Paying Taxes Twice? Income Earned in 2006 and then Indebted in 2007

[blackcoffee]

What is the name of your state? California


I received commission income from a specific annuity sale as a W-2 employee as a captive agent from a life insurance company in 2006. I paid federal and state taxes on this income on my 2006 income tax return. More than a year later in mid 2007 the commissions were reversed by the company.

The company included this commission reversal in my 2007 income.

Is there a something in the tax code that would prohibit a life insurance company from adding income to my W-2 in this situation where I paid income taxes on the same commissions in a prior year?

Does the fact I had a non-recourse employment contract with the company play a factor in the insurance company's ability to write this off as a bad debt and include it as income?

I've read through Pub 15, 15-A, 15-B, and 525 and the only thing I could find about an employer's ability to do this is if they charged it off as a bad debt and FORGAVE the debt. I've disputed the debt from day one with the company and I think I can prove that there is doubt that I owe this debt. Rather than deal with me, the employer just added the debt as income.

I'm ready to file my tax returns with Form 4862 with the wages I believe I earned during 2007.

There are more details to my situation I have left out that don't pertain to the question I'm asking, but that may be relevant to an attorney reviewing this question. I will probably need an attorney in the near future to help me, I just want to see what type of advice I get on this forum in response my question.

[LdiJ]

Originally Posted by blackcoffee

What is the name of your state? California


I received commission income from a specific annuity sale as a W-2 employee as a captive agent from a life insurance company in 2006. I paid federal and state taxes on this income on my 2006 income tax return. More than a year later in mid 2007 the commissions were reversed by the company.

The company included this commission reversal in my 2007 income.

Is there a something in the tax code that would prohibit a life insurance company from adding income to my W-2 in this situation where I paid income taxes on the same commissions in a prior year?

Does the fact I had a non-recourse employment contract with the company play a factor in the insurance company's ability to write this off as a bad debt and include it as income?

I've read through Pub 15, 15-A, 15-B, and 525 and the only thing I could find about an employer's ability to do this is if they charged it off as a bad debt and FORGAVE the debt. I've disputed the debt from day one with the company and I think I can prove that there is doubt that I owe this debt. Rather than deal with me, the employer just added the debt as income.

I'm ready to file my tax returns with Form 4862 with the wages I believe I earned during 2007.

There are more details to my situation I have left out that don't pertain to the question I'm asking, but that may be relevant to an attorney reviewing this question. I will probably need an attorney in the near future to help me, I just want to see what type of advice I get on this forum in response my question.

Ok...let me rephrase that to make sure that I understand.

The company paid you a commission in 2006. It appeared on your W2 for 2006. The company wanted the commission back from you in 2007 and for one reason or another wasn't able to take it back from you. Therefore they added it to your W2 income AGAIN?

If I understood you correctly it makes absolutely no sense for them to do that. It makes no sense from an accounting perspective or a tax one. If they felt that you owed them the money, then they should have deducted it out of your current pay, therefore reducing your pay for 2007, rather than increasing your pay. They are double dipping from an accounting perspective.

If they were unable to reduce your current pay, then it wouldn't even make sense for them to issue a 1099c, because they already deducted the income when they paid you in 2006, therefore again, they would be double dipping to deduct it again.

The only way it would make any sense at all, is if they corrected your pay and gave you a corrected W2 for 2006, taking out the commission, and then adding it back for 2007. However that would be a very complicated accounting and tax process for them, and it wouldn't make sense for them to do that when there are other methods for resolving the issue.

How much money are we talking about?

[blackcoffee]

Originally Posted by LdiJ

Ok...let me rephrase that to make sure that I understand.

The company paid you a commission in 2006. It appeared on your W2 for 2006. The company wanted the commission back from you in 2007 and for one reason or another wasn't able to take it back from you. Therefore they added it to your W2 income AGAIN?

Correct

Originally Posted by LdiJ

If I understood you correctly it makes absolutely no sense for them to do that. It makes no sense from an accounting perspective or a tax one. If they felt that you owed them the money, then they should have deducted it out of your current pay, therefore reducing your pay for 2007, rather than increasing your pay. They are double dipping from an accounting perspective.

First they reduced my pay in 2007 by the amount they said I owed. I went into a negative balance on my ledger for the month of July. Then because I had no other choice, I resigned. I left the company with a negative balance on my ledger equal to the amount they then added back into my W-2.

Originally Posted by LdiJ

If they were unable to reduce your current pay, then it wouldn't even make sense for them to issue a 1099c, because they already deducted the income when they paid you in 2006, therefore again, they would be double dipping to deduct it again.

The only way it would make any sense at all, is if they corrected your pay and gave you a corrected W2 for 2006, taking out the commission, and then adding it back for 2007. However that would be a very complicated accounting and tax process for them, and it wouldn't make sense for them to do that when there are other methods for resolving the issue.

How much money are we talking about?

That's what they should have done. The company says I owe about $11,000.

[tranquility]

Obviously this is not a correct reporting. To see how to unwind things is difficult. My assumption is that the OP earned a commission on the sale of an annuity. The annuity has a certain time before it can be cancelled for some reason and the commission is contractually paid at the end of the time. However, in 2006, the company got a little greedy and wanted to take the deduction of the payment of the commission before it "vested" (for lack of a better term) and included it in the OPs income. However, the conditions to qualify for payment on the sale of the annuity didn't occur (buyer cancelled within a certain time?) and the commisison shouldn't have vested. The problem is that it happened between two accounting periods.

So the company is out the money in 2007 and they create a loan of some sort on the books (pre-payment for future commisions, whatever) as an asset with the other entry against the OPs account. OP says "no way" and leaves. Company then drops the prepayment/loan into payroll and issues a W-2. This could be done if there was a contractual agreement to deal with prepayment/loan issues in this way. (Or, if a forgiven debt, a 1099-C.)

The company screwed up by not waiting. They tried to push an expense into 2006 and weren't going to take the income untill 2007 (I bet.). Since they aren't getting the money back, they want to take a current deduction in 2007 and put it in as income in that year. This may be contractually correct, but is legally incorrect because of the 2006 W-2 out there. The company MUST correct the 2006 W-2 as to income (making sure the withholdings stay the same) and the OP needs to amend his 2006 return once he gets the new W-2. Then the company issues the now contractually and legally correct 2007 W-2 for the income. If they decline to do it this way, they must legally go after the overpayment against the OP.

If I were the OP I'd send a CRR letter pointing out the problem. If the company does not make it right, the OP will report them to the industrial relations (labor board for CA) department with a wage grievance.

The problem to the OP, is this aggressive stance will cause the company to go after him legally for the overpayment. Paying tax on $11,000 twice, if everything else goes away, is better than paying the $11,000 back.

[LdiJ]

Originally Posted by tranquility

Obviously this is not a correct reporting. To see how to unwind things is difficult. My assumption is that the OP earned a commission on the sale of an annuity. The annuity has a certain time before it can be cancelled for some reason and the commission is contractually paid at the end of the time. However, in 2006, the company got a little greedy and wanted to take the deduction of the payment of the commission before it "vested" (for lack of a better term) and included it in the OPs income. However, the conditions to qualify for payment on the sale of the annuity didn't occur (buyer cancelled within a certain time?) and the commisison shouldn't have vested. The problem is that it happened between two accounting periods.

So the company is out the money in 2007 and they create a loan of some sort on the books (pre-payment for future commisions, whatever) as an asset with the other entry against the OPs account. OP says "no way" and leaves. Company then drops the prepayment/loan into payroll and issues a W-2. This could be done if there was a contractual agreement to deal with prepayment/loan issues in this way. (Or, if a forgiven debt, a 1099-C.)

The company screwed up by not waiting. They tried to push an expense into 2006 and weren't going to take the income untill 2007 (I bet.). Since they aren't getting the money back, they want to take a current deduction in 2007 and put it in as income in that year. This may be contractually correct, but is legally incorrect because of the 2006 W-2 out there. The company MUST correct the 2006 W-2 as to income (making sure the withholdings stay the same) and the OP needs to amend his 2006 return once he gets the new W-2. Then the company issues the now contractually and legally correct 2007 W-2 for the income. If they decline to do it this way, they must legally go after the overpayment against the OP.

If I were the OP I'd send a CRR letter pointing out the problem. If the company does not make it right, the OP will report them to the industrial relations (labor board for CA) department with a wage grievance.

The problem to the OP, is this aggressive stance will cause the company to go after him legally for the overpayment. Paying tax on $11,000 twice, if everything else goes away, is better than paying the $11,000 back.

I do agree, but if the company does not correct the 2006 W2, then the company is taking a tax deduction for the money twice as well as the OP paying tax on it twice. The company is also paying SS and Medicare taxes on it twice as well.

[tranquility]

I agree with you. Even my way is wrong and the thing gets reported twice. The actual way to handle it (in my fantasy theory of what happened) is to correct the 2006 and the 2007 W-2 by the amount of the income and to sue the OP for the money.

[blackcoffee]

Originally Posted by tranquility

Obviously this is not a correct reporting. To see how to unwind things is difficult. My assumption is that the OP earned a commission on the sale of an annuity.

Correct.

Originally Posted by tranquility

The annuity has a certain time before it can be cancelled for some reason and the commission is contractually paid at the end of the time.

Annuity can be cancelled at any time by client, but client would have to forego any interest earned. Using this arrangement the agent keeps the commission.

A little more background .... During the sale my manager made several mis-representations (using a definition for the lower form of fraud, but manager's conduct may have been intentional which would have been fraud, I need an attorney's help for this) on behalf of the myself (manager needed an agent to write the business, manager's do not get commissions unless written through their agents) who didn't know any better. The case was bound to cause problems for me (facts I am mentioning here are leaving the area of tax law ... I'm trying to keep it concise).

Originally Posted by tranquility

However, in 2006, the company got a little greedy and wanted to take the deduction of the payment of the commission before it "vested" (for lack of a better term) and included it in the OPs income. However, the conditions to qualify for payment on the sale of the annuity didn't occur (buyer cancelled within a certain time?) and the commisison shouldn't have vested. The problem is that it happened between two accounting periods.

See above, but the annuity was cancelled and I was vested, however company decided to give the client's money back (principle plus all interest) and reversed my full commission and manager's override commission instead of following procedure and just giving the client's principle back.

Originally Posted by tranquility

So the company is out the money in 2007 and they create a loan of some sort on the books (pre-payment for future commisions, whatever) as an asset with the other entry against the OPs account. OP says "no way" and leaves. Company then drops the prepayment/loan into payroll and issues a W-2. This could be done if there was a contractual agreement to deal with prepayment/loan issues in this way. (Or, if a forgiven debt, a 1099-C.)

I left because I had to leave. I would have to sell $11,000 before I could get another paycheck ... two or three months. Of course I was really angry at my manager for setting me up for this fall. There was a contractural agreement, but it's a non-recourse contract meaning that if I leave the company the company would have a hard time collecting the debt. Which is why I guess they decided to add it to my W-2 wages

Originally Posted by tranquility

The company screwed up by not waiting. They tried to push an expense into 2006 and weren't going to take the income untill 2007 (I bet.). Since they aren't getting the money back, they want to take a current deduction in 2007 and put it in as income in that year. This may be contractually correct, but is legally incorrect because of the 2006 W-2 out there.
The company MUST correct the 2006 W-2 as to income (making sure the withholdings stay the same) and the OP needs to amend his 2006 return once he gets the new W-2. Then the company issues the now contractually and legally correct 2007 W-2 for the income. If they decline to do it this way, they must legally go after the overpayment against the OP. If I were the OP I'd send a CRR letter pointing out the problem. If the company does not make it right, the OP will report them to the industrial relations (labor board for CA) department with a wage grievance.

The problem to the OP, is this aggressive stance will cause the company to go after him legally for the overpayment. Paying tax on $11,000 twice, if everything else goes away, is better than paying the $11,000 back.

Thanks for your insight. I do follow your procedural explanation of how the company got to the point where they decided to add it to my W-2, and what they should have done. I am looking specifically for anything in the IRS code or administrative law that would show what that company did is clearly illegal. I'm considering filing my taxes with a substitute W-2, form 4852, and letting the IRS sort this whole thing out.

[blackcoffee]

Originally Posted by tranquility

I agree with you. Even my way is wrong and the thing gets reported twice. The actual way to handle it (in my fantasy theory of what happened) is to correct the 2006 and the 2007 W-2 by the amount of the income and to sue the OP for the money.

As much as I don't want to be sued, I was hoping that they would, so the facts surrounding my situation would have exposed the manager's mis-deeds, and I could have received a fair and final decision. Instead the company chose the low cost and easy method of writing the debt off as a bad debt and adding the income to my W-2; hoping that I would roll over. Very irritating.