The company I freelanced for went out of business in 2007 without paying me for my last project. I was told (by a knowledgeable person) that the company had cut a check for me, but then the CEO decided not to make the payment and kept the money. I am concerned that the 1099 I receive for 2007 won�t match the amount of money I actually received. If that happens, what should I do? They owe me more than $7000. I don't want to pay tax on it if I didn't receive it.
(A little more info: As far as I know, the company was unable to file for bankruptcy and so just simply closed its doors. At least one other person who worked for the company is in the same position with regard to their W-2.)
I'm hoping that's what they did. But, since the person who did the accounting was let go when the company closed its doors, I don't know whether that WAS done. I've sent an email to the person who should know (the CEO--it was s small conpany). I have not yet received an answer.
I am concerned that the 1099 I receive for 2007 won�t match the amount of money I actually received. - moorelindaellen
The IRS computer matches 1099 information it receives from your payers with the information you reported on the return. In your case report the gross receipts reported on the 1099MISC as gross receipts. Then report the excess amount (if any) as a bad debt. To substantiate the deduction you need to be able to show you are unlikely to receive payment. The announcement the company has closed it's doors can show the debt is noncollectable. If you do not receive a 1099MISC from the client, then just report the gross receipts shown on your books. ---- At least one other person who worked for the company is in the same position with regard to their W-2 - moorelindaellen
The IRS will go after the individuals responsible for filing and making sure the payroll taxes are paid. Your acquaintance's W-2 should only reflect wages actually received. Many states will actively pursue companies that short pay their employees. Have the employee contact the state wage department for back wages.
"Then report the excess amount (if any) as a bad debt." (to far in the red)
If I remember correctly, reporting the excess amount as bad debt will only work if the taxpayer has selected accrual basis for this business; if this is the first (and presumably also last) year for this business, then selecting accrual instead of cash basis for this business should not be a problem, but if this is not the first year and cash was previously selected as the accounting method, then the bad debt deduction option will not be available unless the taxpayer goes through the rigamarole of requesting permission from the IRS to change accounting methods for this tax year.
I recall that it is allowable to make a negative adjustment on line 21 of the 1040 for incorrect information documents, but making this change will not also reduce SE tax.
Can anyone think of an effective and legal workaround for this situation if the taxpayer is cash basis in this business?