IRS inquiry - 1099-MISC - Box 7 Non Employment Compensation

[CM1975]

My mother (who used Turbo Tax for filing 2019 taxes) received a letter asking about a 1099-Misc form, which she received $2K from the local multi County Transit company for "Property Value Settlement" (they bought 4 houses down the street to install light rail).  The letter stated to either send back Schedule SE for self employment SS and Medicare taxes or explain why you feel, this doesn't qualify.

Since I believe this wasn't an "intent to earn money" (they make the offer), I don't believe this requires a Schedule SE form (please correct me if I'm wrong).

My other question is why after filing with Turbo tax, would she receive a letter asking for more details about the 1099-Misc entry.  Shouldn't Turbo tax provide the IRS more detail about the "transaction", especially if some items qualify for the SE form and some do not, so they don't have to ask for clarification.

Thanks

[ColeenD3]

Is this a 2020 1099-Misc or 2019? As of 2020, payers are required to use Form 1099-NEC to report SE income.

This is not SE income, you are correct. Please see this LINK for how to include the income if it is indeed from 2019.

There is no way to include a note or explanation to the IRS for a position that you take. It is proper procedure for the IRS to contact you if they need further information.

[Opus 17]

The fact of the matter is, this was never taxable income to your mother of any kind and could have been excluded entirely from her tax return.

Now regarding your initial question, TurboTax did nothing wrong. If you receive a 1099 – MISC form with income in box 7 and do not believe it is self-employment income, you report it correctly and the IRS usually sends a letter asking for an explanation. This is the correct procedure.

However in this case, the income is not taxable at all. It represents a settlement due to loss in property value due to the utility company’s actions. It is not taxable income when received. Instead, it reduces the adjusted cost basis of her property, which might result in a higher capital gains tax when she sells the property, but is not taxable right away.  See for example this previous question and answer, and the document linked in the answer.

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/are-legal-settlements-dealing-wi...

If this was me, I would do the following steps.

1. Prepare an amended return for that tax year that removes the 1099 income completely. This should result in a small additional refund claim.

2. Write a letter to the IRS office that sent the assessment notice. In the letter, explain that the 1099 was issued because of a loss in property value. Include copies of any documents from the utility company that support this position. Also explain that you have taken advice, and reviewed the rules on the taxability of the income, and have determined that this income was not taxable at all because it reduces the cost basis of the property instead.  You can reference publication 4345.  Explain in the letter that you have prepared an amended tax return that removes the income and claims an additional refund.

3. Mail the letter, the amended refund, and copies of documentation from the utility company, by certified registered mail, to the office that sent the original assessment notice (and not the normal address for mailing amended tax returns).

It may take a while, but the IRS should acknowledge that you do not owe self-employment tax and they should pay the additional refund from removing the income from the tax return.