IRS Procedural Question

[Rick]

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.

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[Adam H. Kerman]

Rick <ri...@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.

[Rick]

"Adam H. Kerman" wrote in message news:tt5aio$1hrsi$1...@dont-email.me...

That's an interesting suggestion. I would have thought writing anything
with the words "business income" and "self-employment tax" might draw
someone's attention and have the opposite effect of intended, but I do see
your point.

Along those lines, it's interesting the IRS will often challenge someone's
Schedule C (especially if there are losses) and require the taxpayer to
prove it's not hobby income, while in this case you have the reverse
situation where the IRS might challenge an assertion of hobby income and ask
the taxpayer to prove it's not a business. I wonder which occurs more
often.

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