Old 1099s

[buzzardbreath]

Got a new client - a real prize. Has not filed going back to 2004. Was recommended to me by another client who told him I could "do miracles" for him. Right.

Actually for most of those early years, guy was his own flooring contractor, and had a crew of between 1 and 3 people. Guy received 1099s for big money, but after paying his "crew" and taking other deductions, he will have only a fraction of that amount.

I have the names of his crew, and where they lived at the time they worked for him. And we have reasonable amounts to deduct for their pay. Of course, we don't have social security numbers.

For amounts paid out to individuals in excess of $600, I ALWAYS issue 1099s if there is to be a deduction taken. I believe it is proper to issue 1099s for years 2004-2008 when he was working this "crew." All but one of them have Latin names.

Is the potential damage to my client more dangerous than to simply not issue the 1099s and forego the deductions?
Keep in mind that if he does not deduct amounts paid to his crew, he will be left with a tax liability he will never be able to pay.

[JohnH]

What makes you think that you cannot take the deduction if no 1099 is issued?

I've never seen a requirement or a cite to that effect - just some anecdotal stuff from other tax preparers who take a conservative view on this and one or two situations where the preparer caved in during an audit.

[mastertaxguy]

"Old 1099's"

The real issue for the taxpayer AND the preparer is what documentation or written/paper records (besides copies of cash) does the TP have to substantiate the payments to his 'workers'/sub contractors? A 1099 MISC is often taken as evidence of payment. Note on form 8867, in dealing with self employed indivduals, receipt of 1099's is accepted as documentation of income.

There is a penalty for failing to file 1099's when otherwise required. In some cases recently (on audit/examination) I have had some success getting IRS waive the penalty when the TP obtains via the W-9 form route, or provides other sufficient documentaton to identify the worker/sub contractor. True, the workers/subcractors were aware of the TP's issues, and had reported the income received from TP on their returns.

Of course, the workers may turn around and claim they were employees which starts yet another round of examination and/or opens another can of worms.

[mscash]

Old 1099s

Issue the 1099s and let the chips fall where they may.

[Black Bart]

Forget the 1099s. He's got enough problems now without creating more. I agree with John that there's no reg saying he can't deduct contract labor with or without them. If he has proof of payment, he's home free. Anyway, the sub-contractors are/were required to report the income whether they got a 1099 or not and it really has no bearing on his deductibility of payments to them. You're just trying to catch up his old taxes without breaking him, muddying up the water, or stirring up a hornet's nest.

I've filed many such old returns and IRS is usually so glad to bring them up current (I think - they've never questioned any) that they accept any reasonable-looking prior year's return as is -- I've never been asked for old 1099's from such cases. Don't worry about it unless IRS asks for them -- and I'd bet a hundred bucks that will never happen. If they do, he can deal with it then -- they're already late now.

[JohnH]

Nice summary Bart.
Brief, relevant, and to the point.`

[buzzardbreath]

Good Discussion on this

Thanks for all the opinions. I did make a mistake by not quantifying some of the numbers, because this may change the opinions when real numbers are presented.

The aggregate of gross receipts by this contractor is appx $100,000 per year. He obviously needs the deductions. Some of you are advising to take the deductions anyway. But rest assured the aggregate of the 1099s involved is in
the area of $30,000 per year.

In recent years a question appears at the top of Sch C which asks if the proprietor has issued (or will issue) 1099s to those persons who qualify. A follow-up question for those who answer "No" is whether the conditions of the business should normally result in 1099s being issued.

I agree with Bart that in almost every case the IRS is so anxious to get these old returns filed that they usually don't question anything. But I don't know whether ignoring the 1099 requirement for $30,000 is smart or not.

That is my question, I suppose.

[geekgirldany]

I have filed missing 1099s before with a client for maybe two years of returns. Not as far back as you are saying. They never got a penalty on not reporting the 1099s on time.

I keep all my old 1099 left overs each year, do you have the forms to even report the 1099s on? Unless you kept them for those years there is no way you could get the red copies to send into the IRS.

Plus you said that a majority of the subs did not have a SSN. Did they have an ITIN or does he any type of numbers for them? You would be sending in names and addresses for the subs and that is it.

That is a large deduction but I believe I would go by the documentation showing he paid the subs... and not send in the 1099s. I might be wrong but I do not believe Schedule C started asking the question about reporting 1099s until about 5 years ago.

[JohnH]

The question began on the 2011 Schedule C, so it won't have to be answered on anything prior to that year. Although there has been lots of speculation about whether answering "Yes" / "No" on the two questions might increase the odds of an audit, not enough time has elapsed to know for sure. The next 12 - 18 months will likely bring clarity to that speculation.

I think the question is there primarily to intimidate the taxpayer into compliance, plus giving the auditor a heads up on something to check into if an audit does occur for some unrelated reason. Whether the wrong set of answers generates an audit is probably overblown, much like the old question about whether claiming a home office deduction is an audit red flag (I don't think it is).

In any event, if you take the deduction without issuing the 1099's, you just answer the questions honestly. Whatever happens after that is still just a part of the client's responsibility. I do think it would be a great idea going forward (if you continue to do his work), to advise him that he MUST give everyone a W-9 and issue 1099's at year-end. That should be a condition of doing work for him in the future.

Incidentally, in the OP you said that you have names and addresses of the subs. You could take this opportunity to send them a W-9, regardless of whether you prepare the 1099MISC or not. Some will respond and others won't, but you may gain valuable info of future use if there's an audit. For at least some of them, you'd have all the info needed to hurriedly prepare 1099MISC if the situation changed.

[taxea]

1. was the issuing of 1099 rule in effect in 2004 to present?
2. was the failure to file a 1099 in effect 2004 to present?
3. does TP have cancelled checks issued to the workers or any docs that prove he paid them?

[Mo Sheets]

Late 1099's - Penalty

I have a client who previously handled his own bookkeeping and 1099's. He was late mailing the 1099's several years ago (he thought they had to be mailed by April 15th...NOT). It took the IRS about two years but they sent him a pretty substantial bill (he had about 30 1099's) for the late filing.

[buzzardbreath]

No 1099s

A preponderance of this survey suggests overwhelmingly that I should not attempt to issue 1099s to validate the deductions for subcontract labor.

I believe I won't.

[buzzardbreath]

Resurrect this Thread

I've already drug you guys [gals] through this thing once, but there have been new developments.

And I want to focus on statements made by some of you that the IRS is so happy to get old returns filed that they'll just process anything through just to get it over and done with. (Bart, you and JohnH are the leaders of the pack)

The calculations for these old years are now complete. I'm not going to insult your intelligence by telling everyone that we have receipts for ALL such expenses. However, in lieu of receipts, there has been intensive research done. We have jobsites for mileage, pricelists for materials, quotes which allow for payment of those subcontractors that would have received a 1099, crew levels. We are even claiming additional revenue that the IRS doesn't possess at present.

I am convinced that we have realistic income, and I will state the expenses MAY be overstated, but they are realistic and supportable via means other than receipts.

As it turns out, the taxpayer has income ranging from $18,000 to $32,000, and he had two children which qualified for EIC. Bottom line is he has a refund for ALL those years, collectively worth $10K or thereabouts.

So the complexion has changed dramatically. NOW will the IRS happily file away these old returns and process them for refunds? This is important because even though we can support the expense through other means, a simple audit will disallow many of these expenses without receipts.

[JohnH]

There's no way to predict what IRS will actually do, especially given the unusual circumstances. But you must make a subjective determination about the undocumented expenses. Are they reasonable? Do the facts and circumstances make sense, and in your professional judgment are they legitimate? Looking at everything in the broad sense, has the client convinced you that he is being forthright and honest with you? Finally, you should make sure that the client understands that HE is responsible for everything on the return, including expenses which could be disallowed upon audit. With EIC in the mix, you'd better be sure you've done all your due diligence there as well. I think it would be wise to use the current-year due diligence requirements and apply them to the prior years.

You probably should come up with a special letter detailing all the major unknowns about this return.
Require him to sign it.
And make it crystal clear that if IRS makes changes, the taxes, penalties, and interest are all on him.

[buzzardbreath]

Old Refunds

Thanks John -

But with respect to filing for these old refunds, which (if any) of the following is accurate?

1) Taxpayer can rely on receiving multiple refunds for these very old returns.
2) The same statute of limitations which places a 3-yr limit on filing amendments for refunds
also applies to original returns, so there will be no refunds.
3) Although no refunds are forthcoming, filing these original returns can have the effect of
negating the substitute returns and assessments from these old years.
4) It is too late to change the assessments from the IRS based on their substitute returns
and taxpayer will have to pay the assessed amounts.