Every now & again we have a discussion on this forum and other forums about a client who has paid independent contractors and failed to issue a Form 1099-Misc. Some tax preparers go so far as to tell their clients they can't take the deduction on their tax return if the 1099-Misc isn't issued to the I/C. I've always disagreed with that assessment, as have others, but I still see that argument advanced from time-to-time. Well, today I gained a little more insight into this matter.
I'm working on an audit of a 2007 Form 1120 which has gotten very involved on a number of levels, and today the auditor sent me a 4564 with several items, one of which deals with significant payments to an independent contractor. The auditor has not previously asked for the 1099-Misc, so she is not aware of whether a 1099 has been issued (it has).
The 4564 specifically states that "If a Form 1099 was not issued you will need to prepare all delinquent forms and have available at our next appointment." In my opinion, there's only one way to interpret this. The auditor is not questioning the deductibility of the payments. There is every indication that the deduction will be allowed EVEN IF NO 1099-MISC HAS BEEN ISSUED, provided we submit one along with a 1096 at the next appointment. Sure, there would be a $50 penalty for each 1099 not submitted on time, but there's not a hint that the failure to prepare the 1099 would invalidate the deduction.
Maybe this will help a little in getting some perspective on what we should be doing for our clients. Naturally we would prefer that they properly issue a 1099-Misc to all I/C's, but if they fail to do so, we should be willing to help them correct the problem. It isn't productive to threaten to penalize them for not being good accountants and refusing to take a perfectly legitimate tax deduction on their returns.
I'm working on an audit of a 2007 Form 1120 which has gotten very involved on a number of levels, and today the auditor sent me a 4564 with several items, one of which deals with significant payments to an independent contractor. The auditor has not previously asked for the 1099-Misc, so she is not aware of whether a 1099 has been issued (it has).
The 4564 specifically states that "If a Form 1099 was not issued you will need to prepare all delinquent forms and have available at our next appointment." In my opinion, there's only one way to interpret this. The auditor is not questioning the deductibility of the payments. There is every indication that the deduction will be allowed EVEN IF NO 1099-MISC HAS BEEN ISSUED, provided we submit one along with a 1096 at the next appointment. Sure, there would be a $50 penalty for each 1099 not submitted on time, but there's not a hint that the failure to prepare the 1099 would invalidate the deduction.
Maybe this will help a little in getting some perspective on what we should be doing for our clients. Naturally we would prefer that they properly issue a 1099-Misc to all I/C's, but if they fail to do so, we should be willing to help them correct the problem. It isn't productive to threaten to penalize them for not being good accountants and refusing to take a perfectly legitimate tax deduction on their returns.
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