Insufficient 1099 info

[Edsel]

Contractor is ready to issue 35 1099-MISC for subcontract work done.

Four of the recipients have no SS#. Recipients were transient to begin with, and have left town with no practical way to contact them.

Here are options I think to be (somewhat) available, although they are "real-world" solutions and won't appeal to the purists:

1) Issue 1099s without a SS#. Contractor has done this before, and gets a letter two years later telling him to start withholding 28% backup withholding because the name and number do not match. Included in the letter are these people with no SS#.

2) Deem the work to be non-deductible and don't issue a 1099. Charge the amount paid to the owner's drawing account, essentially forcing the owner to pay tax on the amounts that would have otherwise been a deduction.

3) Do not issue a 1099 for these four recipients, but deduct the amount anyway.

I am listing #3 above because it is an option, but I'm also telling everyone that I won't do this. That option essentially converts the clients failure into MY failure.

Comments??? Almost ALL of you have had this situation if you've been in business very long...

[DaveO]

I'll vote option#1

Print "unable" in the SSN field.
In Nebraska you must withhold 5% state tax if your sub's aren't registered with the state.

[Gretel]

I would issue 1099's and put "unable to obtain" in the box for the FEIN. However, IRS says you have to try twice to get number from contractor. The only way I see to prove this to send out letters to the last know address.

[joanmcq]

Have client send W-9s to the last known address registered mail. If they come back wrong address or he gets back confirmation of reciept, this is some proof he tried to get the numbers should the IRS come after. Then file 1099s with 'refused' or something of that sort. then tell him to make sure to get the w-9s filled out BEFORE he pays anyone.

[DaveinTexas]

Imho

I would take the Option 3. Do your due diligence, send out the W9's requesting the information and if it comes back undeliverable as the other Joan mentioned, your due diligence is done.

Deduct the expense as long as the taxpayer has valid documentation, canceled checks and/or invoices from the contractor listing the services rendered.

I say this because in the last two audits I went through, one auditor didn't take the 1099s at face value and the other auditor said she never takes them at face value. My client failed to send out the 1099s but proved her deduction with canceled checks. The auditor stated that canceled checks will prove the deduction; that's amazing to me. How does the auditor know that the person my client paid was a contractor performing services and not a family member getting a loan?

I would deduct the expense, 1099 or not, the expense is ordinary necessary and if you have the valid documentation to prove the deduction, deduct the expense. Tell your client to deduct the $50 per recipient fine, I have seen this once from the IRS, from the contractor's pay in the following year and deduct the fine as a business expense on his Schedule C.

Boy am I grumpy around this time of year.

[Black Bart]

I like #1

(1) Issue 1099s without a SS#. Contractor has done this before, and gets a letter two years later telling him to start withholding 28% backup withholding because the name and number do not match. Included in the letter are these people with no SS#.

I usually do this and leave the box blank. As you say, it generates an annoying IRS letter, but while a few clients occasionally get billed for late filing1099s, I have never seen a fine for no number).

The letter basically says if it you know it's just a clerical mistake by you/IRS/worker, then just correct your records and forget it; but if it's bogus or he won't furnish one then send him a backup withholding notice and W-9 form (which, of course, is now unnecessary and impossible since nobody's got a clue where they're at). So...you do nothing and generally don't hear anything more.

Many times you can't get addresses on these people, so I use "General Delivery" of my town which gets it sent back pretty quick -- problem then is getting client to hold on to it...

I'd add a memo to engagement letter saying client didn't furnish a number to me.