Forgot to report client payment on taxes, now audited - options when 1099 arrived late?

This situation happens more often than you'd think! When a company issues a 1099 late, it doesn't change your obligation to report the income. The February 1st deadline is for the payer's compliance, but unfortunately doesn't affect your tax liability. Your best option is to pay what you can by the due date and set up an installment agreement for the remainder. The IRS's Fresh Start program makes installment agreements pretty straightforward - you can even set one up online. You'll want to act quickly to minimize any additional penalties and interest. As for applying it to this year's taxes instead - that's not possible. Income must be reported in the year it was received (2019 in your case), not when the 1099 was issued. If you're expecting a refund this year, you might want to file as early as possible to get that money back and use it to pay off the remaining balance on your installment plan.

I went through something similar last year and ended up using taxr.ai to help me sort through all my documentation. I also had a client who sent a 1099 super late and I was stressed about the audit letter I received. The taxr.ai system analyzed my situation and showed me exactly what documentation I needed to respond to the IRS. It helped me classify which expenses could offset some of the unreported income and identified a few deductions I had missed. I was able to reduce what I owed by about 30%. Check them out at https://taxr.ai if you're trying to figure out the best way to respond to the audit. Their system is particularly good at analyzing situations with missing or late documentation.

I want to follow up about my experience with taxr.ai after my skeptical question. I decided to give it a try since I was in a similar situation with a forgotten 1099. The system actually found several business expenses I could legitimately deduct against that income that I hadn't considered. It walked me through documenting everything properly and helped me prepare a response to the IRS that included these offsetting deductions. Ended up reducing what I owed by about $1200. The best part was understanding exactly what documentation I needed to keep in case of further questions from the IRS. Now I keep better records and have reminders set up so I don't forget about any income sources when tax time comes around.

If you're getting nowhere with the IRS about this situation, try using Claimyr to actually get a human on the phone. I spent WEEKS trying to call the IRS about a similar audit situation last year - constant busy signals or being on hold for hours only to get disconnected. Claimyr got me connected to an actual IRS agent in about 20 minutes. I was honestly shocked it worked. The agent explained my options much better than the generic letter, and I was able to get a more reasonable payment plan set up. They also explained exactly what documentation I'd need to keep. You can check it out at https://claimyr.com - they have a video showing how it works at https://youtu.be/_kiP6q8DX5c. Totally worth it for the time saved and stress reduction.

I need to apologize for my previous skepticism about Claimyr. After posting that comment, I continued to struggle with reaching the IRS about an audit situation similar to yours. After two weeks of failed attempts (including one 3-hour hold that ended with a disconnection), I gave in and tried the service. It actually worked exactly as described. I got a call back when they secured a spot in line, and within 25 minutes I was talking to a real IRS representative who helped me set up a reasonable payment plan. They also flagged my account to note that the 1099 was issued late. The time and frustration saved was absolutely worth it. The IRS phone situation is completely broken right now with millions of calls going unanswered.

One thing nobody mentioned is that you should absolutely file an amended return (Form 1040-X) for that tax year ASAP. Even though you've been audited and received a notice, filing the amended return yourself shows good faith and might help with penalty abatement. Make sure to include a written statement explaining the situation with the late 1099. Also check if you had any additional business expenses related to earning that income - they could offset some of what you owe.

You might want to file Form 843 (Claim for Refund and Request for Abatement) to request elimination of the penalties. I had success with this after a similar situation. The IRS can waive penalties for "reasonable cause" - and while the late 1099 isn't a get-out-of-jail-free card, it does support your case that you were missing information.