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I recently found out that as a business owner I had to issue form 1099-MISC to independent contractors, like, plumber who once fixed sink in our salon. Also, apparently I had to issue 1099-MISC because I was renting out premises where I do business.

However, back in 2011 I did not know that I had to issue 1099 for those two cases.

Now the FTB is inquiring about my missing 2012 tax return because back in 2011 I forgot to mark "Final" checkbox on my 565 form because we changed business structure from General Partnership to Sole proprietorship after the other partner left. I sent to FTB amended 2011 tax return with "Final" marked and everything else being the same. FTB told me that this 2011 tax return will go through their audit department.

Will FTB possibly now take away all my tax deductions that I claimed back in 2011 and for which I did not issue form 1099?

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If you're under audit - you should get a proper representation. I.e.: EA or CPA licensed in California and experienced with the FTB audit representation.

There's a penalty on failure to file form 1099, but it is with the IRS, not the FTB. If I remember correctly, it's something like $50 or $100 per instance.

Technically they can disqualify deductions claiming you paid under the table and no taxes were paid on the other side, however I doubt they'd do it in a case of simple omission of filing 1099 forms. Check with your licensed tax adviser.

Keep in mind that for the IRS 2011 is now closed, since the 3-year statute of limitations has passed. For California the statute is 4 years, and you're almost at the end of it. However since you're already under audit they may ask you to agree to extend it.

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