Even though some of the more onerous 1099 reporting requirements were repealed or at least pushed off for a while, this past tax season practitioners and clients were faced with a couple of new questions that a caused more than a little pain. Not much has changed for the up coming season.  Many are still in denial on this one….

The Schedules C and F and the business return forms have a couple of ‘gotcha’ questions – 1) Did you make any payments that would require you to file Form(s) 1099 and 2) If so, did you or will you file the required forms?  It is the second question causing all the problems.

So clients who made contract labor or other payments over the $600, but who didn’t issue 1099’s are in a bit of a bind. If the say no to question number one, then the contract labor, legal or other fees will be easy pickings for a computer audit heuristic. Or, it is possible they are making a false statement on the return.  If they say yes – which is likely the truthful response, then we hope they actually prepared and filed the 1099s. Unfortunately, a significant number did not.

Clients offer a range of excuses for not doing so, including ignorance of the requirements or inability/unwillingness to incur the costs of compliance. For those who decide to file and especially those filing late, they encounter a number of problems locating the information for the forms, not the least of which are unwilling recipients — “What do you mean you’re reporting this to the IRS, you never have before!”

If they decide to say no – then they may also try to forego the deduction – reasoning that if I don’t take the deduction, then it’s my loss and the IRS would accept this as sufficient. While this may seem like a safe response, I don’t think it will protect them under audit. If an IRS agent inspects a business and finds payments for services that were subject to 1099 reporting, then the client will have a hard time defending against failure to file penalties, including intentional disregard provisions and even mandatory withholding. The result could be loss of the deduction by not claiming, and 1099 reporting penalties to boot…not good.

So what if a client decides to be totally honest and say ‘yes’ to question one, and then answer question two ‘no’?  Like shooting fish in a barrel for the IRS…..check answers: if one ‘yes’, and two ‘no’ – see how much was claimed, and pull for examination…..

For practitioners, what do we do when we know the answers provided are likely or certainly false?…..quite the pickle – you are signing that the return is correct to the best of your knowledge and belief. This includes these questions – our software won’t leave the answers blank….do you knowingly sign a false return?