This is it. The big day. February 1. The day the last of your W-2 and 1099 forms will arrive in your mailbox. And you will be completely ready to do your 2001 income tax returns.

OK, you can quit laughing now and we can get down to business.

Little Pieces of Paper

The information you need to calculate your taxable income (and, therefore, your income taxes) divides into two groups: information the Internal Revenue Service (IRS) will get both from you and somebody else, and information the IRS will receive only if you give it to them.

Not surprisingly, the first group has traditionally involved income, and the second deductible expenses. W-2 forms tell you–and the IRS–what you earned from a particular employer, and what taxes were withheld. Various flavors of 1099 tell you–and the IRS–about other types of income: interest, dividends, fees, pensions, stock sales, real estate sales, unemployment compensation, state income tax refunds and some weird ones that you will probably never see. The IRS regularly computer matches these payer reports to individual income tax returns, and sends out notices asking for more taxes if there appears to be an omission. Sometimes these notices are right. Other times, they just lend credibility to the folk saying, "To really screw things up, you need a computer."

I always encourage people to compare the W-2s and 1099s they receive to their pay stubs, Quicken files, or chocolate-smeared tally on an old envelope. Payers have known to report wrong amounts, or to have included a check you never actually received (perhaps due to ineptness by the postal service, your agent or whoever was supposed to put your new address in the payer’s computer).

Conversely, you should use that same set of records to make sure you receive all the W-2s and 1099s you are supposed to. They are, indeed, supposed to be in the mail by January 31, and even those payers who miss that deadline are rarely more than a few days late. It is far easier to call and request that duplicate form now than right before the deadline when half the membership of SAG will be calling.

In recent years, the IRS has broken with tradition and started having certain types of expenses reported as well, ones that give rise to tax credits (like tuition payments) or big deductions (like mortgage interest). So far, their efforts to computer-match these to tax returns can be charitably described as "feeling their way" but they soldier on and do better each year.

There is one more type of reporting form that can involve both income and expenses. Certain types of entities (typically, partnerships, S-corporations and trusts) do not pay tax themselves, but proportionately pass income, deductions, credits and all sorts of esoteric stuff through to their owners. These are reported on K-1 schedules. Because the underlying entity must first complete its tax return, K-1s are due much later than other reporting forms–April 15 for partnerships and trusts. We accountants spend a lot of time sending and receiving K-1s by fax in mid-April.

The IRS has announced that this year they will begin computer-matching K-1s to the related individual income tax returns. K-1s are much more complex than the other reporting forms and much harder to trace to the right spot in a tax return. I fear that the first-year effort will not be a sight for the squeamish.

More Little Pieces of Paper

The second category of information is important, too, and here you’re generally flying solo. You have a measurable financial incentive to go through the distasteful task of organizing your expense data. Each dollar of deductible expenses saves you a certain amount of taxes; it can be as little as fifteen percent, and as much as forty-two percent. Whether you squeeze the last dollar of deductions from your records, or say, "that’s enough" when you are confident you have all the significant ones depends on your personality. Everyone will pick up a dollar bill from the sidewalk. How low would you go? Would you pick up a nickel? A penny? Chewing gum that still looks fresh?

The incentive for being equally meticulous about income that is not reported on a W-2 or 1099 is less direct. You are honest, of course, and that is the primary reason you tell the government about this income. That, and the fear of getting caught. Getting caught may not be certain (as it would be with W-2 or 1099 income), but, boy, is it ugly when it happens. Actually going to prison for tax fraud is rare, but the time you would have to spend, the penalties you would have to pay and the charges from your accountant or lawyer could make solitary confinement appealing.

And if you are wondering how you might get caught not reporting those tips or "under the table" payments, two things can happen. You can get audited, or the person who paid you does. If your return is selected for an audit, the first question the IRS agent must answer is whether you can live the way you do on the income you report. The agent will ask to see your bank statements–or subpoena copies from the bank–and ask you to account for all the deposits.

If the person who paid you gets audited, and the IRS sees payments without 1099s or inaccurate tip reporting, the IRS will have a good reason to look at you. Just remember that businesses get audited at triple the rate of individual taxpayers, and someone sleazy enough to play games with this part of his tax reporting is probably pinning red flags all over that company’s tax forms.

Hot Off The Press

OK, so it’s only hot from the output side of my copier. Anyway, just call or write if you would like a free copy of my "Checklist of Potentially Deductible Items" for those in the arts.

Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or 773/525-1778 (888/525-1778 outside the Chicago area).

Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.