Accountants that specialize in tax return preparation find both enjoyment and challenges from having to work with individual taxpayers lacking formal CPA courses. This demands a lot of penetrating questions from accountants in order to collect complete information. For example, many taxpayers believe that they are not required to report income for which they did not receive a Form 1099.
Tax accountants therefore should follow a strategy of requesting information in the same organized format as CPA exam questions. A good start is listing all income with a description of how it was earned. Just because someone did not receive a Form 1099 does not mean the income is omitted from a tax calculation. CPAs must assure they capture all income instead of just 1099s.
People who have side jobs or payments as independent contractors are especially vulnerable to IRS scrutiny. An accountant must avoid criticism from taxpayers that insufficient tax preparation questioning led to income understatement. The solution is simply listing income sources just like a sample CPA test question.
The top priority is clearly obtaining business income from all sources whenever an independent contractor has any reported on a 1099. Most likely, a taxpayer with two or three 1099s also conducted services for payment totals of less than the $600 minimum required for a 1099.
But applying the process from CPA exam study questions to tax preparation work entails more than business income matters. Interest and dividend income is also reportable even when no Form 1099 is issued. Financial institutions typically do not issue 1099s for individuals earning less than $10. However, interest and dividend income is still reported on tax returns whenever it exceeds $1. Taxpayers must keep their own records of income.
Taxpayer records are especially important when a 1099 includes reimbursement of expenses. In such cases, a taxpayer needs an itemized list of the tax-deductible expenses to offset the income on the 1099. These are important situations for accountants to recognize when taxpayers state that they incurred no expense because the parties that hired them paid all costs.
Another case of potential non-taxable income on a 1099 arises when state governments issue a Form 1099-G for state income tax refunds. These amounts are only taxable for taxpayers who itemized deduction of state income tax on the prior year federal tax return.
In all of these cases, the best procedure for a tax accountant is collecting tax information in a format that mirrors CPA exam material. This eliminates any ambiguity or uncertainty.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.