“ Is generating a 1099-MISC illegal without any payments made?”---->It is a violation of tax laws. You can ask the ER to send you payment. You need to contact your ER or individual who sent the 1099s to request your payment. You may send a second request via certified mail if you receive no response. This step is essential, as the IRS will not assist you if you have not made an attempt to contact the ER to request your payemnt.If that fails, report your income on 1040X based on the records you have of their payments to you. For example, you might have invoices. If there’s a mis-match between the amount of income you report and the amount of income that the company reported to the IRS, then the IRS will audit your tax return. Simply provide the auditor with documentation for how you calculated your business income, and inform them that the 1099 were intentionally incorrect as they didin’t intentionally pay you and issued a 1099 to you. Then the IRS may audit your ER.Or, yu can send a letter to the IRS with your return;then, They'll then go back on the issuer and require them to provide proof of the payment, like the check with your signature on the back. If they can't, you're all set. Additionally, the ER may have to pay a penalty for failing to report the correct amount of income on Form 1099-MISC. Under normal situations, the penalty is $15 per incorrect 1099 if the corrected 1099 is filed within 30 days of the original deadline for filing Forms 1099 and 1096 with the IRS. The penalty rises to $30 per incorrect 1099 if the correction is filed by after 30 days but before August 1, and $50 per incorrect 1099 if the correction is filed after August 1. The IRS will waive the penalty if the ER can show reasonable cause. if the IRS can show "intentional disregard" of the filing requirements or the accuracy of the information, the minimum penalty is $100 per 1099 form. If they are audited by the IRS and it discovers just 10 instances where they should have filed corrected 1099s but intentionally did not, the penalties could be in the thousands of dollars.
Actually, you had to report $1K on your Sch C line 1b Part 1 and write it off as other expenses on line 27a since you didin’t receive $1K from your ER. By including $1K in your gross income, you actually overstated your income on your federal/state tax return and may be subject to tax refund; it is possible you will end up paying more taxes.
“1) How do I correct the 1099-MISC income reported during the tax filing? 1040X is an option or anything else??”---->As said, you can report the whole $1K on Sch C line 1b and write it off on line 27 a as other expenses. You need to do file an amended return as your deductions, income or credits are incorrect; the IRS wants you to file amended return as long as your state tax liability may be affected by a change made on your federal return.
“2) I want to threaten the employer to collect my $1000. can I use the point that they " Illegally generated 1099-MISC without payment”--->Correct;According to the IRS direction, your ER should report on Form 1099-MISC only when payments are MADE in the course of their trade or business. The IRS instructions on the 1099 forms require that "your ER only send them out to people they've paid in the course of their trade or business. You can tell them that you will contact the IRS for this.Your ER should send both 1099 and 1096 to the IRS and the IRS is getting very good at matching 1099′s to income tax forms. I mean since you haven’t received any check from your ER you can prove that you(even though you received 1099 form your ER) have no income to report to the IRS. Then the IRS will contact your ER.