How do I avoid being charged tax for an insurance check that was mistaken issued to me?

Question

The check was issued to me last year and I cashed it. The insurance company discovered they had issued it to me by mistake and they asked me to refund them the money. I did. I would prefer that they contact the IRS and notify the IRS that I did not actually receive any $. Is it possible to issue a 1099 with a negative amount? I kind of need to know this bc the ppl at the insurance co. don't seem to know. I do not earn enough income to claim a deduction from returning the $ to the insurance company (e.g. I have run into the minimum alternative tax where I still have to pay some taxes regardless of expenses/deductions). I am in the United States. Thanks.

They already issued me a 1099 for 2006 this January notifying the IRS that they had paid me. Unfortunately, I didn't get to keep the $.

Answer 1

I have been a tax accountant for 27 years. I can tell you precisely how you are required to handle this. You have two options: 1) On your 2007 return, on the face of the 1040, at line 21 ("Other Income"), enter the amount you repaid the insurance company as a negative number. This is not an itemized deduction, so that won't be a factor nor will the AMT. In space provided next to line 21, enter "repayment of insurance payment erroneously issued in 2006." Also, it would be a good idea to explain this in detail in an attached statement. Choosing to do it, also attach copies of any correspondence related to this issue and enter "see attached statement" next to line 21 (instead of the entry above).

2) Amend your 2006 return, following the same principles outlined herein.

Hope it helps.

Answer 2

If you returned the money the same year it was issued to you, it is a nontaxable event for you. Since the insurance company issued you a 1099, I assume that they paid you in 2006, and you refunded the money in 2007.

Was the insurance supposed to be a nontaxable payment? If so, there is no problem.

If the insurance was supposed to be taxable, then you should have reported it on your 2006 return.
Did you report it and pay tax on it?

If you reported and paid tax on it, then file a Form 1045 to claim a refund of the taxes you paid, since you have repaid the insurance company. You only use Line 28. You re-do your 2006 tax return without the payment, and then figure how much extra tax you owed. You mail this separate from a tax return, and the extra tax you paid will be refunded to you within 60 days of your filing.

If you did not report it, but it should have been taxed, I would do nothing at this point. If the IRS questions you, be sure to show that this was re-paid and in fact you did not receive the money.

The other course of action, if it should have been taxed and you didn't report it, would be to file an amended 2006 return showing the payment, and then at the same time file a claim of right as described above, so that you will not owe tax on the money you returned to the insurance company.

Answer 3

fangtaiyang, you blew it. A 1099 was issued. Therefore, if the income isn't shown on a return, a CP 2000 will eventually come out from IRS. At that point, the taxpayer must respond to that notice. Therefore, the proper answer is to file an amended 1099 picking up the income and then zeroing it out and providing a proper explanation for doing so.

Answer 4

You cannot issue a 1099 or W2 with a negative amount. They would have to do a corrected 1099 for last year, and you would have to file form 1040X, a corrected personal tax return. Unfortunately for you, there is no simpler way.

Answer 5

Since this happened in 2006 they must have taken care of it. You would have had your 1099 in January if one was coming.

Answer 6

Insurance payments are not generally considerd income for IRS purposes and are not generally reported. In this case, you essentially did, but didn't recieve the money anyway. You should not need any form from the insurance company and should not have to report it.