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Reimbursement for Damages, Sent a 1099-MISC

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Lahts

Member
Hi there. I was hoping that perhaps I could find some advice. In a nutshell, a natural gas company that clears a right of way behind our home every couple of years was performing mowing, etc last summer and one of their machines kicked up some gravel/stones which broke a window at our home. We replaced the window and the company reimbursed us for out of pocket expenses. The company sent us a 1099-MISC form which shows the reimbursed money as miscellaneous income. I'm confused why we even receive this as this was a straightforward reimbursement for damages they caused. I of course want to report it on our taxes but am curious if I should add a note and paper trail for this incident? It would seem to me that the money is in essence increasing our taxable income. Any help/suggestions/guidance are greatly appreciated. Thanks!
 


LdiJ

Senior Member
It really was inappropriate of them to issue a 1099-MISC since it was a damage reimbursement, but it could be impossible to get them to void the 1099 if they believe that is the right way to handle it. What I would probably do is exclude the income from the return but include a non-formatted statement explaining why the income was excluded. I would also be prepared to get a CP-2000 letter later on down the road and possibly have to explain it again.
 

Lahts

Member
It really was inappropriate of them to issue a 1099-MISC since it was a damage reimbursement, but it could be impossible to get them to void the 1099 if they believe that is the right way to handle it. What I would probably do is exclude the income from the return but include a non-formatted statement explaining why the income was excluded. I would also be prepared to get a CP-2000 letter later on down the road and possibly have to explain it again.
Thank you so much for the information. I have felt very uncomfortable about it since they sent it. I reached out to them and they basically said that it was their normal way to handle things. Still seems wrong to me. So I could just not include it in the actual return figures but include a letter and documents explaining the situation and the reimbursement for damages? Thanks so much!
 

Taxing Matters

Overtaxed Member
It really was inappropriate of them to issue a 1099-MISC since it was a damage reimbursement, but it could be impossible to get them to void the 1099 if they believe that is the right way to handle it. What I would probably do is exclude the income from the return but include a non-formatted statement explaining why the income was excluded. I would also be prepared to get a CP-2000 letter later on down the road and possibly have to explain it again.
I disagree that it was inappropriate for the company to do that. Box 3 is the appropriate place to report damages paid for things other than physical injury or sickness. See the Form 1099-MISC instructions, starting at page 5, at the bottom. The amount paid can be taxable income if it exceeds the basis in the property that was damaged. That was likely not the case here, and if that is correct then I agree that the income would not be included on the return and that a statement attached to the return explaining why would be a good idea. That may or may not prevent the CP-2000 letter (which for the OP's benefit is a letter that says the IRS received a report of income that it cannot find reported on your return and telling you that it will adjust your tax accordingly unless you can explain why the return was correct). Even if you get the letter, it's not a big deal. Provide the explanation and that should take care of it. You'll reduce your basis in the house by the amount of the payment you received and increase it by whatever you actually spent to repair the damage.
 

Lahts

Member
Thanks again for the great information. I had heard that there is a line someplace on the 1040 where I can in essence remove the figure... Anyone know how or where that is done? Thanks!
 

LdiJ

Senior Member
Thanks again for the great information. I had heard that there is a line someplace on the 1040 where I can in essence remove the figure... Anyone know how or where that is done? Thanks!
No, there isn't a "line". You simply do not include the income and include a non-formatted statement explaining that you did not include a 1099-MISC that you received and why.

If you do not normally use a tax professional you might want to consider using one this year. I do not know if online software allows for an unformatted statement to be included on an efiled return...and paper returns are discouraged by the IRS.
 

davew9128

Junior Member
No, there isn't a "line". You simply do not include the income and include a non-formatted statement explaining that you did not include a 1099-MISC that you received and why.

If you do not normally use a tax professional you might want to consider using one this year. I do not know if online software allows for an unformatted statement to be included on an efiled return...and paper returns are discouraged by the IRS.
I typically attach Form 8275 as an explanation.
 

LdiJ

Senior Member
I typically attach Form 8275 as an explanation.
I think an unformatted statement would be easier for him than filling out form 8275. I don't think listing rev procs/rev rules etc., is required in this instance.
 

davew9128

Junior Member
I think an unformatted statement would be easier for him than filling out form 8275. I don't think listing rev procs/rev rules etc., is required in this instance.
I agree about using terminology, but for a situation of not including amounts from a 1099, not sure you need to use technical language. Using that form is also just better protection from penalties.
 

Taxing Matters

Overtaxed Member
I agree about using terminology, but for a situation of not including amounts from a 1099, not sure you need to use technical language. Using that form is also just better protection from penalties.
There is no harm in using the form, but for this a simple statement attached to the return would also suffice. You'll still have met the requirement for adequate disclosure so I see no difference in penalty exposure between the two.
 
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