As the tax deadline approaches we will discuss two problems preventing you from filing your taxes: missing or inaccurate tax documents. Some small employers forget to send W-2s preventing you from filing your taxes; other businesses may send incorrect forms. K-1s are even worse. With a K-1 you may not even know what the numbers should be and they always come late in the tax season.
There is a process in finalizing your tax return when information reported to you (and hence the IRS) is wrong. The IRS knows some tax reporting documents have errors. Unfortunately, the IRS computer only believes what it sees. Once information is reported to the IRS you need to make sure you tell the IRS computer what it wants to hear or you will end up in IRS hell getting letter after letter while the IRS employee working your case is never available. The best course of action is to avoid the IRS letter or audit in the first place. There is a process to fix wrong information at the IRS.
Missing or Incorrect W-2s and 1099-Rs
The process is different with W-2s and 1099-Rs versus other tax reporting documents, so we will start there. The first step when a W-2 is wrong or missing is to contact the employer to secure a copy. Many employers and payroll services provide information online now making it easier for most people to gain access to their information. If attempts to acquire your tax document are unsuccessful you can file your tax return by filing Form 4852. The form is a substitute for a W-2, 1099-R and a few other tax reporting documents related to retirements plans and insurance contracts. Form 4852 cannot be filed before February 15th. If the W-2 is missing you need to make an estimate of income and withholding. If the IRS received the W-2/1099-R you will receive a letter stating the difference. Unless you have records of the correct amounts or the number the IRS has is obviously wrong, you will be stuck with the IRS’ numbers.
Missing or Incorrect K-1s
K-1s create more frustration than missing W-2s. At least with a missing W-2 you probably have a paycheck stub to estimate your numbers from. With a K-1 you are at the mercy of the entity creating the K-1. K-1s also show up late in the tax season so you don’t know if it is late or missing. Partnership K-1s are due the same day as individual returns which means they can drop them in the mail April 15th. If a K-1 is missing you almost always file an extension and hope the K-1 arrives. By May it is time to file without the K-1.
An AWOL or incorrect K-1 (including the capital account information) is handled with Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request. The capital account information is something you should have a record of; the income information is a different story. Estimating K-1 information is challenging since you don’t have a reference point or complete understanding of the entities activities. Here are a few solutions:
- Use numbers similar to past years. Some K-1s are similar year to year. There may also be a pattern after several years. You can continue the pattern in your estimate.
- In a worst case scenario you will have no reference points. There is no other choice than to guess. Use reasonable numbers. As hard as it can be, you still need to make an estimate. The IRS will have to do the same thing you are if they challenge your numbers.
I have never seen the IRS challenge my numbers unless the IRS received the actual K-1. The IRS knows you are in the best position to decide the number closest to correct. The IRS can still challenge your position and you should be prepared for that event. However, if the IRS never received the K-1 their guess is as good as yours.
Putting It All Together
My office prepares a small number of these forms every year. In most cases the W-2 or K-1 was never sent to the client or IRS. In cases where the IRS received the information, but the client did not, the IRS sends a letter and we need to adjust for the information the IRS provided unless we have proof a number is wrong or it is obviously wrong.
The best defense is to keep good records. A missing W-2 is only a problem if you did not keep your paystub. A paystub can be wrong, but only in a minor way. K-1s are hard to verify, but you can track your own capital account. Have your tax professional track your basis in their tax software. Technology makes it so much easier today.