Posted by Marian_in_CA on 11/24/08 7:27am
Msg #270437

What's with all of the IRS stuff?

I mean this with the best intentions... but what's up with the interesting suggestions about the IRS and 1099 lately?

1. You cannot report someone to the IRS for tax fraud unless you have concrete evidence or at least really good knowledge that they are doing something specific. When you report them, you need to tell the IRS the nature of their fraud and how you know about it. The lack of payment on accounts does not necessarily equal criminal behavior. I'm not defending them here... I think the lack of payment if atrocious... I just think reporting them to the IRS is the wrong way to handle it. Specifically, the IRS themselves tell you NOT to do this - that they should should not be used as a mediator for business disputes. They also specifically state that tax fraud reports must be fairly significant. Reporting them for a $150 invoice is not even going to register to them. They simply don't care unless you give them something solid...they aren't going to go chasing after $150 unless it's obvious.

Really, the only proof you would have that they are committing fraud would be if they issued you a 1099 form but never actually paid you. In THAT case, then yes... that's a concrete violation and the IRS would pay attention.


2. A recent request for a TIN so he/she could issue the SS a 1099 for the money he/she couldn't collect? Wow... now that's actually venturing on tax fraud, if you ask me. How can you issue a 1099 for work or service they didn't perform? Furthermore, why would you even do that when you can write-off the bad debt yourself? Lack of payment on an account is bad debt. Yes, there is a 1099-C that is used when a creditor agrees to reduce a debt... but in that case the 1099-C is issued for amounts over $600. How many of you have invoices over $600 with the same company? And even then... there all kinds of rules that involve needing an accountant/tax professional.


My point being, using the IRS (and IRS procedures) as a method of collecting business debt seems unethical and, frankly, useless. It also makes it clear that you don't know how to handle business accounting or dealing with uncollectable receivables.

Maybe before you get too creative with the IRS and potentially cause trouble for yourself, try reading up on how you are *actually* supposed to deal with business debt:

http://www.irs.gov/publications/p535/ch10.html

If you don't know how to handle accounts receivable, then I suggest talking to an accountant rather than coming up with schemes to report people to the IRS for things that may or may not be true. The fact is that every business experiences bad debts on their receivables. In some industries, unfortunately, the % is higher than others and you need to allow for it and/or adopt better methods of preventing it in the first place (be more selective in who you work with, get payment upfront, etc.).

Reply by Lee/AR on 11/24/08 7:45am
Msg #270439

Well-stated, Marian. IRS 'reporters', take note. n/m

Reply by MW/VA on 11/24/08 8:07am
Msg #270440

Re: Well-stated, Marian. IRS 'reporters', take note.

Good post. I've also read that some try to use the IRS as a "collection agency"--amazing.

Reply by Bob_Chicago on 11/24/08 9:12am
Msg #270445

Actually, I do not believe that it is not even tax...

fraud on the the part of the.. "payor" unless they are keep their books on a "cash" basis, and claim a deduction for the amount the they failed to pay to you.
The fact that you received a 1099 does not mean that you are required to
claim the unpaid amount as income. You receive a number of 1099s. and
do generally not get them from companies that pay you less than $600 in a
calendar year.
If you are on a cash basis, you only need to report the amounts that you
actually receive, and then only if recieved in "good " funds (check doesn't bounce)

Reply by MistarellaFL on 11/24/08 9:25am
Msg #270448

That's just Jack.....

He's like a broken record on the subject of not being paid and notifying the IRS that the non-paying company is keeping "our" fees, and not paying taxes on it.

Reply by John_NorCal on 11/24/08 10:07am
Msg #270451

Great post Marian.

As you state the IRS is not a collection agency and does not want to be bothered with this. I would make one correction to your post though, and Bob_Chicago touched on it to a certain extent. That is:

Unless a person is an accrual basis tax payer, they are not able to deduct income that has not been received. I believe a majority of people here are cash basis tax payers so they report income as it is received. In other words if you didn't receive it you can't deduct it. If on the other hand you receive a check and it later proves to be uncollectible, then it can be deducted from a persons schedule C.

Reply by Marian_in_CA on 11/24/08 11:13am
Msg #270455

Re: Great post Marian.

Thanks John... I'm no expert. I just happen to work my 9-5er with a bunch of accountants and have asked them about this several times.

My personal businesses are accrual-based rather than cash. I chose that because it keeps me more organized. It can be more of a headache at times, but it gives me a more accurate picture of things and helps me set goals on where I need to focus my time and energy. Cash-basis is simpler, though harder to track. What works for some may not work for others.


I think the biggest point, though are that we shouldn't be using the IRS as a collection agency.

Reply by Bob_Chicago on 11/24/08 11:39am
Msg #270460

Just to clarilfy, I believe that you can only deduct a bad..

check if you have previously picked up the amunt as income.
EG, you get a check in Decmber , file your return in early Jan,
and the check later bounces.

Reply by Margaret_FL on 11/24/08 10:21am
Msg #270453

I reported someone to the IRS and it prompted an audit and the IRS padlocked their doors. It does work but you need a lot of proof, which I had because I had worked for him and he owed me $3000. He also had not reported or paid his payroll taxes in 5 years. I watched them back up a truck to his business and cart off all his files. I had a friend who still worked for him up until the IRS shut him down. By the way, he was a Real Estate Attorney.

Reply by Marian_in_CA on 11/24/08 11:08am
Msg #270454

IN those cases, it's a real no-brainer. Glad they did shut down, too.

Reply by WDMD on 11/24/08 12:29pm
Msg #270466

Regarding 1099-C's, here is a Q&A from NATP for when it would be appropriate to issue one.




Question:
Your client Barbara stops by your office to discuss issues she is having with her Schedule C business. Her first issue relates to one of her difficult clients with whom she has just had a falling out with. Barbara has not been paid for services her business provided to Donald Deadbeat and when she last asked him when he was going to pay her the $5,000 bill he still owes, he told her she would never collect a dime from him. Barbara is angry with Donald and has asked you to prepare Form 1099-C, Cancellation of Debt, for the unpaid bill. What do you tell Barbara?

Answer:
At this point, Form 1099-C is probably not appropriate as Barbara has not met the requirements for issuing the form. Normally, Form 1099-C is issued only by financial institutions such as banks and credit unions and taxpayers who are in the trade or business of lending money. However, in Service Center Advice 1998-020, the IRS ruled that there is no prohibition in the code or regulations to reporting of debt discharges by entities other than financial institutions and those in the business of lending money. Thus, a private business that extends credit to its customers, but is not a financial institution, may issue a Form 1099-C to a defaulting customer. The IRS cautioned that an entity which is not required to report, should not issue a Form 1099-C unless there is either a discharge of indebtedness or a specific identifiable event described in the regulations.

For purposes of the reporting requirement for debt discharges, indebtedness is considered discharged on the occurrence of one of the following identifiable events:

1.A discharge of indebtedness under Title 11 of the U.S. Code (bankruptcy);

2.A cancellation or extinguishment of an indebtedness that renders a debt unenforceable in a receivership, foreclosure, or similar proceeding in a federal or state court, (other than the discharges under Title 11 listed in (1) above;

3.A cancellation or extinguishment of indebtedness on the expiration of the statute of limitations for collection of the indebtedness, subject to the limits described below or on the expiration of a statutory period for filing a claim or commencing a deficiency judgment proceeding;

4.A cancellation or extinguishment of an indebtedness under an election of foreclosure remedies by a creditor that statutorily extinguishes or bars the creditor's right to pursue collection of the indebtedness;

5.A cancellation or extinguishment of an indebtedness that renders a debt unenforceable under a probate or similar proceeding;

6.A cancellation or extinguishment of an indebtedness under an agreement between the applicable entity and a debtor to discharge an indebtedness at less than full consideration;

7.A discharge of indebtedness under a decision by the creditor, or the application of a defined policy of the creditor, to discontinue collection activity and discharge debt; or

8.The expiration of the non-payment testing period.

Unless, as defined in (7), Barbara has a defined policy in her business that would apply to the nonpayment at this time, Barbara has not yet met the requirements to issue Form 1099-C to Donald Deadbeat because neither a discharge of indebtedness nor a specific identifiable event described in the regulations has occurred. Therefore, Form 1099-C should not be issued to Donald until those requirements are met.