Why is this important? Mostly because if the income is in box 7, the IRS must allow us the expenses and often it is the business expenses that they are most antagonistic with. They have often focused on salesmen and car salesman. This is a group which has many expenses, but which often do not keep good records of their expenses. The have also focused on those with income on their form 1099 listed in box 3, saying those are not real business activities despite what legal explanations are clearly stated on the form 1099. Whereas if the income was in box 7 of the form 1099's, then they would consider those expenses as related to the income. Their interpretation runs counter to the instructions on the form 1099 itself. Yet no amount of discussion has persuaded them. So this must be a recent policy decision made by them or in fact the IRS making law. This has particular importance for those people who have large business expenses because if the expenses can be matched to the income then this lessens the audit risk as well as often times eliminating the alternative minimum tax which catches so many salesmen.
But there are many ways to skin a cat or deal with the IRS. Everyone knows they have more financial resources than us and can and often do assert a position that is blatantly unfair and incorrect. Once this happens many individuals feel they have no recourse but to cave in and just pay out of fear and intimidation. However there are other choices. I have had two cases with the IRS last year over this particular form 1099 issue. Both cases were similar. In one case the individual got quite justifiably scared and took his records away before I could talk to him about the best strategy. After all the IRS is intimidating to many of us, as they have unparalleled power. The one person who got scared off took the case to a tax attorney who in my opinion did not seem to want to defend the taxpayer as strongly as I believed should be done. I felt very strongly about the rightness of these two taxpayers cause, so after persuading the second salesman to fight the IRS. This second person chose a different tax attorney and his outcome is very different from the first. His case is being settled for about $600. The attorney fees paid on this case were about $850. This was much less than the IRS was going for. The tax attorney selected was the only difference. Two very different outcomes to what appeared to be similar issues. The only difference was the strategy employed. So if you find yourself in a difficult situation, there are good alternatives to rolling over out of fear.