failure to file 1099 for 4 years.

[Taxes86]

i have a new client who has never filed an 1099 misc for his independent contractors. IRS disallowed all his deduction for the payments made to the contractors cause 1099 were not filed. whats the best approach if any for the client to pay the penalties and get the deduction.

[kathyc2]

Curious as to how they filled out the 1099 questions on return? Unless they answered yes that 1099's were required, and no that not filed, it seems like they filed a fraudulent return.

[Rapid Robert]

IRS disallowed all his deduction for the payments made to the contractors cause 1099 were not filed.

Shouldn't that be challenged? There are penalties for not filing 1099-MISC for PAYMENTS meeting certain requirements, made in the course of a trade or business, but what legal authority does the IRS have to disallow legitimate business DEDUCTIONS if there are adequate records?

[Roland Slugg]

IRS disallowed all his deduction for the payments made to the contractors cause 1099 were not filed.

The IRS isn't disallowing the deductions because 1099s weren't filed. They were disallowed because either, (a) there are insufficient records (or no records at all), (b) the payments were not "ordinary and necessary," or (c) they were not paid in connection with a trade or business or an income producing activity.

To get the deductions reinstated, the taxpayer needs to address (a), (b) and/or (c) above.

If 1099s were required to be filed but weren't, any penalties assessed are probably legitimate, and it's unlikely they will be abated. (Of course, the taxpayer can always ask.) However, if the deductions themselves were disallowed because the IRS determined they were were not paid in connection with a trade or business, then there was no 1099 filing requirement for those payments and, thus, no penalties for not filing them.

[kathyc2]

Shouldn't that be challenged? There are penalties for not filing 1099-MISC for PAYMENTS meeting certain requirements, made in the course of a trade or business, but what legal authority does the IRS have to disallow legitimate business DEDUCTIONS if there are adequate records?

I believe it would come down to the nature of the "business' of the IC. There is a big difference if the IC is a legitimate business that holds themselves out to the general public to perform services, or is a pseudo employee. One of the requirements of S530 relief in revenue act of 1978 to treat as an IC rather than an employee is complying with 1099 reporting requirements with respect to compensation.

My reading is that if the 1099 reporting is not complied with 3509 penalties could come into play.

[DaveinTexas]

Roland is on point

The IRS doesn't take the 1099s at face value, and haven't for some time. They want some type of proof of payment (canceled checks, signed receipts by recipient, etc) to back up the information returns. Maybe the contractors are still around and are still being paid by your client. Would they go as far as signing an affidavit stating they received $XXX amount of dollars from your client in XXXX tax year? It's a thought, only, of course, if they are not delinquent filers.

I had an auditor that would only allow the deduction (my client failed to send out to the recipients or file 1099s with the IRS) if the recipient filed a return for the particular year in question reporting at least the amount of income reported to the recipient by my client. I was shocked the auditor would allow this much leeway but she had many years of experience with the IRS and was willing to lend a hand, so to speak.

As to removing or getting the penalties abated, I would suggest making a very meaningful plea with the auditor by mentioning bringing the taxpayer back into compliance, mention the taxpayer's lack of education, poor business practices in the past, getting records cleaned up now, moving on to bigger/better things, etc. Appeal to their human nature if you will. If the client is stuck with the penalties it would cost much less than getting the deduction denied.

[Rapid Robert]

If the client is stuck with the penalties it would cost much less than getting the deduction denied.

That might not be true with the new, much higher penalties for 1099-MISC late filing/failure to file.

[taxea]

I doubt the workers who were paid would be willing to admit to the income. I would also bet that it was not reported on their respective returns. If the client has means of issuing the 1099's, at least, for the years that can still be amended it could be a way to show the IRS that he trying to mend his ways. That might convince the IRS to do something nice with the penalties. Of course your client will have to stop hiring workers that will not provide the W9 prior to getting hired and paid.

[Taxes86]

thanks for the replies. client has all his cancelled checks for payment made and he is filing all his 1099-misc this year.