Inherited Book Royalties Calculated by IRS as Self Employment Income - Help!

[NW0]

For Tax Year 2019, I started a thread and received instructions how to handle royalty income distributed by my uncle from my grandparents' books.  I have been following advice from that thread for the last 3 tax cycles.

https://ttlc.intuit.com/community/taxes/discussion/heir-to-book-royalties-distributed-by-a-fellow-he...

I just received a notice from IRS that calculated self employment tax that they propose that I owe from my line entry for book royalties.  My entry is in Schedule 1, line 8 and has the additional text "Book Royalties."  From the bit of research I've done on this message board, I don't believe the royalty income I receive is subject to self employment tax.  The books that are generating royalties are several decades old at this point and the income is not a significant part of my family's overall income.

The notice shows the amount that IRS believes I owe, and a payment deadline of Aug. 24 to avoid further interest.  It also says, "If you believe the amount on Schedule 1, line 8 isn't subject to SE tax, send us a signed statement explaining why and include supporting documentation."

So my questions are:

1. Was Schedule 1, line 8 the correct location to enter this income?
2. Am I correct that I should not owe SE tax on this income?
3. If yes to both, do you have suggestions for what supporting documentation to include?  (I have the checks, a letter from my uncle, bank statements, etc.)

Thank you!

[Bsch4477]

Royalties are reported on Sch 1 line 5 flowing from Sch E. 

https://www.google.com/amp/s/ttlc.intuit.com/community/investments-and-rental-properties/discussion/...

[NW0]

Thank you — so the original advice I was following was not accurate. 

Is line 8 an acceptable place to have entered this information, or do I need to amend my taxes?

[Mike9241]

your name, address, ssn and date

Dear Sir or Madam,

I am disputing your assessment of the self-employment tax you assessed on the royalties reported on my 1040 schedule 1 line 8 

Under IRC code section 1402

(a)Net earnings from self-employment
The term “net earnings from self-employment” means the gross income derived by an individual from any trade or business carried on by such individual,

under IRC REG  § 1.1402(a)-1 Definition of net earnings from self-employment.
(a) Subject to the special rules set forth in §§ 1.1402(a)-3 to 1.1402(a)-17, inclusive, and to the exclusions set forth in §§ 1.1402(c)-2 to 1.1402(c)-7, inclusive, the term “net earnings from self-employment” means:

(1) The gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by chapter 1 of the Code which are attributable to such trade or business,

since the term " trade or business" is not defined in the IRC this is from your webpage (in part)

hthttps://www.irs.gov/charities-non-profits/trade-or-business-definedtps://www.irs.gov/charities-non... 

The term trade or business generally includes any activity carried on for the production of income from selling goods or performing services.

I receive the royalties reported on my 1040  as an heir from books written by my grandparents. I perform no services and provide no goods to receive these royalties.  therefore, I am not engaged in a trade or business with regard to these royalties and therefore they do not meet the definition of self-employment income as set forth in IRC code section 1402 and the related regulations as stated above

Please adjust your records accordingly to remove the self-employment tax you are assessing

include the above in a letter that you sign and date under penalties of perjury.

i would change the description in future returns to "royalties received as heir"

include the letter and IRS notice in your response.

send by a method where you can track that the IRS received it. keep copies for your records.

you should receive a response from the IRS. how long it will take is unknown.  

. 

[NW0]

Thank you — the template is very helpful!

[Critter-3]

FYI ... if this income is reported now on the 1099-misc in the royalties box then you would be best to report it as royalties on the Sch E and not on line 8 of the Sch 1  to avoid any futher issues in the future. 

However, if the amount is being reported on a 1099-NEC incorrectly you need to educate the issuer to use the correct form.

[NW0]

Thank you for the information. I don’t actually receive any 1099 for this, as the money is disbursed by my uncle from the bank account that receives the royalties. So all the help and tips are appreciated. 

[NW0]

Folks,

I have drafted the less "legalese" letter below.  What do you think?  I assume that IRS is aware of their own definitions, and I am not sure that reciting them makes for a more compelling argument (and I'd like this to be "easy to read" so as not to turn this into a time sink for the person who reviews it).  Either way, I do very much appreciate that you included the citations because it is good education for me.

Thank you for the time spent looking and replying.

To Whom it May Concern:

I disagree with the charges proposed in the notice dated July 25, 2022.  This notice describes that the IRS has classified the sum of [dollar value redacted] Book Royalties from Schedule 1, line 8 of our 2020 federal income tax return as self-employment income, and then calculated self-employment tax on this income.  These royalties are generated from books that my deceased grandparents authored mostly between [dates redacted].  I receive a portion of the royalties as an heir.

Because these royalties are not generated by any trade or business carried on by me or by my wife, I do not believe that the income is subject to self-employment tax.

Please see attached photos of two disbursal checks (partial sum of the 2020 income) from the bank account of [grandparent/author name redacted].  The books of [grandparent/author names] are well documented.  The Wikipedia entry below includes a concise list of their best known works.

https://en.wikipedia.org/wiki/[redacted]

Please let me know if there is anything else I can do to help settle this matter.

Sincerely,

[Critter-3]

Going forward just put it on the Sch E and save yourself this headache in the future.

[NW0]

Thank you, I absolutely will and I'll make a better description (if that field allows a description).