1099s - The Gift That Keeps on Giving

1099s are a road map into your financial situation. The IRS uses 1099s as a road map to track any number of financial transactions in which you participate. For example:

• Non-employee compensation;
• Rents;
• Sale proceeds;
• Forgiveness of debt;
• Interest earned and paid;
• stock and commodity transactions.

The IRS uses a matching program to verify whether you included these items in your return. Sounds simple enough, but often times the system is blind. For example, it cannot located sums included with other amounts, say in gross rents. It will not deduct basis or expenses from the amounts. It cannot tell if the forgiven debt was for homestead or investment property.

All of these situations are a critical part of your tax calculation in a given year. Here's the kicker - the IRS may not send you an inquiry for years. So your left digging in your records to justify an expense 3 years ago, or to figure out how you calculated your gross income.

The IRS can also use it on a going forward basis, asking you to document why you did not earn the same income in the succeeding years.

So pay attention to those 1099s, and pay attention what ID number you down when someone asks you a w-9 - it may come back to haunt you down the road.