Proof of 1099-MISC payments

[Max W]

If your clients report payments on a 1099-MISC, this may not be sufficient proof to satisfy an audit, even though the 1099 was properly filed.

If the recipient of the payments did not report that income on their tax return, other proof is needed.

This happened in a recent audit to a client of mine who made cash payments to subs.  The proof could receipts,  or a written statement from the recipient that the money was received.

[Pacun]

You need proof EVEN when the person reported the income on his 1040!!! Remember that auditors DO NOT have access to all filings... they only get access to the account they are auditing so they don't know if the person reported the income or not when they are auditing your client's return.

[Richcpaman]

What?  You say the auditor is requiring your client to prove that the people he paid cash to reported it on their returns?

Did your client file 1099's on these folks?  Were they complete?

The Auditor can ask you for the moon.  It is not you or your clients' responsibility to find out if they reported that income or not.

Tell the agent to follow up back at the office and to track down the other vendors

Rich

[ILLMAS]

Could it be that the auditor is trying to figure out where the "cash" came from, like under the mattress? 

[taxxcpa]

Anyone can send 1099-MISC whether they paid anything or not.  But the proof would be checks cashed by the recipients--not whether they reported it.

[Max W]

I am going to rehash this.  I can see that this seems incredulous to some, as it was to me.  It was the first time after having done many, many audits that it has occurred, which is why I posted it, so that everyone could be aware of this.

The client paid Cash, not checks, to various subs.  Properly filed 1099's were issued.  In the initial audit 5 of 6  were rejected as an expense without additional proof.  The reason the auditor gave was the the recipients had  not filed returns showing that income.  The auditor was not auditing the other returns, but that information can be requested through the supervisor.

Later, the auditor called me and only  one now remained unverified. To prove payment, either receipts, or a signed statement by the recipient would suffice.  Unfortunately, there were no receipts and the sub had skipped town and could not be located.     

Thank you all for chipping in.

 

 

[Catherine]

2 hours ago, Max W said:

To prove payment,

Bank withdrawals showing sufficient cash to pay said sub?  The IRS guy should accept the deduction, and open a new audit on the sub who didn't report - with thanks to your client for the tip!

[Max W]

4 hours ago, Catherine said:

Bank withdrawals showing sufficient cash to pay said sub?  The IRS guy should accept the deduction, and open a new audit on the sub who didn't report - with thanks to your client for the tip!

Cash isn't a problem. Gross was over $180K.    As for the auditor accepting the deduction and opening a new audit, the IRS doesn't work that way.   The auditor only has so much leeway.  Everything has to pass by the supervisor.  Audits are not initiated by the auditors.  Besides, the 1099's ranged between $3 -$5K, hardly worth auditing. 

There were other issues that the client came out favorably on.  

[Catherine]

On 9/7/2018 at 8:50 PM, Max W said:

There were other issues that the client came out favorably on.  

Then call it "as good as it's gonna get" and tell the client he's lucky that's all that was dis-allowed.  He learned a lesson not nearly as pricey as it could have been.

(And yes, I knew the IRS wouldn't - note the use of the conditional.  "Should" and not "will."  But there are lots of places where we see clearly what they *should* - but don't - do; we talk about those all the time here on the forum.)

[michaelmars]

Can't use cash withdrawals to justify an expense since the cash could have been used in Atlantic City.  Cash payments are ok as long as you have receipts for the expense.