1099 should be filed

[HV Ken]

Curious what people do in this circumstance. Business owner (Sch C or 1120-S) has someone come in to clean the office. They write this person a check. Total for year is $7,000. Time to file the 1099s. Person either does not have, or will not offer, a SSN (or ITIN or EIN). You get the picture.

So, do you put the expense on the return and tell the client about their responsibility to get the W-9, etc.?

Or, do you say no 1099, no expense for you! (Seinfeld Soup Nazi reference)

Or, ...?

[Abby Normal]

You send out the W9 twice and file the 1099 with no ID#.

[Lion EA]

If I'm preparing the 1099s for that client, I prepare the 1099 to the recipient with REFUSED and a W-9, and if I think they read English, a copy of the regs or instructions or whatever might get their attention. I tell the client to use Return Receipt Requested. Then we wait. I have client follow up with a phone calI. Come the end of February, or end of March if e-filing, I make sure client understands what his penalty will be when we file with IRS.

If I'm not preparing 1099s, then client will answer the 1099 questions for his return with the truth. I'll make sure he knows the potential consequences. That's pretty expensive office cleaning, so I'd ask him again about the amount. (My whole house is only $2,340/year, but I don't have my OIH cleaned so it's only 9-10 rooms.) I haven't had the situation come up, but if I did my due diligence that he had a business-related expense that cost him $7,000 and we are answering the questions correctly, I would put the expense on the return. I can see where a client might have that number included with other repair & maintenance amounts and tell me the answers to the questions, and I might never suspect that something's missing anyway.

[jklcpa]

I want to add to the above -

Since your client knows the rules and this cleaning person supposedly knows the rules, your client should not be writing any more checks to this person until the W-9 is received. The loss of income should be significant enough to this person to compel compliance. If the person still refuses, your client should find a legitimate cleaning service.

[Lion EA]

I definitely agree. If this is a continuing cleaner, tell your client to hand them a W-9 and tell them they can pick up their check when they return the filled out form. If your client leaves a check in the office or mails it, leave/mail the W-9 instead with a note. Tell your client he will have to withhold, which might get your client to take this more seriously if he has no employees/payroll and would have to deal with the withholding reports himself or pay you to prepare them.

[Jack from Ohio]

Been having this problem with clients for years. They simply will not enforce the rule - "No W-9, No pay."

[Mr. Pencil]

You get the picture.

Yeah, I get the picture. It ain't pretty. Sometimes I feel like saying they can't deduct anything because they don't have a profit motive and aren't operating in a business-like manner!

A contractor who is either illegal or will only work under-the-table surely does not carry workers comp insurance. Does the sole proprietor? He could lose his home. Even if the claim is a scam, he has no defense. Or he could get a nasty hit from Unemployment Insurance, again, he has no defense. But for janitorial service, workers comp is the big risk.

[Lion EA]

I've used the "no 1099" excuse to refuse to deduct an expense that I did not feel was really business-related; softer than calling a client a liar to her face. Sometimes it gets action. I had one gal who did get her mileage log together when she realized she had to answer a couple of questions on the return; but she didn't 1099 some workers that I suspected might've been babysitters and not really business assistants (didn't speak English!) so backed off on some expenses to avoid the 1099 questions. (And, yes, we had a discussion about child care, but I think there's no SS#.)

[HV Ken]

In a private message, a colleague not on this board wrote to me on this topic:

I let them know that a 1099 should be sent and it is their responsibility to get a tax ID number and prepare a 1099. Nothing else you can do. A lot of people hire workers who are illegal or who don’t file tax returns. It is out of our hands as long as we make it clear that they have a reporting responsibility. Owner should have checks showing that s/he made the payments…so the deduction is good. S/he just didn’t file a 1099 and could be subject to a penalty for not filing. Either way…I make them aware and put a note in my files saying that I advised on their responsibility.

Thoughts? Would you agree this takes care of our responsibility as preparers?

p.s. I never said this was my client. My intent was for a more philosophical discussion on this issue as we do encounter this from time to time and was wondering if we are taking the "right" approach or not, as this discussion came up recently in our office so I wanted to put it out there to the experts!

[Kea]

In the line of the PM that HVKen received -

Client asked me if they could continue to use a contractor that did not have an SSN. I asked about an ITIN, but have not yet gotten a response. (I know ITIN does not necessarily mean they can work in the US legally.)

I know there are rules about EMPLOYERS not hiring folks with SSN / ITIN / not eligible to work in US. But do those same rules apply to sole proprieters who use contract labor? (Not looking to start the debate on whether it's a good idea or not. Just what the laws are.)

[Margaret CPA in OH]

Personally I no longer take deductions without 1099's being issued where required. I obtained a pretty major business client several years ago when he was audited. Although he had records up the proverbial wazoo, he did not have W-9's for subs paid about $20,000 total. The auditor denied each and every associated payment costing this client a lot of money. Ever since then, he never pays without a W-9 in hand. After a Workers' Comp audit, he never hires a sub without seeing that sub's coverage form.

Sometimes it takes a financial hit to learn to follow the rules.

[JohnH]

I think the auditor put one over on you. There is no legal basis for denying the deduction in the absence of a 1099. So unless there were other potential problems you wanted to avoid by conceding this issue, you may have given up too soon.

I also don't agree with denying the deduction to a client when they haven't issued a 1099, provided they have proper documentation for the expense. ( "Proper documentation" would be canceled checks, valid receipts, etc. but would not necessarily include 1099 forms, contrary to the assertions of many tax pros who should know better) It is the job of the IRS to audit, not the person the client trusts to prepare their return accurately. This isn't even a grey area - the existence of the two 1099 questions on the tax form make that perfectly clear.

[Mr. Pencil]

There is no legal basis for denying the deduction in the absence of a 1099.

IRC Section 6041 requires payments to be reported on an information return. The taxpayer can not simply ignore the law and report the payments in a different way.

[michaelmars]

I think the auditor put one over on you. There is no legal basis for denying the deduction in the absence of a 1099. So unless there were other potential problems you wanted to avoid by conceding this issue, you may have given up too soon.

I also don't agree with denying the deduction to a client when they haven't issued a 1099, provided they have proper documentation for the expense. ( "Proper documentation" would be canceled checks, valid receipts, etc. but would not necessarily include 1099 forms, contrary to the assertions of many tax pros who should know better) It is the job of the IRS to audit, not the person the client trusts to prepare their return accurately. This isn't even a grey area - the existence of the two 1099 questions on the tax form make that perfectly clear.

totally agree, I make the client aware, and specifically mention how the "new" 1099 question will be answered but I never refuse to take the expense, that's the IRS to determine not mine if the deduction is legit. I have seen payees, suddenly have a corp that doesn't need to get an ein.

[JohnH]

IRC Section 6041 requires payments to be reported on an information return. The taxpayer can not simply ignore the law and report the payments in a different way.

Are you saying that Sec 6041 requires that the deduction not be taken if the information return is not filed?

Then what purpose is served by the two questions on the Sched C, Form 1065, Form 1120, and Form 1120S?.

[Hillenburg]

For each client that I filed 1099's the previous year, they get a phone call the first week in January reminding them of the January 31st deadline. This also helps get this requirement completed before tax season starts.

[Mr. Pencil]

Are you saying that Sec 6041 requires that the deduction not be taken if the information return is not filed?.

No, of course not. Like Michaelmars says, that's up to the IRS. But we were talking about Margaret's situation, in which it WAS the IRS deciding. I think her auditor had a solid legal basis.

[JohnH]

No, of course not. Like Michaelmars says, that's up to the IRS. But we were talking about Margaret's situation, in which it WAS the IRS deciding. I think her auditor had a solid legal basis.

I don't think he had a solid legal basis.

If he did, then I'd be in the camp that says "no 1099, no deduction".

[Mr. Pencil]

I don't think he had a solid legal basis.

If he did, then I'd be in the camp that says "no 1099, no deduction".

Same could be said for any receipt or other documentation. But (again referring to michaelmar's insight) it isn't our job to determine if the contractor is a corporation that doesn't require a 1099. Or anything else--unless the information provided appears to be incomplete, incorrect, or inconsistent. (The one exception I make is for substantiation of charitable contributions, because the law requires specific wording prior to filing the return.)

[J. Ron]

I ask my clients to get a SS or ITIN number before the first check is issued, or to withhold 20 percent for backup withholding. I believe that Pub. 1281 gives instructions to this effect. I think this is required unless it is an incorporated entity. The W9 information should be gotten up front rather than waiting until the end of the year.

[Jack from Ohio]

I ask my clients to get a SS or ITIN number before the first check is issued, or to withhold 20 percent for backup withholding. I believe that Pub. 1281 gives instructions to this effect. I think this is required unless it is an incorporated entity. The W9 information should be gotten up front rather than waiting until the end of the year.

What is your magic solution to get your clients to follow this often spoken direction to them?

[Catherine]

My magic solution is to change the "pay to" field in the client's accounting system to read "No payment until W-9 received!" and that has (mostly) done it. It means two trips to the client for me (unless I can do this on an Accountant's Copy). Gets an answer fast, too.

It IS possible to e-file 1099s with up to 25% of the ssn's missing. Tell your client they WILL get a letter from the IRS (1) scolding them, (2) telling them to get W-9s from everyone, and (3) telling them to start 28% backup withholding IMMEDIATELY. Showing them the backup withholding form (forget the #) gets attention, too, as it is filed annually with sub-totals per month. Clients are usually looking for the least amount of work -- that backup withholding form ain't it!

As far as deductions -- I tell clients that without the 1099 (with tax ID) that upon examination they WILL lose the deduction, completely. Then I ask them if they think their taxes are so outrageous, why they want to pay MORE just so sub-whoever can skip paying their own portion?