Discussion:Rental Owners Filing 1099s for 2011 (pre-repeal)

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Advanced Tax Questions --> Rental Owners Filing 1099s for 2011 (pre-repeal)


Discussion Forum Index --> Tax Questions --> Rental Owners Filing 1099s for 2011 (pre-repeal)

Taxalmancer (talk|edits) said:

15 December 2010

I was curious what others are recommending to your clients regarding the new requirement in 2011 for rental property owners who are now will be required to file 1099-MISCs.

Specifically, if your typical Form 1040 client, say grandma, with a rental property, has to issue a Form 1099-MISC that means she will have to issue it with her social security number on the 1099-MISC. That doesn't seem to be the most secure solution.

Initially, I thought that the rental owner/individual could apply for an EIN but the instructions to the SS-4 don't seem to encourage that:

An EIN is for use in connection with your business. Do not use your EIN in place of your social security number (SSN).


So what are you going to suggest to clients?

Tax Adviser Article 11/11/10

Smokeytax (talk|edits) said:

15 December 2010
Taxalmancer -

Unless it looks like the rules will change, before the end of the year we'll be sending an email to all clients who have rental property, explaining the new rules. We'll attach a form W-9 for them to use in getting the tax ID numbers they need from their payees.

Also, regardless of the SS-4 instructions, we will send along a form SS-4 so that they can apply for a tax ID number. We've done this in the past for sole proprietors whose only reason for needing the tax ID number is for the 1099's their customers give them.

TAXBILLY (talk|edits) said:

15 December 2010
Be aware that if the provider is a corporation a 1099-MISC is not required but that is only for 2011.

We are advising clients with rental property to pay by credit card which would also eliminate the need of a 1099-MISC. taxbilly

NoVATaxes (talk|edits) said:

15 December 2010
Are you also advising them of the backup withholding requirements?

Taxea (talk|edits) said:

16 December 2010
"Are you also advising them of the backup withholding requirements? "

Withholding is only required if vendor refuses to provide W-9. If issuee makes it clear that they cannot be hired until W-9 is provided...I don't see this as an issue. The recommendation is that W-9 is obtained before any work commences. Those who pay their taxes will provide the W-9 info....those who hide their income won't want to and they are the ones the IRS is after.

Taxalmancer (talk|edits) said:

5 January 2011
"We are advising clients with rental property to pay by credit card which would also eliminate the need of a 1099-MISC." taxbilly

Several people have mentioned that they are advising rental property clients to pay contractors by credit card in 2011 because that will exempt them for having to issue a Form 1099.

What is the authority for the exception for payment by credit card for 2011? I can't find anything in IRC 6050W that exempts the filing requirement of Section 2102 of PL 111-240.

Anything authoritative would be appreciated.

Dennis (talk|edits) said:

5 January 2011
If issuee makes it clear that they cannot be hired until W-9 is provided...I don't see this as an issue. When you need a plumber are you going to wait?...♫

SKath (talk|edits) said:

5 January 2011
The Taxpayer also has to consider backup withholding if the payee does not provide the information requested on the W-9.

Lhhesscpa (talk|edits) said:

5 January 2011
Unless it looks like the rules will change, before the end of the year we'll be sending an email to all clients who have rental property, explaining the new rules. We'll attach a form W-9 for them to use in getting the tax ID numbers they need from their payees.

I've already done this. I want to give clients advance notice so that they can avoid scrambling for the info. at the end of the year or even find service providers to be uncooperative or not locatable.

Are you also advising them of the backup withholding requirements?

I did this, too.

-- Larry Hess, CPA | Albuquerque, NM

TAXBILLY (talk|edits) said:

5 January 2011
Granted not "authoritative cite" but from the IRS Commissioner:

"At the risk of getting ahead of the game, I wanted to share with you just one example of how we are analyzing this provision, and looking for opportunities to streamline implementation and minimize burden. We plan to use our administrative authority to exempt from this new requirement business transactions conducted using payment cards such as credit and debit cards. These transactions will already be covered by reporting requirements on payment card processors, so there is no need for businesses to report them as well. So, whenever a business uses a credit or debit card, there will be no new burden under the new law." From: Shulman's comments taxbilly

Taxalmancer (talk|edits) said:

5 January 2011
If I read recently added Reg. 1.6041-1(a)(1)(v) Example 1 correctly, credit card payments are excluded from the reporting requirements of Section 6041 for calendar years beginning after December 31, 2010.

JAD (talk|edits) said:

17 January 2011
I agree, that example seems to clearly state that the use of a credit card relieves the payor from the reporting requirement.

California requires reporting of independent contractors to the state within 20 days of making the payment or entering into the contract. Form DE 542 is required.

Form instructions say, "Any business...that is required to file a Federal Form 1099-MISC for service provided by an independent contractor....must report." I am drafing a letter to send to my client with rentals about these issues, and I think I am going to include this form in the discussion. Other CA tax preparers, any thoughts?

OCNumberz (talk|edits) said:

18 January 2011
I agree, that example seems to clearly state that the use of a credit card relieves the payor from the reporting requirement.


JAD, I am in CA, and I have never seen any penalties for NOT notifying of a new independent contractor hired. I'm just recently seeing notices when SSN's don't match names, and they'd be looking back at the 1099's for 2009 that were issued last February. If not for these new laws, they wouldn't even be concerned.

I fear that this new 1099 rule for credit card merchants will motivate people to use more credit cards for purchases..not good. I, personally, have decided NOT to accept credit cards for payment once I was given the task at an accounting client's to switch to a cheaper merchant. I sadly learned that those rewards cards are paid in full by the poor entity accepting the card. A 2% fee can balloon up to 5 1/2% fee when you accept payments with airline miles or other rewards along with phone payments, a more risky transaction. I'm glad to hear debit cards will be allowed, though.

In CA, the contractors who do really good work are usually in big demand, and I doubt they'll even be set up to take a credit card payment. So, if a client with rental properties wants good/responsive service from a contractor, I doubt they'll get it if they will ONLY pay with a credit card. Personally, I think credit cards are overused, and if we use them to avoid having to do 1099's, we're heading in the wrong direction...adding yet another 'middle man' (the Merchant Service company) to grab more of our income.

JAD (talk|edits) said:

18 January 2011
I agree with everything that you said re credit cards being overused. But I still need to include that fact in the discussion when I speak with my clients about these new rules.

There is a penalty related to the DE 542. From www.edd.ca.gov/pdf_pub_ctr/de542faq.pdf:

The EDD may assess a penalty of $24 for each failure to comply within the required time frames. Also, a penalty of $490 may be assessed for the failure to report IC information if the failure is the result of conspiracy between the service-recipient and service-provider.

MarkSC (talk|edits) said:

18 January 2011
I'm not making a big deal of it (the 1099 rule). The penalties are still pretty low unless backup withholding is required. In my 10+ years of practice, I have yet to see a 1099 penalty assessed. Also, there will be exceptions for hardships and small-time rentals. Plus Congress may well repeal the rule before Jan 2012.

OCNumberz (talk|edits) said:

18 January 2011
JAD, yes, even though the penalties are small, as MarkSC points out, it's your duty to bring it to the attention of your clients. Congress may well repeal, but the 1099's will be a real moneymaker. Here in CA, when independent contractors don't get a 1099, they, many times, don't claim the income. I did a 2009 return where the CPA who did the 2008 return ONLY claimed the 1099's received, and after reconciling the bank accounts, it was $25k short!

Regarding the DE 542, if the State of CA were serious, as soon as they got a 1099 that they hadn't received a DE 542 for, they'd be sending out their $24 penalty bill. What you don't want to mess up on in CA is the $25 Statement of Information form. I have a client who's payment got lost in the mail last year, and his penalty was $250!!!!  : (

Doug M (talk|edits) said:

19 January 2011
Jessica: I understood the risk to be much greater. What if the contractor was subject to back-up withholding and the client makes a payment to the contractor without the 28% withheld?

Death&Taxes (talk|edits) said:

19 January 2011
I sent out an email warning property owners. A client with three 4-6 unit buildings emails back:

"but for my noncitizen tradesperson – we have a problem. He has actually applied for his green card in order to get a social security card. From what he is telling us, this can be a very long process and there is a very good chance he will be denied his green card."

They will be paying him in excess of 10K for his services, which are capital in nature, so you can begin to see the size of the iceberg that lurks beneath the surface. The husband of this couple, a professional, says that the man does great work and his prices are reasonable.

btw, I am not looking for a solution here, but only am trying to illustrate what can happen. These apartments are in an old part of the city but a place that has become quite fashionable among artists and professionals.

JAD (talk|edits) said:

19 January 2011
As Doug pointed out, doesn't that mean that your client has to do the backup withholding?

DaveFogel (talk|edits) said:

19 January 2011
California also has a statute that allows the Franchise Tax Board to disallow a deduction for compensation paid if the payor didn't file the W-2 or 1099 with the FTB. Sections 17299.8 and 24447 of the California Revenue & Taxation Code state:

"The Franchise Tax Board may disallow a deduction under this part to an individual or entity for amounts paid as remuneration for personal services if that individual or entity fails to report the payments required under Section 13050 of the Unemployment Insurance Code or Section 18631 on the date prescribed therefore (determined with regard to any extension of time for filing)."

JAD (talk|edits) said:

19 January 2011
I mentioned that in the letter that I have drafted to go to my client. It's a wonder that anyone has any time to just make a living with all of this #### paperwork and time that needs to be spent understanding the related rules and regulations.

OCNumberz (talk|edits) said:

20 January 2011
I'm hearing those same sentiments, too, JAD. The poor client just wants to concentrate on renting out his commercial units, not concentrate on constant letters from the IRS and CA's EDD and FTB. I don't know how long Section 13050 has been in effect, Dave, but I've never heard anybody actually get the penalty enforced. From what I'm seeing, we're being led in a direction we probably should have been going years ago...a reporting method, just like W-2's for employees, that includes 1099's for the self employed. I think we'll see A LOT MORE INCOME reported, taking some pressure for taxes off the rest of us.

I'm sure the W-2 requirement was initially resisted because of the work it took to set it up. But, it works pretty smoothly and continues now with minimal effort. Small businesses may choose to use a payroll service, to offload the hassle of paying and reporting payments and deductions. I think we'll see some similar service organizations cropping up for the 1099 process, and, at some point, we'll forget we were ever concerned about it. ; )

MarkSC (talk|edits) said:

20 January 2011
The difference is that W-2s report withholding tax, so the employees definitely want that form and will report employers who don't file it. A simple cost-benefit analysis will lead many small-time landlords to conclude that the new 1099 reporting rule is not worth the expense to comply. That's my prediction. We and the IRS can and should make clients aware of the risks/consequences of non-filing, but the truth is that the penalty is so small and enforcement so rare that this is toward the bottom of my list of things to lose sleep over.

DaveFogel (talk|edits) said:

20 January 2011
OCNumberz, according to an article in the Dec. 2006 issue of Spidell's California Taxletter, several subscribers had reported that auditors were disallowing deductions for failure to file the information returns.

Szptax (talk|edits) said:

20 January 2011
oh ethics... 2 clients rent from the same landlord. To 1 client he provided his ssn. To the other, well he is owed money so he won't provide the information...

OCNumberz (talk|edits) said:

21 January 2011
Mark, yes, I agree, the employee WANTS the W-2, but the independent contractor DOES NOT want to receive a 1099. I think the IRS is now taking a different view of unreported income..things they used to ignore and had small penalties for, may now change. It just depends how serious they are.

Dave, Interesting...I hadn't heard that. Until enough people get audited and the word gets out you could lose some big deductions, people will ignore it. Personally, I pay tax on all money I make, and I'd like to see everyone pay their fair share. The honor system hasn't worked, so the 1099 is the next step, I guess.

Szp, a landlord/tenant relationship is a sticky one. I would have hated to have asked former landlords for a W-9. But, when everybody gets used to it, W-9's won't be so bad, I bet. Here's some interesting information I stumbled across about the process, including flowcharts, but I don't see anything about penalties for the one not giving up their SSN/EIN.

Pub 1281

Illini (talk|edits) said:

21 January 2011
Will we be subject to preparer penalties if client does not file 1099-MISC for contractors in 2011 but we still allow the expenses on the return?

Rgtaxservice (talk|edits) said:

22 January 2011
I'm not aware of any requirement that states you have to file any required information returns (1099, w2s) in order to be allowed to claim an expense.

JAD (talk|edits) said:

22 January 2011
It's a CA requirement. See Dave's post above.

OCNumberz (talk|edits) said:

23 January 2011
Illini, Good question! Are we required to look at 1099's as part of doing a return? I wouldn't think so.

Cricktaxea (talk|edits) said:

23 January 2011
Damn, that is a good question and I suspect the answer is yes, that's part of our responsibility as preparers. If we know for a fact that a client is lying about one thing or another on his return, we can't sign it. It's obvious that's the direction we're going because of the huge budget shortfalls. I have to bite my tongue and admit I like the idea because I've been very upset for a lot of years about people getting a free ride with cash transactions.

Bob

Taxalmancer (talk|edits) said:

23 January 2011
Seems hard to believe we could be dinged for that especially if we've notified clients about their responsibility to file 1099s. Do we have to search every transaction in the GL, add up amounts to see if the total was above $600? What if they mistakenly entered ABC, Inc. in their GL as payee when the payee was really ABC Co.? A 1099 should have gone out but we didn't catch it.

If the client is trying to deceive the IRS they're getting booted out my front door. But if they mistakenly missed a 1099, I alert them to the problem, advice them to refile, then claim the deduction on the return I find it hard to imagine I'm going to get a dinged with a penalty, even if they never refile.

Harry Boscoe (talk|edits) said:

23 January 2011
Put it in your engagement letter: "We will share with you things we find in the course of our work, but we are expressly not being engaged to hunt down missing 1099's. Unless of course you would like to include that in our engagement, to be billed at our usual hourly rate. Results not guaranteed."

Is there football today? Refrigbprerator.

Taxalmancer (talk|edits) said:

23 January 2011
Harry there are many things I'd like to put in my engagement letter but decorum doesn't allow me to.

DaveFogel (talk|edits) said:

23 January 2011
What about the “due diligence” requirement of Circular 230, particularly section 10.22(a)(1)? Does it requires us to explain the information return requirements to the client and ask if there are any 1099s that the client hasn’t filed?

Taxalmancer (talk|edits) said:

23 January 2011
Interesting Dave and thanks for the bringing it up. After reading it, I would say it depends upon whether we were "preparing or assisting". If we simply reminded the client of their responsibility to file and they missed someone then I don't see how we'd fall into the tentacles of Section 10.22(a)(1).

If we knew, through our inspection of their records, that a 1099 should have been filed, and wasn't, as long as we remind them of their omission and recommend corrected 1099s be filed, I think we've done our duty. Having said that, if I sensed that nothing was filed so they could fly below the radar, and the client admitted as much, then I would disengage.

Cricktaxea (talk|edits) said:

23 January 2011
Many years ago a CPA I respect explained to me that taxes are a concept and many things are not necessarily spelled out in laws and regs. There's lots of posters on this website that may have years of experience doing accounting and taxes but are not Circular 230 practitioners and are not familiar with its ramifications. They soon will be after the testing and licensing of all preparers is fully implemented. The concept is whether or not you as a preparer knew or should have known by virtue of your education and experience that whatever the issue is is wrong or not. "Knew or should have known" is pretty broad. Anybody interested should read the section on covered opinions. If you are considering doing something a certain way and could, if asked, write a covered opinion justifying it, fine. The fact that you've done something a certain way for years and they've never looked at it doesn't mean it's not still wrong. After thinking about this overnight I think that unless there's final guidance that specifically exempts preparers from linking up those 1099's to expenses, we should be very careful. Look at that recent court case that I can't remember the name of now that busted a CPA because he prepared a business return where the net income didn't justify the client's lifestyle. His defense was the standard "I relied on the information provided me by the client" and the court said no way. You "knew or should have known" because he also prepared the individual returns and those numbers didn't make sense.

Bob

OCNumberz (talk|edits) said:

23 January 2011
I have to bite my tongue and admit I like the idea because I've been very upset for a lot of years about people getting a free ride with cash transactions. Bob

AMEN!

Unless of course you would like to include that in our engagement, to be billed at our usual hourly rate. Results not guaranteed." Is there football today? Refrigbprerator.

Harry, thanks for the LOL amidst all this serious stuff!!  : )


I think someone above said that if a 1099 is NOT issued, the expenses for that vendor are not allowed. Is it up to us to deduct these expenses, or for the IRS upon further investigation if audited? I just contacted a tax client from last year to remind her that 1099's are due out soon. She said she didn't have any to do and didn't have the heart to ask the cleaning lady and gardener (legitimate office in the home) for W-9's. : (

NoVATaxes (talk|edits) said:

31 January 2011
The discussion so far is mainly about issuing 1099s to contractors. I'm thinking the landlord has to issue a 1099 to the property management company for the commissions deducted from gross rent.

Kevinh5 (talk|edits) said:

31 January 2011
Discussion:Due Diligence Tim Kaskey is that former CPA, CricktaxEA. It wasn't a court case, it was an OPR sanction. I link it in the Due Diligence discussion.

Death&Taxes referenced him in Discussion:Rely on Client's Information?

Kevinh5 (talk|edits) said:

31 January 2011
http://taxalmanac.com/index.php?title=Special%3ASearch&search=kaskey

Dhtax (talk|edits) said:

1 February 2011
I'll skip commenting on most of the idiotic elements of this law, but if anyone has answers/guesses to the following I'd appreciate it:

1) Client has EIN as sole proprietor. Does she need to get another EIN for rental property? She does both in her own name, ie no business name.

2) Does the credit card exception extend to debit cards? How about debit cards that can be used as credit cards (eg my bank card says "debit" on it, also has the VISA logo, and when I use it at the store I can do credit and sign or debit and punch in a pin). How about store credit cards, eg Home Depot?

3) Client owns rental co-op apartment: Does he have to issue a 1099 to the co-op association? If so, for what amount, since payments include RE taxes and special assessments. Same question about condo associations.

4) Client has rental vacation cottage. The rental agency sends him a 1099 for the rent they collect. He has to send them one for their fees, right?

Szptax (talk|edits) said:

2 February 2011
#1 - I would recommend it
  1. 2 - I believe it also applies to debit cards. I assume that Home Depot Credit card qualifies as a credit card.
  2. 3 - My first thought was - why not?, but I think that associations are in an exempt category as are governments
  3. 4 - yes

Dhtax (talk|edits) said:

3 February 2011
Thanks, Szptax: Just checking: Are those opinions, or do you have citations? On #2, other sources say that the credit card exemption only applies to credit cards that need to report their payments to the IRS, and this may not include debit cards or store cards. On #3, condo fees are paid to a management company, which is not an association -- but who knows if it's a corporation?

I'm gonna put this on hold and pray for repeal . . .

Laticiaw (talk|edits) said:

3 February 2011
We are telling our rental clients to give the W-9 at the outset of the contract with them and to inform the vendor that until they return the W-9 whether they are a corporation or not...they will not get paid. The W-9 is to protect the client. Any Joe can say that they are incorporated, well then prove it by giving me a W-9. If they don't give you the W-9 then they don't get their check...it's amazing how quickly they come up with a correctly filled out W-9.

Death&Taxes (talk|edits) said:

3 February 2011
Does a debit card meet this definition under Code Section 6050W(d)(2)?

"The term “payment card” means any card which is issued pursuant to an agreement or arrangement which provides for—

(A) one or more issuers of such cards,

(B) a network of persons unrelated to each other, and to the issuer, who agree to accept such cards as payment, and

(C) standards and mechanisms for settling the transactions between the merchant acquiring entities and the persons who agree to accept such cards as payment.


The acceptance as payment of any account number or other indicia associated with a payment card shall be treated for purposes of this section in the same manner as accepting such payment card as payment."

Illini (talk|edits) said:

4 February 2011
I think everything's been solved now???? Accounting Today Senate Repeal update

Death&Taxes (talk|edits) said:

4 February 2011
As I said before, these rental 1099 requirements were not part of the Health Care Act but of the earlier Small Business Act. See the last comment in that link. I spoke with a client who has four multi-unit properties and who says he wants to give the 1099s even if it were repealed. He and partner have no choice but to pay tax on their income, but are sick of sleazeball contractors hitting them with 'write the check to cash' tactics.

Growthguy2 (talk|edits) said:

4 February 2011
"I think everything's been solved now????" I am not so sure. While the Senate adopted a repeal provision, similar action in any sort of reconcilable form has not occurred in the House. There is strong support for the repeal, but the Republican dominated House is likely to require revenue offsets. The Senate refused to adopt any revenue offsets.

DaveFogel (talk|edits) said:

4 February 2011
The 1099 requirement in the Health Care Act for purchases of goods and payments to corporations is now virtually dead. Two days ago, the Senate passed an amendment to an aviation bill that will repeal the provision, and the House has a bill pending (H.R. 4) that will do the same thing. H.R. 4 was sponsored by a Republican and co-sponsored by 263 House members. And the President said in his State of the Union address that he supports repeal of this provision.

This does not affect the "rental 1099" provision that was included in the Small Business Jobs Act.

Illini (talk|edits) said:

4 February 2011
Thanks Death and Dave for the clarification on RENTAL 1099s -- I thought it all stemmed from the Health Care Act.

Death&Taxes (talk|edits) said:

11 February 2011
Randy, your Senator Snowe apparently has introduced a bill to the Senate Finance Committee to repeal this provision, or so reports NAEA

Illini (talk|edits) said:

12 February 2011
I don't think any of them deserve ANY credit for repealing it -- it should never have passed in the first place, IMO.

Cricktaxea (talk|edits) said:

12 February 2011
Isn't that the truth.

Dave, what do you think about preparer due diligence? Ok to simply advise clients about the 1099 requirements and take the expenses on Sch E as usual or do we need to see them? Most of my people with rentals do have everything organized in a folder and totaled up by categories so if 1099's were issued, the copies should be in the folder as well so then it's obvious what happened but of course not everybody's that organized.

Bob

DaveFogel (talk|edits) said:

12 February 2011
Cricktaxea, this was the question I asked on Jan. 23, and I think it's been answered above. Since I'm in CA, I'll want to make sure that the client issued the 1099s that were required since I would hate to have the Franchise Tax Board disallow the expenses.

FLAcct (talk|edits) said:

12 February 2011
What about the case of a taxpayer who uses a management company to manage their rental property. The management company hires and pays the plumber, painter, etc. on behalf of the taxpayer and pays the service provider with rent income they have collected for the taxpayer. In this situation the management company is responsible for issuing the 1099s and the taxpayer does not have to even though they are reporting the expense of the plumber, painter, etc. on their 1040. Is this correct?


A year passes...

Taximan39 (talk|edits) said:

28 February 2012
I am confused about the entire discussion. I know the new schedule E forms have the question about required 1099s, but I thought that was repealed. Copied below is an excerpt from the Journal of Accountancy.

"On Thursday [April 13, 2011] President Barack Obama signed into law the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (HR 4; 1099 Act), which repeals both the expanded Form 1099 information reporting requirements mandated by last year’s health care legislation and also the 1099 reporting requirements imposed on taxpayers who receive rental income enacted as part of last year’s Small Business Jobs Act (PL 111-240). The Senate approved the bill on April 5 [2011], and the House voted in favor of it on March 3 [2011]."

Read all about it...

Taximan39 (talk|edits) said:

28 February 2012
The requirement that 1099s for contract labor for rentals was repealed last year, but the Schedule E asks if 1099s were required, and were they submitted. Would it be safe to just answer NO because the requirement was repealed?

Trillium (talk|edits) said:

28 February 2012
Well, the entire discussion up until your posts was pre-repeal, so it's kind of outdated now.

I started to compile a list of the various discussions we've had this year about the 1099 questions, but only got about halfway through. To start with, though, please see:

To join in on this discussion, you must first log in.
Personal tools