Have you ever dealt with an IRS 1099 audit?

[LCP]

Client didn't issue 1099's in 2010. The IRS came in and identified about a dozen vendors.

It seems that the corrective action is to issue 1099s and send the vendor Form 4669 for him to attest that they reported the income. We were going to send a W-9 and the Form 4669 at the same time and ask that they return them to us.

....or does the IRS need to get that form directly from the vendor?

[LCP]

An update........

On behalf of the client, we sent out the W-9 and Form 4669. The auditor asked that we fax him the forms as they arrive to see that we are making progress I guess.... it appears that he will ask that we mail the actual copy to him later.

"What next" I asked......... it sounds as if he plans to assess the taxpayer at the rate of 28% for any payments where no Form 4669 is obtained. The premise must be that you are not allowed to pay anyone more than $600 unless and until you receive Form W-9 attesting to the fact that backup withholding is not required on that payment.

You might think that if 28% is paid in for that vendor then he would get a refund now and the client could request it be forwarded back to him. I doubt it though.

[JohnH]

Interesting scenario for the vendor. If he reported the income on his return but does not respond to the Form 4669, then he gets a credit for 28% of what he was paid, and eventually it comes to him in a refund of an overpayment. If he then chooses to do nothing in response to any request for refund from the payer, he pockets the 28%. So he gets a 28% bonus.

I'm not recommending this, nor would I consider it ethical, but it is at least a potential outcome. Might help convince someone who is lax in getting their W-9 forms filled out that they need to follow the rules. (assuming the I/C payments are valid in the first place)

[TAX4US]

But what happens when you find that the 1099's should have been filed and payments already made? Sounds like the vendor may get the refund even if not entitled to it. What say ye?

[JohnH]

That's what I said...

[Roberts]

But what happens when you find that the 1099's should have been filed and payments already made? Sounds like the vendor may get the refund even if not entitled to it. What say ye?

Why do you feel the vendor would be entitled to a refund?

[LCP]

You might think that if 28% is paid in for that vendor then he would get a refund now and the client could request it be forwarded back to him. I doubt it though.

This is where the "logic" probably falls apart. Even though the 28% is linked to "backup withholding" requirements, I doubt that any payment by my client would go to that vendor's account.

Fundamentally..... is it improper to pay a vendor before jumping thru the IRS' W-9 hoop? This example suggests that it isn't prudent to do so but is it clearly wrong?

[JohnH]

If the backup wthholding is paid to IRS via a properly-submitted 1099/1096, then it certainlly will show up as a credit to the vendor's withhlding account at some point. I can't think of any other way for IRS to account for receipt of the money.

[LCP]

If the backup wthholding is paid to IRS via a properly-submitted 1099/1096, then it certainlly will show up as a credit to the vendor's withhlding account at some point. I can't think of any other way for IRS to account for receipt of the money.

The IRS auditor referred to a 945 Assessment......I suppose he can do that without linking it to a vendor account.

The assessment would occur if we don't get Forms W-9 and 4669 back. I assume those that we do get back will indicate that the vendor isn't subject to backup withholding.

[Burke]

Fundamentally..... is it improper to pay a vendor before jumping thru the IRS' W-9 hoop? This example suggests that it isn't prudent to do so but is it clearly wrong?

That's what I tell my clients. If they are smart and don't want the hassle of an audit, fines and penalties, they darn well better get that form before paying the vendor, otherwise they may likely never get it when it comes 1099 time. It took the threat of BU withholding on one vendor, before he would provide the W-9 with his SSN. And yes, it is a requirement if you want to avoid the BU withholding. See General Instructions for Certain Information Returns (1097, 1098, 1099, etc.), pages 10 and 11. "If you do not collect and pay over backup withholding from affected payees as required, you may become liable for any uncollected amount." Read especially #1 on page 11, "Failure to Furnish TIN in the manner required." You can hold up payments for 60 days until you get the TIN, beyond that you must institute 28% withholding.

[Burke]

If the backup wthholding is paid to IRS via a properly-submitted 1099/1096, then it certainlly will show up as a credit to the vendor's withhlding account at some point. I can't think of any other way for IRS to account for receipt of the money.

If payments had been property reported via this method, the vendors would have had credit for any withholding. The problem is, apparently the TP did not do this. Therefore, unless the vendors can certify on the 4669 that they did report the payments on their tax return, the TP is going to be liable for the 28%. The vendor got the full 100% payment from the TP in this case, so they are not going to get credit for any tax paid in. It amounts to a penalty on the payor.

[Burke]

The IRS auditor referred to a 945 Assessment......I suppose he can do that without linking it to a vendor account.
The assessment would occur if we don't get Forms W-9 and 4669 back.

That is correct.