Discussion:Audit issue - disallowance of payments to "contractors" vs trust fund penalty
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Discussion Forum Index --> Tax Questions --> Audit issue - disallowance of payments to "contractors" vs trust fund penalty
| 9 July 2009 | |
| I have a new client being audited on an old return. Among the many issues is the payments to her 'employees' which were not done as payroll. She classified these payments as Contract Labor on her Sch C, and never issued 1099s. The employees-contractors never reported.
The auditor is stating that this deduction must be removed due to not filing the 1099s. I can argue this point, however, the IRS can then esaily argue back that my client improperly classified these employees as contractors and failed to withhold. Then make my client liable for the withholdings that never were. In both cases my client is equally up the creek. Question: Are the withholdings that were never taken considered the same as not paying trust funds? My client will most likely end up in BK, and if I would rather let the IRS disallow a deduction than assess the trust fund penalty. | |
Death&Taxes (talk|edits) said: | 9 July 2009 |
| The easy answer is that it is very unlikely the auditor will allow such a change for several reasons: more work for the auditor, and more important, as an Appeals Officer said to me once, 'your client encouraged tax avoidance by others by not issuing 1099s.' | |
RoyDaleOne (talk|edits) said: | 9 July 2009 |
| Question: Are the withholdings that were never taken considered the same as not paying trust funds?
No, these amounts are not trust funds, because such amounts were not withheld from the pay of the employee. The employee received their full pay, not a net pay. In a weird way these amounts represent 1. An increase in pay to the employee, or, 2. amounts the employee now owes the employer. I would now consider filing the 1099s late, well maybe not. | |
RoyDaleOne (talk|edits) said: | 9 July 2009 |
| Will, I guess you need to parse this to determine the correctness of my comment above:
Code Section 6672 (a) GENERAL RULE Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. | |
| 9 July 2009 | |
| I've had this come up in a few audits over 20 years. In every case the auditor insisted we file the late 1099s. I always keep prior year 1099 forms around for just this purpose. In one case we forgot to file the 1099 (one!) and the auditor called me twice, months after the audit to get me to file it.
All that being said, I'm not enough of an expert in this area that I feel this is the best thing to do in your case, Wiles. | |
| 9 July 2009 | |
| I have a similar issue ongoing at the moment - and this related to cash payments which could not be verified - the auditor has said he would allow the deduction if the client prepared 1099's and obtained an affadavit from the subcontractor that the payments were received and reported on the subcontractor's return.
Generally, I have found the IRS to be very reasonable as long as the client complies with the issues (in this case filing 1099s) in the future. | |
| 9 July 2009 | |
| I had this issue this past year.
1. the taxpayer is entitled to the deduction regardless. Whether its "outside services" or reclassified as wages, they paid it and its deductable. 2. the auditor on the case presented me with options: reclass as wages, he took the 2 highest paid persons in 3 categories and assessed that tax only. He didn't pull all of them in. Not filing 1099's really hamstrings you. That test gets really skewed. | |
Mikex2e7n5 (talk|edits) said: | 21 July 2009 |
| Ifyou have checks then the IRS will allow you the deduction. BUT since they didnot file the 1099's then they lose sec 530 protection (if there was any)and the workers can be reclassed as employees.
The IRS then will assess 3509(b) rates for as many years as they want that do not have a statute. Now if there was withholding, they will assess the employers portion plus the employees portion. The client would be liable for the amount withheld from the employees per 6672. Rule of thumb: Per the employee vs independent contractor factors, there is no such thing as "Contract Labor" You might get by with some Section 530 protection if there is real "Reasonable Cause" | |
