As the tax deadline approaches we will discuss two problems preventing you from filing your tax return missing or inaccurate tax documents, especially W-2s and K-1s. Some small employers forget to send W-2s or go out of business; other businesses may send incorrect forms. K-1s are the worse. With a K-1 you may not even know what the numbers should be and they always come just before the extension deadline.
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.
Missing or Incorrect W-2s and 1099-Rs
The process is different with W-2s and 1099-Rs versus other tax reporting documents.
The first step when a W-2 is wrong or missing is to contact the employer to secure a correct copy. Many employers and payroll services provide information online making it easier for most people to gain access to their information.
If attempts to acquire your tax document are unsuccessful you can still file your tax return by filing Form 4852. Form 4852 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 document missing is a W-2 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.
You can file Form 8275 explaining the difference between your numbers and those the IRS has. The goal is to file an accurate tax return AND avoid an IRS audit. You can learn more about filing Form 8275 here.
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. With a K-1 you are at the mercy of the entity creating the K-1. K-1s frequently show up late in the tax season, or even close to the extension deadline, so you don’t know if it is late or missing.
S corporation and partnership K-1s are due March 15th while individual returns are due April 15th. However, the entity can file an extension, forcing you to do the same. If a K-1 is missing you almost always file an extension and hope the K-1 arrives. By late summer it is time to file without the K-1 and amend later if more accurate numbers arrive, or unless you know the K-1 will arrive before the due date of your tax return.
Always file you tax return on time, including extensions. Failure to file penalties are large!
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 consistent with prior 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. Keep good records! That is your best defense.
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 amend/adjust for the information the IRS provided unless we have proof a number is wrong or it is obviously wrong.
The best policy is to keep good records yourself. A missing W-2 is only a problem if you did not keep your paystub. A paystub can also be wrong so review your paystub each payroll period. K-1s are hard to verify, but you can track your own capital account (money your invested and distributions). Have your tax professional track your basis in their tax software. Technology makes it so much easier today. Or, keep a record on a simple spreadsheet and keep with your other permanent tax documents.
Here is to a great tax season.