Make sure you have all your income tax information | Paul Pahoresky

With tax season upon us some of my clients are anxious to get their returns filed.

For those taxpayers wanting to get a jump on their tax-filing obligation the challenge comes in making sure that they truly have accounted for all forms of income received throughout the entire year.

As a reminder, the United States taxes all worldwide income, so a taxpayer has an obligation to report all of this worldwide income earned during the year.

We are all familiar with the most common form of income — wages and self-employment earnings — but we may have other income which needs to be reported. Examples would be gain or loss from the sale of stocks, dividends and interest earned, earnings from a partnership whether your participation is active or passive, income from debt forgiveness as well as income from a hobby.

In addition, there are other situations where taxpayers may not think that the income needs to be reported; prize winnings at a community or church festival are considered gambling winnings. The sale of one’s own plasma is another type of taxable income that can be easily forgotten.  Just because a 1099 was not received does not mean that the income need not be reported. There are a number of transactions that taxpayers may not think need to be reported but do, in fact, need to be reported. Two examples are bond transactions with no gains and the sale of a primary residence.

Many of the 1099 forms are not received until mid to late February or even later, so it is important to really be aware of what taxable income a person has.  When a taxpayer receives any type of W-2 form or 1099 form, the IRS also receives a duplicate copy of that same form from the issuing organization.

When a taxpayer fails to report income that the IRS becomes aware of through their receipt of this tax information, the IRS will send a notice to the taxpayer.

These notices come months or even years after the tax return is filed and processed. If additional taxes are due at that point, the IRS will not only collect the tax but will charge penalties and interest as well. I recently had a client receive an income under-reporting notice for 2021 even though their return was filed over 18 months ago. This client failed to report over $60,000 of interest income from government bonds that were cashed back in 2021. They did not recall receiving the proper 1099 form. However, even if a 1099 form was not properly received, they are still required to report all worldwide income.

When gathering the tax information and preparing to either bring the information to a tax preparer or to prepare the returns on your own using one of the various commercially available tax preparation software programs, it is important that a taxpayer gather and collect all of their income and deduction information. Those taxpayers who have moved around a lot or have had multiple jobs or those taxpayers who have investments in multiple financial institutions can be very challenged in remembering all of their income sources and obtaining and gathering all of the tax-reporting information necessary.

It seems that almost every tax season I have a client that comes to me very early in the tax season and they want to get their taxes prepared. They are firmly convinced that they have all of their information necessary to file. We file the returns and then several weeks down the road they call me back and explain that they received some additional tax information or forgot about a certain transaction or account that they had.

We certainly prefer our clients to come in earlier rather than wait until the very last minute. However, it is important that a taxpayer has a good understanding of all of their various income sources and to make sure that they have received and report all of the information to avoid having to amend the return at a later date or even worse, receiving a notice from the IRS down the road.

Paul Pahoresky is the owner of PRP & Associates.  He can be reached at 440-974-1040 extension 214 or at paul@prpassoc.com.  Consult your tax advisor for your specific situation for additional information and guidance on these topics.