1099-MISC for SCRA Refund

[jasonlerner92]

I received a 1099-MISC from my bank. They conducted an audit of my accounts under the THE SERVICEMEMBERS CIVIL RELIEF ACT (SCRA). Since it was reported to the IRS as "other income" I am forced to claim it as income on my taxes. I do not understand WHY? This is not "free money" or "additional income" given to me by the bank. This money is a REFUND of fees, interest and other charges the bank charged me and then REFUNDED me under the SCRA. In essence they are giving me money I paid them back to me. It is not NEW income or ADDITIONAL income, it is income that is already part of the income reported as wages in my taxes. If I add this 1099-MISC money into my income then I am being taxed twice on the same money. What documentation do I need to show this so I can not report this money and prevent an audit from the IRS.

[JulieS]

Yes, you do have to report the amount as "Other income", but because of the nature of this amount, it should not be taxed.

I am assuming this is all related to personal banking and not to a small business account. If that is the case, you can enter a balancing transaction to offset the amount.

Here is how to enter your 1099-MISC box 3 amount:

1. Select Federal on the left side menu.
2. Select Income and Expenses toward upper left.
3. Expand/ scroll down the list and find the section called, Less Common Income.
4. Scroll all the way down and select Miscellaneous Income, 1099-A, 1099-C.
5. Select Other reportable income.
6. Answer the first question Yes.
7. Enter SCRA refund as the description and amount on this page, click Continue. 
8. Click Add another income item.
9. Enter SCRA refund as the description and the same amount as a negative number on this page, click Continue

[jasonlerner92]

Yes, this is the result of an SCRA audit the bank did.  I assume it was for many years, perhaps over the course of how long I have had the accounts open.  It applies to my personal banking, most likely just to my various credit cards as the fees and interest rates are capped by the SCRA.  The bank confirmed for me that this money was a "refund" and not any forgiveness of loans or interest.  I asked them for a copy of the audit showing the details of the audit.

Just to be clear, you are saying enter the 1099-MISC as INCOME and then enter a second 1099-MISC for the same amount essentially as "negative" INCOME to zero it out?

There is not away to put in the 1099 and indicate that it is non-taxable?

Is there some tax rule or documentation that shows that SCRA refunds are not taxable that I can keep for my records?

Thank you for your quick reply.

Jason Lerner

[JulieS]

No, there isn't a way to show that is not taxable except to balance the transaction out with a negative income entry.

If you already entered the 1099-MISC in a different section, you can just enter the balancing transaction to offset it. This isn't a common problem, so no special reporting method exists to deal with it. 

[jasonlerner92]

Tracking.  

Thank you for your assistance.

Jason

[jasonlerner92]

Ma'am:

Talk to a tax advisor at the military tax center.  She said to not file the 1099 at all and to use a Form 8275 to explain the situation, but I don't see that in TT.  Thoughts?  Will the 1099 and negative 1099 you recommend show the "notes" to explain why I put in a negative transaction?

Thanks.

Jason

[JohnW152]

Using a Form 8275 isn’t a bad idea; problem is, it’s not available in TurboTax, so you’d need to print and mail your return rather than e-file..

The positive and negative entries alluded above are typically very good ways to report activities like you have here.  

The “notes” next to each entry will work.  The fields accept quite a few characters

[jasonlerner92]

Yes, would prefer not to mail.  The notes section will be visible on the forms submitted?  She mentioned that sometimes not all forms and worksheets actually get transmitted.

Thank you for your assistance.

Jason

[MarilynG1]

Yes, you will see the Notes on Schedule 1, Line 8z under 'Other Income'.

Schedule 1 is filed with your return. 

[jasonlerner92]

Thank you 🙂