Refund from tax preparer - if/how to report

[ZWu1]

My tax preparer will refund me say $X dollars for the mistakes he made in prior years that could not be corrected/amended. I am willing to pay taxes on this amount out of my own pocket. However, since he will not issue me 1099 form since he said this by his research is not taxable:

1. Can I still report this as income?

2. If so, what support do I have?

3. Any other things to beware?

Thank you very much,

Eleanor

[DoninGA]

Did you enter the amount paid to the preparer as a business expense?  If not, then there is nothing for you to report on your tax return for the refund.

[rjs]

Why do you want to report income that a tax professional told you is not taxable?

You can report phantom income as "other income" without a 1099 or other document. It would be the same as if someone made a taxable payment to you in cash with no documentation. However, you cannot report it as income if the additional income makes you eligible for any tax credit, deduction, or other benefit that you would otherwise not be entitled to. It's safest to not report made-up income on your tax return.

[ZWu1]

No I didn't. The refund is tax money I over-paid that cannot be claimed back by filing anything with IRS. What are the cons if I do report that as income?

[DoninGA]

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@ZWu1 wrote:

No I didn't. The refund is tax money I over-paid that cannot be claimed back by filing anything with IRS. What are the cons if I do report that as income?

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It just a refund that was paid back to you from the tax preparer.  There are no consequences with the IRS since it is not any type of income that has to be reported on a tax return.

[ZWu1]

Because I am not sure what he said is 100% correct, and my friend who is a very experienced CPA said I need to report it as income. (BTW, this won't affect any tax credit, benefit, etc).

The refund is taxes I overpaid in past years that cannot be corrected by filing any forms, etc. Besides different opinions I heard, I also do not want risks/audits in the future as the amount is large. So paying taxes is safest per my friend. 

But I have only got 2 opinions so far, totally opposite ones. What are the cons if I do report it as income?

[Opus 17]

Regardless of the reason why the tax preparer chooses to give a refund, it is a refund of the user fee, not a refund of tax money from the IRS. Discounts, refunds and coupons are between you and the service provider and are not taxable income unless you previously deducted the preparer fees as a business expense, in which case the refund is business income.

The downside of reporting it as taxable income when it is not, is that you pay extra taxes that you don’t have to pay.

If you want to pay taxes on money that is not taxable income, why did you come here asking for advice?

[ZWu1]

Thanks a lot. It seems like your comment is:

Refund of tax overpaid to IRS by the CPA due to CPA's mistake is NOT income.

Thanks a lot for your input.  

[ZWu1]

So again, the money is a large amount of tax money, NOT preparer's service fees I paid.

[guywong]

Assuming this is not a refund of tax preparation fee, but compensation of "injury" you suffered, I can see why your CPA friend thinks this may be taxable income.  Under current tax law, damages unrelated to physical injury or sickness are generally taxable. I would further assume a mistake made on the tax return wouldn't include physical or emotional harm.

Tax implications of settlements and judgments | Internal Revenue Service

The general rule regarding taxability of amounts received from settlement of lawsuits and other legal remedies is Internal Revenue Code (IRC) Section 61. This section states all income is taxable from whatever source derived, unless exempted by another section of the code (emphasis added). IRC Section 104 provides an exclusion from taxable income with respect to lawsuits, settlements and awards. However, the facts and circumstances surrounding each settlement payment must be considered to determine the purpose for which the money was received because not all amounts received from a settlement are exempt from taxes. The key question to ask is: "What was the settlement (and its corresponding payments) intended to replace?"

26 U.S. Code § 61 - Gross income defined | U.S. Code | US Law | LII / Legal Information Institute

Internal Revenue Code Section 61

26 CFR § 1.61-1 - Gross income. | Electronic Code of Federal Regulations (e-CFR) | US Law | LII / Le...

Regulations on Code Section 61

§ 1.61-1 Gross income.

(a) General definition. Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Section 61 lists the more common items of gross income for purposes of illustration. For purposes of further illustration, § 1.61-14 mentions several miscellaneous items of gross income not listed specifically in section 61. Gross income, however, is not limited to the items so enumerated.

26 U.S.C. § 104 - U.S. Code Title 26. Internal Revenue Code § 104 | FindLaw

IRC Section 104

(a) In general.--Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include--

(2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness;

___________

Another IRS source on this subject is Publication 525:

Publication 525 (2023), Taxable and Nontaxable Income | Internal Revenue Service

Someone has already pointed out you don't need a 1099 to report income.  You can report this money received from your tax preparer on Line 8z of Schedule 1, Other income

[ZWu1]

Thanks so much for your detailed response. 

Basically the CPA made mistakes in past year's returns by calculating too little depreciation of a rental property, so I overpaid a total of large amount of taxes (because of many years).

However, since the house was already converted to self use, the amount cannot be claimed/amended with any IRS filing.

So the CPA agreed to give me refund and said he won't issue the 1099 (not sure why). 

Just to confirm: I SHOULD/MUST claim income on the refund from him, right?

[guywong]

Just to confirm: I SHOULD/MUST claim income on the refund from him, right?

Since this is on understated depreciation, I change my mind.  I now believe all you need to do is to increase the amount of depreciation taken on the previous rental property, as depreciation is "allowed or allowable" under the tax law.  In other words,  I now believe the amount you received from the CPA is not currently taxable, but will be when you sell your property.  Hopefully, some higher level tax experts will chime in .

Sorry for the delay in replying.  The message from Intuit went into my junk folder.