Sounds like you may have entered it in the program incorrectly.
Did you enter the 1099-NEC at all ?
Did it end up on the Sch 1 line 8 instead of the Sch C that the IRS thinks it belonged on ?
What exactly did you do to earn that income ? And how much was it for ?
Learn to read your tax return. Look at it and understand why the figures are entered where they are and see if certain forms are missing. Look to see if you have a Schedule SE. Look at your Schedule C to see if you made a mistake. Did you even include the income on Schedule C?
Sounds like you may have entered it in the program incorrectly.
Did you enter the 1099-NEC at all ?
Did it end up on the Sch 1 line 8 instead of the Sch C that the IRS thinks it belonged on ?
What exactly did you do to earn that income ? And how much was it for ?
Thanks for answering my question. You are right. It ends up on Sch1 line 8. I think it's due to I chose "This is not money earned as employee or self-employed individual, it is from an sporadic activity or hobby."
It is for one time consultancy and I have another full time job. I'm not sure I belongs to self-employed individual.
You can reply to the IRS that is does belong on Sch 1 line 8 and that the computer who saw a 1099-NEC with more than $400 on it is wrong in that it was missing on the Sch C.
"This is not money earned as employee or self-employed individual, it is from an sporadic activity or hobby."
Of course since you do have a Sch C on the return it may be difficult for you to justify why this amount was not on the Sch C with the other SE income but you can try. Otherwise just pay the balance due the IRS is asking for.... read the CP2000 notice carefully for how to respond if you don't agree.
@ydst wrote:
Thanks for answering my question. You are right. It ends up on Sch1 line 8. I think it's due to I chose "This is not money earned as employee or self-employed individual, it is from an sporadic activity or hobby."
It is for one time consultancy and I have another full time job. I'm not sure I belongs to self-employed individual.
Yes, that's it. You reported it as "other income" instead of self-employment.
There's a lot of guidance on whether your side-income is a hobby or self-employment, you can start here.
https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business
Very briefly, you are self-employed if you are engaged in an "ongoing trade or business" with a profit motive. There are a number of factors the IRS will use to make this determination, such as regularity, similarity to your "regular" job, and so on. You said "one time consultancy." If you performed a service (consulting) and you did it for money, then it should probably be considered self-employment.
With self-employment, you can deduct ordinary and necessary expenses, and then you pay income tax and SE tax on the profit. With a hobby, you can't deduct expenses, so you pay income tax on the gross proceeds, but you don't pay SE tax.
Your options now are to:
a. prepare an amended return declaring the money as self-employment. Deduct any expenses, and calculate your net profit and any extra tax due. Send the amended return and a check to the IRS office that sent the notice, along with a letter of explanation.
b. If you have no expenses to deduct, then you can just follow the instructions in the letter to pay the assessed SE tax.
c. Write a letter to the IRS explaining that, based on the tests the IRS uses, this is not self-employment income.