Tax Tips
FIINANCIIAL Q AND A
Gina L. Gwozdz

Jim writes:

I have just received a notice from the IRS stating that I did not report $4,000 of income. The detail shows that a bank had reported that amount as nonemployee compensation. It turns out that the amount was for a settlement of a 2003 claim I filed under the Fair Credit Reporting Act. I never received a 1099. The IRS says that my tax increase along with penalties and interest amounts to $2,102. This includes "selfemployment tax deduction." I completely forgot about the settlement money.

Now, how do I respond to the IRS? Throw myself on their mercy; dispute the characterization (re the self-employment) or what? I did have some expenses associated with the lawsuit, which hopefully would decrease the net amount that is taxable.

They want a response soon, they say that my return is going to be examined. Does that mean audited, or what? I am at a loss here. Any help would be greatly appreciated.

Answer:

Jim, the first thing you should do is hire a professional to help you correspond with the IRS.

I have seen more people make things worse by trying to take care of notices themselves. This time of year it's going to be hard to find someone who is going to act fast, but you need that as well. A good tax consultant should be able to tell you if it was taxable at all or not.

Whether or not the settlement was taxable depends on the nature of your claim and what the settlement was for (IRS Publication 525 deals with judgment/settlement proceeds).

I agree that it doesn't sound like it should be recorded, as non-employee compensation and self-employment tax should not apply.

Once you know the proper tax reporting of the item, then you can appropriately respond to the IRS and take care of the situation.

Ted writes:

My son is 20. He dropped out of college and has been home doing some Online School to try and get a degree. Can I still claim him as my dependent?

Answer:

Hello Ted, thanks for writing.

Online School is not a qualified school, but you said that your son did go to college.

If he attended college for at least five months during the year, being enrolled full-time, and the college is a qualified school (has a regular teaching staff, course of study, student body), then he will probably qualify as your dependent. It would be best to discuss this

A

with your tax consultant.

Shelley wonders:

It has been recommended by my mother's doctor that she get a 4-wheeled walker.

Because she got one without wheels earlier in the year, Medicare will not cover it.

With the doctor's note that it is medically necessary, can this be added to the medical expenses for the year? (I know about the limit but this year, I suspect she will hit it.)

Answer:

Thanks for writing Shelley!

If your mother has a prescription for the wheelchair then it is deductible as a Medical Expense on Schedule A, subject to various limitations.

I would keep a copy of the prescription with the tax return.

!

Gina L. Gwozdz is a Bullard resident and certified public accountant. You may reach her via her web site at http://glgcpa.blogspot.com/