Must you report income even if you do not receive a Form 1099?

Mr. and Mrs. LaRochelle learned the hard way that even though you do not receive a Form 1099, you must still report the income or it will cost you more than just the tax. The facts of this case are that the LaRochelle’s just moved their primary residence to Florida but also kept their home in Washington, D.C. Mr. LaRochelle had a very busy personal and business life and was actively involved in ten different partnership business. In 2017, Mr. LaRochelle received two Individual Retirement Account payments. One was for $ 60,000.00 and the other was for $ 238,000.00. Because the LaRochelles did not receive a Form 1099-R, it was never mentioned to the tax preparer that these distributions were made and subsequently were not reported on the tax return. The IRS does a cross matching of information returns such as Forms 1099, K-1, etc., to see if taxpayers properly report this income on their tax returns. When the tax returns and information returns do not match a CP2000 letter is generated asking why there is a difference. If no good answer, or no answer at all, is received, the IRS will generate a Notice of Deficiency, as they did in this case. The LaRochelles paid the tax and interest immediately but filed a petition with the Untied States Tax Court requesting that the penalties for not paying the tax timely be removed. Judge Leyden was unimpressed with the LaRochelle’s argument that they had reasonable cause and further ruled that the LaRochelles owned the $ 9,000.00 of penalties. Morale of this story is, make sure you report all of your income not just income for which you receive a third party notice such as a Form 1099 or K-1.