-2 Isn't the Only Important Form
- Internal Revenue Service: Topic 652 - Notice of Underreported Income – CP-2000
- Forbes: Help! I Got Mail From The IRS (A CP 2000 Notice)
- CCHGroup.com: 4 Ways to Make Notice CP 2000 the Last Step in an IRS Audit
- Forbes.com: Ten Things You Should Know About 1099s
- Internal Revenue Service: CP 2000 Frequently Asked Questions
- Strategic Tax Lawyers: The Importance of 1099s What IRS Officers Need You to Know
- Tim Boyle/Getty Images News/Getty Images