Square reported girlfriend's business income under her SSN, triggering IRS issues (2012). Does she have any recourse?

Question

My girlfriend received a certified letter from the IRS telling her she owed almost $20,000 to the IRS for the 2012 tax year.

She called the IRS and learned that the reason for the charge was that Square had reported income under her social security number. She had signed up with Square, which asks for your name and social, but had also supplied a business EIN which the income should have been reported under.

What are her options?

SOLVED

Well, I would first like to thank all of you for immediately jumping to conclusions and essentially throwing around accusations of tax evasion. All she had to do was send a couple of statements from the business bank account to Square and they re-issued the corrected 1099-Ks.

Answer 1

If she reported the income on the business return, I'd treat this as a "mail audit".

Try to get a clear statement from Square confirming what they reported, under which SSN/EIN, for what transactions. Make a copy of that. If at all possible, get them to send a letter to the IRS (copy to you) acknowledging that they reported it under the wrong number.

Copy the IRS's letter. Square's letter, and both personal and business 2012 returns.

Write a (signed) cover letter explaining what had happened and pointing out the specific line in the business return which corresponded to the disputed amount, so they can see that you did report it properly and did pay taxes on it as business income. End that letter with a request for advice on how to straighten this out.

Certified-mail the whole package back to the IRS at whatever address the advisory letter gives.

At worst, I'm guessing, they'll tell you to refile both returns for 2012 with that income moved over from the business return to the personal return, which will make everything match their records. But with all of this documentation in one place, they may be able to simply accept that Square misreported it and correct their files.

Good luck. The IRS really isn't as unreasonable as people claim; if you can clearly document that you were trying to do the right thing, they try not to penalize folks unnecessarily.

Answer 2

Square use SSN to verify identity, and they only ask for the last 4 digits for that purpose. If she entered the full SSN - then she entered it into the tax id field, which was a wrong thing to do.

It is also worth mentioning that since you mentioned a "business partner" that "should have taken care of taxes" that you should have a tax adviser whose job would be to take care of taxes and ensure that your interests are well-represented.

I would suggest not to try interacting with the IRS on your own. Hire a tax adviser (EA/CPA licensed in your State) to do that. That tax adviser will be able to fix the problem (there are different ways of doing it, depending on the circumstances) and also verify that the business taxes were properly taken care of.

When dealing with business partners - assume that what they've "supposedly" did was not done, until you see it with your own eyes. Saying that "Supposedly, her business partner took care of all tax issues" means, in this case, that you've been caught with unreported income that you tried to conceal. It is your (your sister's...) responsibility to prove otherwise. It is a very weak defense when the IRS comes knocking on the door for their money.

Answer 3

I am currently dealing with the same issue of having a 1099 reported to the wrong person. I applied for the square account for my son's business but used my information, which I realized now was a BIG mistake. I did contact Square by email yesterday, which was Saturday, not expecting to hear from them until Monday, or possibly not at all (wasn't hearing a lot of good things about Square's customer service). She was most helpful and while the issue isn't completely taken care of, I do feel better about it. She just had me update the taxpayer information number which then updated the 1099 form.