Given the hypothetical scenario you presented there appears to be several options to reconcile the accounting records of the business to the accounting records provided to the IRS.
The first would be to show the total gross receipts on Sch C line 1b. Then show a reduction in the amount of lawful money which was demanded on Sch C line 2 which includes 'any other adjustments.' There is a note in parentheses on that line to 'see instructions' but I have not been able to locate specific instructions for that line in the instructions. This option should allow the local borough to match/reconcile figures easier than the following option.
For the second option, the specific instructions on page C-4 in regard to Line 1b it states: 'If the total amounts that were reported in box 7 of Forms 1099-MISC are more than the total you are reporting on this line, attach a statement explaining the difference.' Therefore you could attach a short statement. However, this option would be more burdensome for the local borough to match figures. However, the local borough would be showing more receipts on their records vs the Sch C so they would be less likely to make a fuss compared to the opposite situation in which their receipts would be less than the Sch C.
The IRS is supposed to follow this when dealing with a potential hobby loss. But if a demand is made for lawful money should one worry about or even consider what a subject under the Internal Revenue Code has to deal with?
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