Filing taxes can be a complex and intimidating process, and many people might inadvertently overlook reporting certain income sources, like dividends and interest earned on their savings and checking accounts. If you find yourself in a similar situation, where you haven't filed 1099 forms to declare these earnings for a few years, you may wonder about the potential consequences and how to rectify the situation. In this blog post, we'll explore the implications of not reporting such income, what to expect when you start filing properly, and whether it might raise any red flags with the IRS.
Understanding 1099 Forms
First, let's clarify what 1099 forms are and why they are important. A 1099 is an information return used to report various types of income to the IRS. There are several types of 1099 forms, and the specific one that applies to your situation is the 1099-INT (for interest income) and the 1099-DIV (for dividend income).
Unreported Income and the IRS
It's important to note that not reporting your dividend and interest income is a violation of tax law. While the IRS may not have sent you any notifications about this omission, this does not necessarily mean you are in the clear. The IRS has the authority to discover unreported income through various means, including data matching with financial institutions, and if they do, it can lead to penalties and fines.
Voluntarily Reporting Unreported Income
Given that you want to start filing 1099 forms for your unreported dividend and interest income, the IRS tends to appreciate proactive efforts towards compliance. While there's no guarantee, voluntarily reporting the income you omitted in previous years can demonstrate your willingness to correct any past errors.
Low Amount of Unreported Income
In your case, where you mention having less than $100,000 in your savings and checking accounts, the relatively low amount of unreported income may mitigate the severity of potential consequences. The IRS may prioritize cases involving larger sums of unreported income, but it's still essential to rectify the situation to ensure your tax filings are accurate and compliant.
Red Flags and Potential Audits
The IRS primarily focuses on discrepancies and patterns that indicate non-compliance. While the mere act of starting to report your unreported income should not automatically raise red flags, there's always a possibility that it could trigger an audit. However, it's crucial to remember that audits are not solely initiated because you're correcting past errors – they can happen for various reasons and are often random.
Correcting Past Mistakes
To begin the process of filing 1099 forms for your unreported income, you can follow these steps:
- Gather Financial Records: Collect records of your savings and checking account statements, including any statements related to dividends and interest.
- Consult a Tax Professional: Seeking guidance from a tax professional is highly recommended, as they can assist you in properly calculating your unreported income and filing the necessary forms.
- Amend Previous Tax Returns: If necessary, you may need to amend your past tax returns to include the unreported income. The IRS allows you to amend returns for up to three years from the original filing date.
- File 1099 Forms Annually: Moving forward, make sure to report all dividend and interest income on your tax returns each year.
In conclusion, while starting to report unreported dividend and interest income on your savings and checking accounts is a commendable step towards tax compliance, it's essential to remember that the IRS takes tax reporting seriously. The IRS may not necessarily penalize you harshly for rectifying past omissions, especially if the amount is relatively low, but it's crucial to do so accurately and transparently.
To ensure that you navigate this process correctly and minimize any potential risks, consulting with a tax professional is strongly advised. Remember that the goal here is to rectify past mistakes and maintain a clean tax record moving forward. By doing so, you can achieve peace of mind and ensure that your financial affairs are in order.