Issues w/ getting SS#s for 1099s - Any Suggestions

[peggysioux]

Independent Contractor Vs Employee

Taxpayer has a elderly home care business and files 1099's each year for workers. Taxpayer has been advised that the workers are actually employees and should be receiving W-2 and employment taxes should be paid. Taxpayer continues to pay as sub-contractors. How do other tax preparers handle? If we handle the return knowing employer has employees that she is paying as sub-contractors, are we in violation of reguations?

[JohnH]

Sandy: Thanks for that added clarification on the 1099 issue. And yes, taking on audit representation for a non-client is virtually a guaranteed headache.

[JohnH]

Bart; Very nice summary. And lots of good information.

[Black Bart]

You are

If you can't dazzle them with brilliance, then baffle them with bulltwit

indeed a card, BH.

I'm curious about one thing - has anyone on the forum EVER encountered a situation in which an auditor threatened to deny a deduction based on non-issuance of a 1099?

No, I haven't.

...it's my opinion that if an auditor threatened to deny the deduction then all one would have to do is issue the 1099 and pay the penalty if it's assessed. I don't see how an auditor could deny a legitimate deduction just because the paperwork wasn't completed - they have to look at the substance of the transaction...

Agree. If client has the paid bills the deduction seems a lock to me. Sandy did the right thing (expediency demands we bend on occasion) because she had a weak client, not a weak claim. Lucky that auditor didn't draw our esteemed and intractable colleague, erchess, who might have (in lieu of taking him to the Supreme Court) made him personally pay $45 per item of infraction.

I hear this a lot, but I think it's just an idea...to nudge clients into compliance...the threat of denial of the deduction...useful with recalcitrant clients...no practical significance.

I also view it as a customer club, but don't use it because I don't think it's true (actually doesn't strike me as particularly believable).

...I've never even seen a situation where the $50 penalty was imposed...

It happens. First thing agent asked me for at an audit was 1099s -- billed $50 each for three unfiled; nothing said about disallowing deductions. Had two other clients hit for late filing: 50 1099s @ $50 (got off with a tear-jerker letter) and 20 1099s @ $50 (left--result unknown). Forms made but not mailed 'til summer.

Speaking of clubs, the prospect of losing $50 cash per form PDQ seems to focus the client's mind more sharply than a vague, distant loss of deductions....

[S T]

Client by Client

I think you have take it on a case by case basis.
This particular client had several 1099 forms at low amounts (just over the $600 threshold). So by the time you added the per penalty vs the tax savings vs other audit issues , it just made sense on this "particular audit" The point being - the issue was made by the auditor that the 1099 forms had NOT be filed.

It might not make sense $$ wise for the t/p for 1099 form vs penalty per 1099 form not filed/or late filed in "higher 1099 $$ amounts", say if the 1099 misc amounts were in the higher thousands of $$

Just letting you know that I did indeed have an issue with the auditor over NOT filing 1099 MISC forms and a disallowed deduction. By the way, this was not a regular client where I prepared the return, I was merely representing at audit - and words of wisom - don't do it, unless audit representation is your main source of business. This client was a disaster!


Sandy

[JohnH]

That's interesting. You experience is the first one I've ever heard of. I understand conceding the issue for other reasons, but how did the auditor explain the penalty being more than the the tax savings? I'm puzzled by that argument.

[S T]

I had an audit

I think it was an audit in 2005 or 2006 on a 2004 return. Obviously the 1099 amounts were relative small - Auditor would NOT allow the deduction for outside services/commissions, etc , as 1099 forms were not issued.

I stated we would issue the 1099 forms, we did the calculation, and the auditor advised the penalties and interest would be more than the tax savings.
So, the decision was made not to claim the potential 1099 amounts.

This audit had so many other issues, that you did not want to "push" the auditor too far, and on the other side of the fence the auditor also acquiesced on some other issues.

I am now relating that experience to all of my clients that should be issuing 1099 forms and it has "turned on a light bulb" Compliance has been effectively better in relationship to issuing the 1099 misc forms.

Sandy

[BHoffman]

If you can't dazzle them with brilliance, then baffle them with bulltwit

[JohnH]

Yes, that makes sense to me. If a business owner issues a check to a legitimate independent contractor, then it seems silly to me that an auditor would even consider denying the deduction just because a 1099 was not issued. And as you pointed out, if a 1099 is issued it means virtually nothing with respect to validating a business deduction - the canceled checks are the proof, not some after-the-fact document.

I'm running the numbers and thinking that even the smallest deduction of $600 would yield a net tax savings of somewhere around $120 - $240, so even if the client hadn't issued the 1099's it would still be good business practice to do so in preparation for an audit and simply pay the $50 per form if a penalty notice comes over the transom later on - long after the audit is over.

Some of us might enjoy telling our clients this sort of thing to scare them into complying - I might have even said something along these lines to a client or two myself from time to time - but there's no need to kid ourselves about the issue on this forum.

[BHoffman]

I'm curious about one thing - has anyone on the forum EVER encountered a situation in which an auditor threatened to deny a deduction based on non-issuance of a 1099?

Hi John - one of my clients was audited years ago (before he became my client) and the auditor let them off with a warning about filing 1099 forms in the future. The auditor did allow the deduction. This was a general contractor. He had contracts with the subcontractors, invoices, and cancelled checks as proper substantiation - obviously, this is how IRS auditor would know that a transaction is "valid". The non-issuance of 1099 forms doesn't appear to be a guarantee that the IRS will disallow a deduction that is otherwise substantiated, at least in this one instance. In the reverse, I don't know whether an issued 1099 alone would suffice as substantiation or not.

Based on the prior response, I think the "bogus threat" comes from dogmatism.

[taxea]

" I don't see how an auditor could deny a legitimate deduction just because the paperwork wasn't completed - they have to look at the substance of the transaction"

if the proper documentation is not there how does the auditor know the transaction is valid?
The IRS is tightening up on many of the laws. These days document, document, document is in order.
As a preparer, if my client did not issue the required 1099's I tell them that the IRS is likely to reject the expense claim and they will then be subject to additional tax, penalty and interest.
It is what the IRS deems to be reasonable documentation, not what we want them to accept as reasonable.

[JohnH]

I advise my clients to always get the W-9 before making any payment to an I/C. Most do, some forget, and so we do the W-9 dance around Jan of each year with a few of them.

I'm curious about one thing - has anyone on the forum EVER encountered a situation in which an auditor threatened to deny a deduction based on non-issuance of a 1099? I hear this a lot, but I think it's just an idea advanced by tax preparers who are tyring to nudge their clients into compliance. I've never even seen a situation where the $50 penalty was imposed, although it's my opinion that if an auditor threatened to deny the deduction then all one would have to do is issue the 1099 and pay the penalty if it's assessed. I don't see how an auditor could deny a legitimate deduction just because the paperwork wasn't completed - they have to look at the substance of the transaction. So unless someone can cite a situation in which this actually happened I'm inclined to keep the threat of denial of the deduction in the category of bogus scare tactics - sometimes useful with recalcitrant clients but of no practical significance.

[taxea]

I advise my clients who use I/C's to have them fill out the W-9 at time of hiring. I let them know that if they cannot prove the expense, the IRS may deny it and this means that any payments to one person of 600 cannot be expensed on his business return. Makes them a bit more diligent in gettting the info they need and when they ask....what to do if the person won't complete the form...I say...don't hire him/her

[TaxLadyinPA]

Ditto

I warn all my clients to require a completed W-9 before any check can be written along with all Certificates of Insurance.

Sometime it works and sometimes it doesn't. Most time it does. I have very few problems when 1099 time comes.

DITTO agree ..... but it doesn't always work does it.

[JohnH]

---> I charge $45 a quarter hour for the task so if I have trouble making sense of what they give me or if every bit of information is somewhere else in a pile of disorganized papers and half of the items have to be corrected, then my fee goes up enough to keep me happy. <---

If that's the standard, I have several clients who would make you very happy...