Partnership and uncleared/cashed checks and 1099's

[Catherine]

One I've never seen before.

 

Small partnership.  Three checks written over the course of the year - all in the same month -- never cleared the bank. BUT the vendors all got their money.  It's like the bank paid the checks but never charged them to the client's bank account.  

 

The client will talk to the bank and see if they have a clue.  

 

What I'm left with is a dilemma:  one vendor gets a 1099-MISC.  He *got* the $1400 or so bucks in that "uncleared" check but my clients never "lost" the money.  (The other two checks were for less than $150 total; not an issue.)

 

So do I include that amount that the vendor really DID get, on his 1099-MISC?  Or not, since my client has no out-of-pocket for that amount?  Or send a 1099-MISC but tell the client it's not a deduction on their return (that I don't do; just their pre-tax accounting as their guy doesn't use QB) because they're not out the cash?

 

[ILLMAS]

Is the bank a small community bank from the stone age?

[Pacun]

I would send the 1099-misc to the vendor and not take the deduction this year. Sooner or later the bank will trace those checks and the client will be charged. Can you make sure that your client doesn't have two or more checking accounts?

 

Maybe he used his personal checks to make the payments.

Edited January 22, 2015 by Pacun

[Catherine]

Is the bank a small community bank from the stone age?

Got it in one.

 

And to Pacun -- nope; those check stubs are in the check ledger (paper! ye olde desk checks in a binder).  

[ILLMAS]

I would say no 1099, TP never paid it reality, but would advise the vendor to report it anyway, have them explain what happen.  Something similar happened to client of mine, client tried to make things right with bank, but the bank never reversed or debit the amount, it was a very small amount.  Now lets say vendor is on a cash basis and doesn't want to report it in 2014, then I would say hell YES.

[Catherine]

I would say no 1099, TP never paid it reality, but would advise the vendor to report it anyway, have them explain what happen.  Something similar happened to client of mine, client tried to make things right with bank, but the bank never reversed or debit the amount, it was a very small amount.  Now lets say vendor is on a cash basis and doesn't want to report it in 2014, then I would say hell YES.

 

LOL -- the vendor in question, in this case, is the tax accountant.  I would *hope* he reports all his income!!

[Pacun]

I agree with ILLMAS but what if the bank corrects the "mistake" and charges your client in 2015? I think I would send them a 1099-misc even though the instructions read "if you paid someone more than $600...".

 

The client will be very unhappy to get a 1099-misc for 2015 because they didn't provide any services.

[Catherine]

I agree with ILLMAS but what if the bank corrects the "mistake" and charges your client in 2015? I think I would send them a 1099-misc even though the instructions read "if you paid someone more than $600...".

 

The client will be very unhappy to get a 1099-misc for 2015 because they didn't provide any services.

 

Very good point.

[rfassett]

Issue the 1099.  The vendor received the money.  Your client's issue is with the bank, not the vendor.  If the vendor claims he received the money, issue the 1099 to remain compliant.  The checks are still outstanding and it is assumed that they will at some point clear the bank.  So your client is entitled to the deduction.  If for some unexplained reason, the bank never ever clears the checks, then your client would need to pick them up as income at some point in the future.

[Lion EA]

I have a problem with an S-corp who wants his return soon but hasn't looked at his December statements.  We took a peek at the payroll account statement yesterday as we knew one payroll bounced back and forth while between lines of credit.  Well, pay went to employees and then back into bank (this was all about 12/2) but never back to employees per statement !!  Bookkeeper is sure she got December direct deposit, though.  It's going to be a mess.  And, this a multi-million dollar corp where I really need to research and probably file 3115s, so not happy that I have another issue to research when he flat-out refused to go on extension -- a conversation we've been having for months, but yesterday his wife said No.  He's already looking at new banks, so I think the bank may have messed up royally with the December 2014 payroll not actually getting paid until January 2015.

Edited January 22, 2015 by Lion EA

[Lee B]

Over the years I have seen a least a dozen instances where the check was deposited by the payee and the check was never charged to the account the check was drawn on. About 5 years ago this happened the monthly payroll check for the  owner

of my largest client. After I reconciled their monthly payroll checking account, I went back to the owner and told her that

her paycheck hadn't cleared. She went back and checked her bank account and her paycheck had been deposited

and credited to her personal account. To this day her paycheck is still outstanding.

[DANRVAN]

Issue the 1099.  The vendor received the money.  Your client's issue is with the bank, not the vendor.  If the vendor claims he received the money, issue the 1099 to remain compliant.  The checks are still outstanding and it is assumed that they will at some point clear the bank.  So your client is entitled to the deduction.  If for some unexplained reason, the bank never ever clears the checks, then your client would need to pick them up as income at some point in the future.A

Agree, issue a1099 and take deduction for outstanding checks.

[Gail in Virginia]

Couple of points:  if client is accrual rather than cash, then if the money is ever coming out of the bank he should definitely go ahead and take the deduction in the year it was incurred. Assuming that he is a cash basis taxpayer, items charged to a credit card are deductible when charged, not when the payment for the credit card clears the bank.  I would not see this as much different if the bank has paid the check without deducting it from his account but intends to deduct it at some point.   So that leaves they have paid the check out of someone else's account and are really not interested in tracking and correcting the error, and therefore your client is never going to pay this money.  In that case, it would be best to not recognize the expense   since it will never really be incurred.  That's just my opinion, your mileage may vary.

[TaxmannEA]

This sounds like a situation that one of my clients had about a year ago. In his case his bank balance mysteriously dropped by about $2500. When I did the bank rec., I found a check image that was from another business at another bank. The clearinghouse had mis-routed it to my client's account. The bank president claimed that he had never seen that happen before, but a few months later the same thing happened with another clients account at a different bank. Oh the wonders of modern technology! 

[BulldogTom]

Catherine,

 

I would issue the 1099's, especially since you know the cash was received by the client.

 

If you want to true up the cash account, you could Debit Cash and credit a liability account for future cash clearing, but I would not do that.  The books are correct.  The cash went out when the check was cut, the check is valid and used for a business purpose.

 

As stated above, the issue is not with the vendors, it is with the bank.

 

Tom

Newark, CA

[Catherine]

The taxpayer is cash basis.

 

I will issue a 1099-MISC to the vendor.

 

However, I think the expenses are invalid as deductions as those three checks (one big, two tiny) are now too old to be cashed; they were all written in March 2014.  But I will dump that portion of the problem into the tax accountant's lap and let him wrangle over it.

 

Many thanks to all!  I was thinking myself around in circles and now think I have it straight.  As usual, the way I first thought before I started second-guessing myself into confusion.

[rfassett]

 

As usual, the way I first thought before I started second-guessing myself into confusion.

 

That is precisely the reason I gave up thinking several years ago. (My client think I have a lisp when I say that out loud and they think I am saying I gave up DRINKING.  If they knew the truth they would probably bolt. ) 

[Lee B]

 However

 

However, I think the expenses are invalid as deductions as those three checks (one big, two tiny) are now too old to be cashed; they were all written in March 2014.  

 

 

 

In my experience most checks are considered to be legal tender for up to 1 year. Checks that I have seen that are negotiable for less than 1 year always have

that limitation printed on the front of the check. However, some banks have a policy of not accepting checks that old, but that's a bank policy, not a legality.

[Medlin Software, Dennis]

Notes on the front of a check such as two signatures required, void after 60 days, etc. only matter if the check is presented to a teller who uses their vision.  With Check 21, most checks are simply scanned.  If there is some sort of scribble in the signature area, and something the machine can read for an amount, and a valid MICR line, it goes through.

 

The likely issue is the account number is on the right of the MICR line, the signature had a tail which crossed the MICR line, and the scanner read the account number incorrectly, coupled with another customer at the same bank not watching their account to catch the error.  Likely more prevelant with an optical scanner than a magnetic scanner.
 

[Lee B]

One additional issue:  Almost all states have an "Unclaimed Funds Law", which says a matter of law that funds in a checking

 

represented by uncashed checks do not belong to the accountholder. After a period of time, usually 3 years, the state requires

 

you to fill out forms and forward the funds to a state agency, where  it's usually held for 7 years awaiting claimants.

 

Back in the 90's my state of Oregon used to send out letters, forms and instructions to every business to remind everybody

 

about their obligations with respect to the "Unclaimed Funds Law.". This is additional support for recording the expenses

 

and issuing the 1099 s.

[Margaret CPA in OH]

Ohio also has an annual Unclaimed Funds report that must be filed. There are rather precise steps to be taken when a paycheck is involved but, yes, if the funds were not deducted from the checking account but claimed on a return as an expense, the money must be turned over to the state. I've had to do that with clients who were not especially happy but had, of course, taken the deduction. Cake and eat it, too, syndrome, I think.

[GeneInAlabama]

Notes on the front of a check such as two signatures required, void after 60 days, etc. only matter if the check is presented to a teller who uses their vision.  With Check 21, most checks are simply scanned.  If there is some sort of scribble in the signature area, and something the machine can read for an amount, and a valid MICR line, it goes through.

 

The likely issue is the account number is on the right of the MICR line, the signature had a tail which crossed the MICR line, and the scanner read the account number incorrectly, coupled with another customer at the same bank not watching their account to catch the error.  Likely more prevelant with an optical scanner than a magnetic scanner.

 

Three times in the last few years, I have received a check that had no signature or any kind of mark what-so-ever on the signature line and I went ahead and deposited them anyway to see what would happen.  All three times they went right on through and I never heard anything from them.  

 

My daughter whose name is listed on her checking account as "Regina" signed a check one day as "Gina" and it bounced back because the name didn't match what they had on record.

 

I guess everything depends.

[cred65]

Ohio also has an annual Unclaimed Funds report that must be filed. There are rather precise steps to be taken when a paycheck is involved but, yes, if the funds were not deducted from the checking account but claimed on a return as an expense, the money must be turned over to the state. I've had to do that with clients who were not especially happy but had, of course, taken the deduction. Cake and eat it, too, syndrome, I think.

 

In 2012 I was able to receive an unclaimed funds check from 1972.  It required a bunch of evidence but it worked.