Fishing Penalties and Notices
Some fishermen who file their taxes by the deadline to avoid the estimated tax penalty still received penalty notices from the Service Centers. This occasionally will happen. If you received a penalty notice for underpaying estimated tax that you think is wrong, it is important that you immediately write to the address on the notice and explain why you think the notice is in error. Do not ignore a penalty notice even if you think it was sent to you by mistake. If you paid the penalty without questioning the notice and now feel you did not owe it, you can file Form 843, Claim for Refund and Request for Abatement, requesting the penalty amount be refunded to you.
A common error when reporting Form 1120S or 1065 income is failure to complete line 42 of Schedule E (Form 1040). If you complete this line, the IRS then knows the gross income reported from the Partnership or S Corporation is from fishing.
If you have done the following, the estimated tax penalty may not be applicable to you:
- At least 66 2/3% of your gross income is from fishing and
- (A) Make an estimated tax payment by January 15 of at least 66 2/3% of the tax shown on your prior year return and file your return by April 15 or (B) file your Form 1040 return by March 1 and pay all the tax you owe at that time.
If you can answer "Yes" to both items 1 and 2, the estimated tax penalty will not be applicable. If you receive an estimated tax penalty notice from the Service Center that you feel is wrong, confirm whether the penalty is applicable. Items 1 and 2 above contain the criteria for a fisher with sufficient fishing gross income (66 2/3%) to avoid the estimated tax penalty. Different criteria is applicable to those fisher who did not have at least 66 2/3% of their gross income from fishing (or farming) in the 2009 or 2010 tax years. Publication 505, Tax Withholding and Estimated Tax, contains detailed information on this topic.
If you conclude that you are not subject to the estimated tax penalty, immediately write to the address contained on the penalty notice or call the phone number contained on the penalty notice and explain why you feel the penalty notice is in error.
If you contacted the IRS about an ongoing problem and it remains unresolved, or if you are experiencing a hardship because of IRS treatment or delay, contact the Taxpayer Advocate Service. Call 24 hours a day, 7 days a week, toll-free (877) 777-4778.
Principal Business Activity Code
The correct code for the fishing industry is 114110. This code should be used regardless of the type of business return filed (Form 1040, Individual Income Tax Return; Form 1120, Corporation Income Tax Return; Form 1120S, Income Tax Return for an S Corporation; or Form 1065, Partnership Return of Income).
If you file a Schedule C, Sole Proprietorship, which is your primary source of income, and enter an incorrect code, you may be assessed an estimated tax penalty. Only fish and farming industries are permitted to file individual returns without estimated tax payments.
1099 MISC Issues
As the crewmember or sternman who is given a share of the catch to sell, you may be faced with a potential recordkeeping problem. The crewmember/sternman who sells their share of the catch for cash would be issued a 1099-MISC from the buyer and one from the boat owner. However, the 1099s could be for different amounts. Because both Forms 1099-MISC need to be filed with the IRS, in this instance Agency records would indicate twice the amount actually received by the seller. You might consider doing one of two things (or both):
- Have the boat captain sell the entire catch and then you receive your money from him.
- Receive a check as payment for your share of the catch from the buyer.
Failure to elect one of these two options will probably result in continued inquiries regarding the discrepancies.
If the IRS contacts you about a discrepancy that is caused by this issue, please contact the IRS immediately.