1099MISC with subs refusing to give social security #

[Burke]

I would further suggest that every worker, as a matter of company policy, be given both the W-9 and a job application and be required to complete both prior to hiring.

Can't be done, as the W-9 requires an SSN be provided. Against the law, until an offer to hire has been made and accepted.

[taxea]

Page 6 of the general instructions for Form 1099 says:



It then refers you to the backup withholding instructions that basically say to start backup withholding.

It is interesting to note that nowhere in the instructions does it say you have to secure a W-9 prior to making your first payment to the recipient. It merely says if the recipient fails to furnish you a W-9 with the TIN, you have to start backup withholding.

So in your case, I would simply issue the 1099-MISC to the recipient and IRS with the TIN box blank. I would also attach a note to each stating the recipient refuses to return a W-9 with a valid TIN. You might also inform the recipient that there is a $50 penalty for failure to furnish a TIN, and that he/she should expect correspondence from IRS concerning this.

I read the instructions to mean that the client is are responsible to get the info before the work begins and if the worker refuses to provide it then withholding should commence with the first payment. The client shouldn't be asking for the required information after the fact.

I would further suggest that every worker, as a matter of company policy, be given both the W-9 and a job application and be required to complete both prior to hiring. When reporting the 1099 I would include a copy of the worker's job application. I don't remember what cannot be asked for on an application but at least it would have a driver's license number for identifying information if you are not allowed to ask for an ssn, which I doubt.

I don't agree that the client should hire the worker if the worker refuses to properly identify him/herself.

[Gary2]

Unless it's a 50/50 custody arrangement where the parents are counting days down to the wire, the noncustodial parent should KNOW they are not allowed to claim the child without the express permission (by way of the 8332) of the other parent. Any preparer worth their license (another point for mandatory CPE) will know the questions to ask. If the taxpayer lies to the preparer, its fraud.

Yes, but if there's no preparer, then what they should know and what the IRS can prove they did know are two different things. And even if the preparer asks all the right questions, and is capable of convincing a jury that they asked all the right questions, how do you argue against "I misunderstood what my preparer was asking"?

That's why it takes repeat offenses to get enforcement. Once the IRS has sent the letter saying "Your EITC has been denied because the child didn't live with you," it becomes easier to make the case "you knew about it because we can prove that we told you."

[Snaggletooth]

They Do What They Want

Joan, no disagreement with anything you've said, but the sad truth is Congress WANTS the EIC to flow freely from the coffers of the govt.

IRS could do a better job, but fact is they are much more likely to come after the tax preparer than the perpetrator of EIC fraud. In the first place, they can't collect the money from people who have already spent it and no longer have it.

A friend of mine does some 2500 returns annually, some 80% of them with EIC. And did contact their congressman and senator. He found out that Congress is not concerned with an orderly process of disbursing these refunds -- their objective is that the money get poured into the economy quickly and couldn't care less whether the rules have been followed.

There was, of course, a pretense of upholding honest values, but you didn't have to go very far to realize that dispersion of wealth was their main objective, and honesty stands little chance of getting in the way.

[JohnH]

Yes, they save billions but lose votes.
What's a few billion wasted when it helps you keep your cushy government job with all the perks & power? Congress would never allow any meaningful reform, even if IRS were inclined to undertake it. Just hold hearings every now & then, bluster a little about "waste & fraud", and slide the whole issue under the rug.

[joanmcq]

Unless it's a 50/50 custody arrangement where the parents are counting days down to the wire, the noncustodial parent should KNOW they are not allowed to claim the child without the express permission (by way of the 8332) of the other parent. Any preparer worth their license (another point for mandatory CPE) will know the questions to ask. If the taxpayer lies to the preparer, its fraud.

The noncustodial parent knows they are not. And I'm glad to see these cases followed up on by the IRS, flagged if it's EIC, and the money eventually returned.

Canada manages to pre-audit most of their returns. Even a quick review of returns with EIC, refundable ATC, etc. would result in taxpayer savings WAY beyond the cost of a preaudit (heck its about 5K or more a pop?). And the new identity theft fraud that has become rampant is built upon the refund first, ask questions later attitude. The american public may be conditioned towards quick refunds-and in most cases with the refund being withholding, it's justified. But when it's a refundable credit, it's free money. The public can be de-conditioned. The homeowners and adoption credits may have been a pain, but with the dollars at stake, a bit more due dilligence on the IRS (and congress for their large part in it) could save billions.

[David1980]

Same thing with people who rush down to e-file their taxes and claim a child to which they are not entitled, forcing the legitimate parent to file a paper return. Both receive letters stating the child was double-claimed, but IRS doesn't do a thing to investigate and award the deduction to the proper person, then collect from the fraudulent party.

I've seen a return where it basically went through 3 years like this (I was not the preparer).

Year 1: Non-custodial parent claims kids, gets EIC, refund check comes as expected.
Year 2: Non-custodial parent claims kids. Gets rejected, must file 8862 (someone should have taken a hint), return refiled with 8862, gets EIC, refund check is partially offset for IRS debt of some kind...
Year 3: Non-custodial parent claims kids. Gets rejected. Taxpayer not allowed to claim EIC that year.

Not sure if it were a 2-year or 10-year disallowance on EIC, probably a 2-year I would guess, though if the taxpayer continues to claim the kid for EIC I imagine it will turn into a 10-year disallowance.

It was refreshing to see something actually happening. Of course, I assume the other parent was also claiming the kid which is how the IRS knew - I'll bet a lot of this goes on where dependents are claimed that shouldn't be and so long as nobody else claims the same kid it probably stays under the radar.

[kpangelinan]

The issue with collecting penalties (over and above the usual P&I) is that there isn't always fraud, and even when there is, it's difficult to prove.

For example, when the AGI tie-breaker rule is invoked, there's generally no fraud. The person losing the tie can't be assumed to know the other person's AGI. Or if a person doesn't know about the 8332 rule, and mistakenly believes it's his or her year to properly claim a child, that's not fraud either. And when the person does understand the rules, but asserts they didn't, how can the IRS prove fraud?

While I believe there is a significant problem with people claiming a dependent when they know they don't have the right, I've seen my share of honest mistake cases. So the question then is when does it become worth the IRS's time to separate the honest mistakes from the fraud? I'm not surprised if it takes multiple violations before the IRS will take action.

Possibly....but most of the cases I've been involved in in wrongfully claiming a dependent had to do with blatant fraud, meaning they just took the child to get the EIC....and in almost every case, the child never lived with them, so in cases like these, there shouldn't have been questions beyond that about the EIC anyways....you can get into honest situations where AGI tie-breaker rules needed to be applied and they didn't know for claiming the exemption, but like I said, in my experience, it's been the EIC that people get aggressive and greedy about in order to get and rush their big refund check.

[Gary2]

The issue with collecting penalties (over and above the usual P&I) is that there isn't always fraud, and even when there is, it's difficult to prove.

For example, when the AGI tie-breaker rule is invoked, there's generally no fraud. The person losing the tie can't be assumed to know the other person's AGI. Or if a person doesn't know about the 8332 rule, and mistakenly believes it's his or her year to properly claim a child, that's not fraud either. And when the person does understand the rules, but asserts they didn't, how can the IRS prove fraud?

While I believe there is a significant problem with people claiming a dependent when they know they don't have the right, I've seen my share of honest mistake cases. So the question then is when does it become worth the IRS's time to separate the honest mistakes from the fraud? I'm not surprised if it takes multiple violations before the IRS will take action.

[kpangelinan]

TheIRS does eventually resolve the matter after investigating and determining the person entitled to the exemption. Had a client who's ex-husband claimed their child, the IRS then seized his refund for back child support owed to my client. She was the custodial parent and the IRS eventually made that determination and changed his return to reflect a higher tax and he had to pay back the refund! My client got the child deduction AND the back child support. Win, win for her!

Love hearing stories like this...glad it worked out for your client.

But yes, eventually, it gets worked out. It can take several months though.

[taxmandan]

Same thing with people who rush down to e-file their taxes and claim a child to which they are not entitled, forcing the legitimate parent to file a paper return. Both receive letters stating the child was double-claimed, but IRS doesn't do a thing to investigate and award the deduction to the proper person, then collect from the fraudulent party.

TheIRS does eventually resolve the matter after investigating and determining the person entitled to the exemption. Had a client who's ex-husband claimed their child, the IRS then seized his refund for back child support owed to my client. She was the custodial parent and the IRS eventually made that determination and changed his return to reflect a higher tax and he had to pay back the refund! My client got the child deduction AND the back child support. Win, win for her!

[OtisMozzetti]

In my experience, I have to agree with Burke. Nothing ever seems to happen. IRS could stop this by enforcing the $50 penalty, and chasing down (to the extent they can) people who give out phony numbers or no numbers at all. Some of them do leave the area, but most of them still hang around where they are working odd jobs and continuing to work under the table.
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Same thing with people who rush down to e-file their taxes and claim a child to which they are not entitled, forcing the legitimate parent to file a paper return. Both receive letters stating the child was double-claimed, but IRS doesn't do a thing to investigate and award the deduction to the proper person, then collect from the fraudulent party.

They are more interested in computerized interceptions that don't work correctly, chasing down preparers for penalties, etc. than getting out and being really effective.

This is in reply to the second half of your statement, Golden Rocket. In my experience, it may be true that the IRS does not jump into conducting investigation of the duplicate claim of a dependent or qualifying child. What the IRS seems to do following the letter stating that the child was already claimed is to await the requested documentation of the validity of the claim. Maybe what you are saying is that the IRS does not get around sufficiently often to assessing penalties for the claim if that claim turns out to have been unsubstantiated.

[kpangelinan]

Update and Thanks!i

I mailed, as POA of the client, the two contractors a letter to each explaining what could happen to them and asking for the W9's.

Both immediately sent me the W9's all filled out and signed.

I mailed them their 1099MISC's and the client signed and mailed out the 1096.

Thanks again for the suggestions and tips!

[Golden Rocket]

Not Doing Their Job

Except that he/she won't get any, in my experience.

In my experience, I have to agree with Burke. Nothing ever seems to happen. IRS could stop this by enforcing the $50 penalty, and chasing down (to the extent they can) people who give out phony numbers or no numbers at all. Some of them do leave the area, but most of them still hang around where they are working odd jobs and continuing to work under the table.

Same thing with people who rush down to e-file their taxes and claim a child to which they are not entitled, forcing the legitimate parent to file a paper return. Both receive letters stating the child was double-claimed, but IRS doesn't do a thing to investigate and award the deduction to the proper person, then collect from the fraudulent party.

They are more interested in computerized interceptions that don't work correctly, chasing down preparers for penalties, etc. than getting out and being really effective.

[kpangelinan]

Thank you!

Have client phone contractor and explain, including $ penalties. If no response, have client mail the W-9 with return receipt requested. If still no response, then mail contractor Form 1099-MISC with "refused" for his tax ID number. If still no response, file Forms 1099-MISC with IRS. Warn your client of HIS penalties for not getting the W-9 before making payments.

A good route to go.

Page 6 of the general instructions for Form 1099 says:



It then refers you to the backup withholding instructions that basically say to start backup withholding.

It is interesting to note that nowhere in the instructions does it say you have to secure a W-9 prior to making your first payment to the recipient. It merely says if the recipient fails to furnish you a W-9 with the TIN, you have to start backup withholding.

So in your case, I would simply issue the 1099-MISC to the recipient and IRS with the TIN box blank. I would also attach a note to each stating the recipient refuses to return a W-9 with a valid TIN. You might also inform the recipient that there is a $50 penalty for failure to furnish a TIN, and that he/she should expect correspondence from IRS concerning this.

This is of course prior to paying....meaning withholding from their checks. When it's after the fact, the recipients of the money do not care.

But, yes, we'll go ahead and issue it blank with a note as you suggested....kinda what I was thinking.

Except that he/she won't get any, in my experience. But the backup witholding notification does do wonders in obtaining the SSN/EIN's. Although that is only if you are paying them in the future. Bet the client won't make that mistake again. It's something I harp on over and over, and it just doesn't seem to sink in with some people.

Correct...for future payments, it will be easy with these subs, but like you, no matter how many times I harp on my clients about it, it never sinks in.....now that the Schedule C AND the 1120's have those questions on there about whether they were required to 1099 and if so, are they planning on sending them in or have they already sent them in is opening up plenty of eyes!

Thanks again!