Lewis Peter and Judy Larson, pro se. T.C. Memo. 2002-295

Windermere Information Technology Systems (Windermere) paid Mr. Larson $63,233 in wages that it reported in Form W-2 and $21,891.95 in non employee compensation. Due to a printing error on Form 1099, it reported that it paid Mr. Larson $1,891.95 in non-employee compensation. Taxpayers jointly filed Form 1040. Taxpayers reported with respect to Mr. Larson's non-employee business activity, gross income totaling $4,392, total expenses of $4,341, and a net profit of $51. The $4,392 of gross income reported on Schedule C of Taxpayers' 1999 joint return consisted of non-employee compensation of $2,500 from Data Search and non-employee compensation of $1,892 from Windermere. Taxpayers did not at any time attempt to verify the accuracy the amount of non-employee compensation reported in Form 1099 that Windermere issued that year.

IRS issued a notice of deficiency (notice) for 1999. IRS determined that the correct amount of non-employee compensation was $21,891.25 and not the $1,892 that Taxpayers reported. IRS also determined that Taxpayers were liable for the accuracy related penalty because of a substantial understatement of tax.

Pursuant to section 749 1 (c), IRS bears the burden of production with respect to a penalty issue. Although Taxpayers do not dispute that Windermere paid non-employee compensation of $21,891.95, and not $1,892, to Mr. Larson during 1999 and that there is a substantial understatement of tax for 1999, it is Taxpayers' position that they are not liable for the accuracy related penalty because, according to Taxpayers, they "used reasonable care in the preparation of their tax returns" and "should not be penalized."

It is significant, according to the Court, that, by reporting only $1,892, instead of $21,891.95, Taxpayers failed to report approximately 91 percent of the total non-employee compensation that Mr. Larson received from Windermere. At no time did Mr. Larson, an experienced businessman attempt to verify the accuracy of the amount of non-employee compensation (i.e., $1,891.25) as shown on Form 1099. We believe that the Taxpayers should have attempted to ascertain why the amount Windermere reported in that form was extremely small when compared to the amount of work that he performed for Windermere as a non-employee during 1999. Decision entered for IRS.



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