Saturday, May 27th, 2017

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Critical 1099 Info for Investors – Ignore at Your Own Risk

IRSIf you’re in business for yourself but not actively sending out 1099s to your non-employee contractors like you should, then you need to read every single word of this blog post. Just do it…you’ll see why, and you’ll likely buy me something frosty next time you see me to say thanks (hypnotic command…boom ; -)

Just this past week I was sitting in a closed-door mastermind (our thrice yearly Flip VIPs meeting) when one of my esteemed colleagues – a guy who makes a nice pile of cash flipping short sales and lending hard money – announced that he wasn’t really into the whole idea of sending out 1099s – too much hassle, plus one of his guys (a general handyman I think) had told him that if he started handing out 1099s, then he’d have to raise his rates beyond $15 to install a toilet to offset paying taxes.

So he went for no 1099s, and just figured if he gets called to the mat in an audit at some point, he’d just pay some small penalty and move on.

Red Alert

The room quickly erupted with all manner of friendly-but-stern warning (one of my favorite parts of these kinds of masterminds is when the guys and gals around you aren’t afraid to tell you when you’re flat out wrong).

Turns out that once upon a time the IRS didn’t spend too much time or effort chasing missing 1099s…but those days are apparently gone. Now they see missing 1099s as an easy way to make money…lots of money…from you, should you get caught in their scanning crosshairs.

To make the point, another guy in the group forwarded an email alert about this very topic that John Hyre had just sent out to all his clients.

Who’s John Hyre?

JP Moses & John HyreJohn Hyre is a tax attorney, accountant and real estate investor.  In fact, I’d call him the nation’s leading tax attorney and CPA for real estate investors specifically. I’ve had the good fortune of knowing John for the last 10-ish years or so, and I can tell you he’s one of the smartest, wittiest, sharpest and savviest guys on the planet.

Nearly all of his clients are real estate investors, and his operation is second to none in terms of bookkeeping, tax returns, tax planning, and audit and asset-protection related services for real estate investors.

John has also written the definitive book on using QuickBooks for Real Estate Investors, and creating Entities (LLC’s, etc.) for Real Estate Investors – both of which I’ve been through personally and have dramatically shaped how I run  my business.

In short, John is someone you want in your corner, and his advice on something like this is worth paying attention to.

So what follows is the full email John recently sent out to his clients about 1099s. Some of it may only relate specifically to his clients, but I’m leaving it intact anyway. If you paid any non-employee more than $600 last year, then you owe it to yourself to read the whole thing.

About Form 1099-Misc for Real Estate

The purpose here is to give you a basic idea of 1099 filing requirements. The discussion below is both basic and incomplete. This topic involves far more rules than we can discuss in a short newsletter.  And if we were to discuss those rules in all of their glorious and painful detail, few of you would read that discussion. This PDF spreadsheet contains fields that can be filled out online and saved to your computer. Please use this form or another typed form.   We will not accept any handwritten submissions, due to the possibility of errors.

Basic Summary:  If you have a trade or business, you are almost certainly required to file various sorts of 1099’s, 1098’s and other similar forms.  Penalties for flawed or missed filings have increased.  Penalties for incorrect or missing Tax ID Numbers are very high (up to 40% of the 1099 itself!) – getting a W-9 from each contractor can help shield you from such liability – we strongly recommend getting a W-9 from contractors.  The IRS has not enforced such requirements in the past.  That has changed and they are now actively looking to “raise revenue” from 1099-related penalties.  You should file this paperwork yourself, have us file it for you, or budget for the resulting penalties.

LAST MINUTE PROCRASTINATORS:  If we receive ANY of your 1099 information after 1/24/14, we WILL charge double.  Last year we had a lot of last minute 1099’s create havoc in the office.  No more.[1]

Who Must File Form 1099-Misc:  Your must file if your trade or business[2] pays someone a total of $600 or more during the year for:[3]

  • Rents
  • Services (including parts & materials)
  • “other income payments”[4]
  • Services from attorneys.[5]
  • 1099-Misc is also used to report payments of $10 or more in royalties.
  • Form 1099-Int is used to report interest paid to others.

Software Generated Forms and Electronic Filing:  Filings must be generated with approved software and most must be filed electronically.  Non-compliant forms (e.g. – hand-written) & filings may give rise to audits and penalties.  NOTE:  We are required to notify the IRS of such non-compliant forms on your income tax return.  In order to keep our license, we are required to the play the part of informant on certain issues such as this one.  We do not like that role.  We like the prospect of unlicensed unemployment even less.  Given the government’s growing power and lust for revenue, we should expect to see more such paperwork, intrusions upon your privacy and overall heavy-handedness.

When You Must File:  You must send the form to each person you paid in 2013 by the end of January 2014.  You must send the government their copy and a Form 1096[6] by April 1, 2014 (if filing electronically, sooner if filing on paper).

Or Else What?  There are four basic kinds of penalties:

  • Failure to make electronic filing:  $50 per Form 1099.
  • Failure to File or Erroneous 1099:  $30 to $250 per form, depending on a number of factors.  The IRS has become increasingly aggressive and prone to arguing that any failure to file was intentional and therefore subject to the maximum penalty.
  • The Grand Slam:  If you fail to report someone’s income and they are audited and unable to pay taxes on that income, the government can come after you for the taxes if you failed to 1099 the person in question.  This approach had been rare until about a year ago.  We saw a noticeable uptick in 2013.  One taxpayer had to pay 40% of the amount on the 1099’s due to missing/incorrect TIN’s – that was withholding of about 28% and penalties of about 50% on that amount.
  • IRS Disallows Deductions:  We have seen auditors become aggressive on disallowing deductions in audits when related 1099’s were not issued.  We can sometimes get such decisions reversed on appeal, but the cost and hassle are not trivial.

1099More Big Brother

Please note that the IRS now asks probing questions on your income tax return.  In particular, they now ask whether you were required to file 1099’s, and if so, whether you in fact filed them.  We are required to truthfully answer those questions.  If the answers indicate a problem (i.e. – did not file 1099’s), you should expect an audit and penalties.

Worse yet, if the answers are inaccurate (i.e. – you state that you filed when you in fact did not), the IRS can assess very painful penalties (much worse than those we described above) for civil fraud.  In short:  The IRS is now very serious about 1099 requirements and very interested in assessing penalties for failure to comply with increasingly complex laws.

What Information Do We Need?  Name, Address & a correct Social Security Number or a correct Tax ID Number of payee, and amount paid to them.  We normally send an Excel spreadsheet for you to enter that information.  We strongly advise that your vendors fill out a W-9 before you pay them.  If the TIN you receive is wrong (i.e. – you did not receive a W-9), then YOU are on the hook for the contractor’s taxes at very high rates!  If you obtain a W-9 and the information on it is wrong, then you are not on the hook for the contractor’s taxes if & until the IRS sends you a letter telling you to withhold on payments made to them.  Get a W-9!

How Much Do We Charge? $10 per 1099 + $20 for report to IRS (also known as a Form 1096).  We charge more in certain states where the locals add to the federal requirements.  Note:  The IRS has aggressively regulated preparers, which in turn leads to an increase in the fees we charge.[7]

Other 1099’s

  • 1099-A:  Required if you repossessed real property from a buyer but did not necessarily write off the underlying debt.  Such a form is often issued when a bank forecloses on a property.
  • 1099-C:  Required if you forgave debt.  This form is normally issued in conjunction with short sales, deed in lieu and bankruptcies.
  • 1099-Int:  Essentially the same requirements as a 1099-Misc, but applies when interest is paid to another in the course of a trade or business.

About Form 1098

Who Must File: You must file if your trade or business received $600 or more of mortgage interest (including points) during the year from an individual (including a sole proprietor).  You must file a 1098 for each mortgage, so you may have file multiple 1098’s for the same person.  You do not have to file a 1098 for mortgage interest received from entities.

Or Else What?  Penalties are similar to those for 1099’s.  Note:  People who expect a 1098 and do not receive one tend to get loud about it.  They will call you.  Eventually, they will call the IRS.  Did I mention that the IRS is quite keen to uncover errors and collect penalties?

What Information Do We Need?  Name, Address & Social Security Number or Tax ID Number of payee, and amount of interest paid to them.

How Much Do We Charge?   $10 per 1098 + $20 for report to IRS (also known as a Form 1096).

Memos Numbered Above

[1] Like the first delicate shoots of late winter, telling us you should be exempt because you have been a client since <insert number> shall cut no ice.  We will charge the extra amount or decline the work.  The disruption costs us, plain & simple.

[2] If you pay a contractor to work on your personal residence, you need not issue a 1099 because the payment presumably did not come from your “trade or business”.  If you pay a contractor to work on your rental property, you need to issue a 1099 because the rental property is part of a trade or business.

[3] This list is not exhaustive.  I only included things that are likely to be relevant to REI and small businesses, which is why you won’t see “cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish” on my list.  Out of curiosity how the heck would you tell if your provider of aquatic life (does that include Sports Illustrated models?) is engaged in the trade or business of catching fish?  Don’t the idiots who write this stuff think we have something better to do than inquire after the professional habits of our sushi guy?  <sigh>

[4] I’m not making that up, it’s straight from the IRS instructions for Form 1099-Misc.  Pretty darned broad if you ask me, pretty much allows them to “get you” for most anything.  Talk about an out-of-control bureaucracy.

[5] Again, not made up.  The 1099-Misc instructions specifically say that payments to attorneys need to be reported.  I guess that even the IRS thinks that attorneys are slippery and perhaps likely to “forget” about certain niceties such as reporting income on their 1040.

[6] Form 1096 is basically a summary of all the Form 1099’s sent to the IRS.

[7] Google “Circular 230” for more information.  I am responsible to you AND the IRS for negligence, etc.  Seemingly simple tasks carry heavy consequences in an environment of over-regulation, massive, complex rules (go ahead and read the full instructions for Form 1099-Misc, be near a bed when you do) and a zealous, “burn the witch” mentality on the part of regulators and the public alike.  Voting for bigger government has consequences, including higher taxes, too many bureaucratic requirements, too much paperwork, and too many compliance costs (such as our bill for preparing increasingly complex tax returns).  As the IRS becomes more punitive with licensed preparers, the higher our fee to compensate us for such risks.

Thoughts?

So what say you? Got anything to add? Extra tips? Questions? IRS jokes? Leave a comment…

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About 

JP Moses is a roughly-hewn man-child who first got into REI after reading Rich Dad, Poor Dad back in Y2K and went full time in 2002. He's tinkered in everything from landlording to short sales to rehabs to Realtoring to REOs to notes to owner financing, blah, blah, blah...Till he finally stuck his flag deep into wholesaling and has since flipped somewhere north of a couple hundred deals.

JP's not a “guru” but also doesn't think it's a bad word. Among his core values are authenticity, creativity, big honkin' value, general fun-ness and being unshaven. He's super proud to be chief blogger guy at REItips.com and host of the free REIology podcast. He also thoroughly enjoys sharing his 53 best real estate investing forms with anyone who wants them. You should totally check that out. :-)

  • Curt Smith

    I had heard that you do not have to send out 1099’s if the service provider is an entity, incorporated. True?

    But this is an issue that I personally have never sent out 1099’s. Our small rehab to rental business does 3-5 properties a year and uses a mish mash of contractors some paid with cash as you know it goes. Theory aside, there’s a reality still in play in REI.

  • Hi, Curt. I believe all that changed thanks to the pork stuffed into Obamacare. We now have to 1099 corporations/entities too. That’s my understanding at least.

    And I hear ya…I just started even thinking about 1099s last year myself..and I’ve been doing this since 2000. But I’m finally getting my act together…based on what John shared here, it’s not a wager I want to keep making.

  • Any information on the 1099k?

  • Hi, Erica! Sorry, all I have right now is what’s posted above :-/ What would you need/use the 1099K for?

  • anticriminals

    The best kept secret is that lawyers do not know the law and neither do the judges. Here is something that I doubt that any of you understand; federal laws apply to
    federal persons, federal places, and federal things (subject matter). The 1099 form is a federal form. For it to be filed, there would need to be a federal connection to the payment and I mean more than some use of Federal Reserve Notes to pay the debt.

    I highly suggest that you learn how to read the laws for yourself. Do not trust a lawyer, a CPA, or the IRS to explain it to you, as all of them have an interest financially in keeping you ignorant of the truth/ law.

    How do I know this? I went to college to be an accountant, but found out that the IRS was teaching accounting; a conflict of interest. I went on to study the law on my own time and in the process I found out that there is no law for the government; only you.

    A great book that everyone should read is “The Great Internal Revenue Hoax “Exposed”, by R. J. “Ray Stenson. Printed in 1983 by M-FACT Books, last known
    address, P.O. Box 803, West Fargo, ND 58078. With this book you will be able to understand most laws.

    I am not an attorney, nor an accountant; thank God I did not sell my soul to the devil. However, a strong word of advice, you should keep in mind that by filing a Form 1099 you may indeed be (and probably are) filing a false information return against that
    person. You may very well be violating that private human beings’ right to privacy, a civil rights violation. You might very well be (and probably are) liable for any damages that you might cause that person.

    I know this much; if you filed a 1099 against me, and it caused damage to me, I would be suing you and your accountant, not the IRS, even though they are very much complicit.

    And you, J. P. Moses, should be careful in spreading disinformation, however well intended.