As a professional Tax Preparer, I see Form 1099-C every so often when completing some return, for someone. A year may go by when I don’t see it at all, last year unfortunately I saw this return more than I like.
Let me first cover what is form 1099-C:
A 1099-C is sent by a creditor to inform you that it is going to write off the remaining unpaid portion of your debt.
The “creditor”, to the IRS, files it when a settlement agreement between a debtor and a creditor has been reached. Or, when a creditor determines that a debt won’t ever be paid.
1099-C form covers a variety of forgiven debts, including but not limited to: interest accrued on a loan, student loan forgiveness and stockholder debt.
If a government agency, credit agency or business decides to relieve you of a debt that is more than $600, you could receive a 1099-C.
You’re also expected to report debts that were forgiven by anyone else as income on your tax forms, unless the debt forgiveness was intended as a gift.
Okay, so now we all know what it is and what it is used for. A few weeks ago, it was brought to my attention that other accountants use this (or the threat of this), to collect from clients who haven’t paid their fees.
This got me to thinking. I have a few CPA’s I have done work for, who have chosen not to pay their bill. Why couldn’t I instead of messing with collections, avoid the cost and time of collections, by just righting it off as a lesson learned and move on?
Well just because I “heard” that someone else was doing it, doesn’t make it a good idea, doesn’t make it legal, or ethical. With that in mind I put the question out there in my little part of the world that is my Social media. So in all my Accounting groups, taxes groups and in Twitter and a lot of places just in general, I put it out there.
A friend of mine read on Linkedin that an Accountant was instead of Sending non-paying clients to collections he was sending out 1099-Cs’. In return, the “Dead beats” paid up.
So my Question, Is that Legal and is it a practice you would use?
Let me tell you I received many responses, I do mean a lot. None with the answer, no one had anything on the legality of it at all. And no one touched on the ethics side of it. In my frustration I turned to the NATP (National Association of Tax Professionals, of whom I have been a continuous member for many years) for the answer.
While I waited for NATP to get back to me, I friend of mine, Jason Dinesen EA of Dinesen Tax, in Indianola Iowa, emailed me. In his email he held what seemed to be the answer, including a Memorandum – SCA 1998-020.
That same day I received a call from NATP, asking me to clarify my question a little more for them. In so doing, I mentioned the memorandum that Jason sent me. Later that day I received a note from them, basically saying the same thing as and quoting the SCA 1998-020 that Jason sent me.
This past Saturday I was taken to an article written in the June issue of TaxPro Monthly that is published by NATP. In it was an interesting article.
Taken from an article in the NATP June 2010 Tax Pro Monthly written by Chris Novak, CPA:
There is no binding, on-point legal authority. However, Service Center Advice 1998-020 concludes that “individuals or entities not required by §6050P to file Form 1099-C may nevertheless voluntarily file such forms in appropriate circumstances.” Nothing specifically prohibits an individual from filing Form 1099-C if such individual cancels a bona fide, uncollectible debt and takes a bad debt deduction under §166(d). It is hard to say such an individual willfully filed a fraudulent information return. In addition, there is no reason to prohibit a non-applicable entity from filing a Form 1099-C, provided it is truthful and accurate. In fact, this may encourage debtors to properly include it in gross income.
He is discussing in the article Cavoto v. Hayes a court case, 104 AFTR 2d 2009-5525
So the short answer to my question/s?
- Is it legal for me as a business owner to right off debt and issue form 1099-C, reporting this as forgiven to the IRS and the debtor? –
- Yes. This is what the form is designed for. There are a great deal of other issues to consider, however other laws besides tax related that need to be considered.
- Is it Ethical, and or a practice you would use?
- From all the accountants, EAs and others in a similar profession stated, why would I want to? So not in my opinion.
- Ethical – if done correctly yes, but unfortunately I found a lot of pros, not being so ethical about it.
In all of this, Jason wrote a blog concerning it (Check it out).
Given all the information, I was forwarded (mostly by way of opinion). From what my friend Jason found and from what I have educated myself from my own research, I have new ways of conducting my business.
Before I disclose what changes I have made to my practice to help avoid having these collection issues let me address a troubling issue from most.
In many of the responses from my peers repeatedly, why would I give finished work to a client without getting paid first? Answer- I am to nice. I like to believe you can trust someone and in hard times I was doing what I could to help them out, so in turn, I would agree to wait until I knew they would have the money to pay for the services, money they wouldn’t otherwise get if the services were not provided, such as tax return refunds. Or otherwise struggling accountants who needed the returns done to get paid by their clients, then having the money to pay for my services.
In the past two years, I have sent to my collection firm a total of $23.2 thousand of uncollected debt. (24% as a note is from CPAs who I helped out with their clients tax issues). Of that, I was able to collect $955.93, and not from the assistance of my collectors, but from Clients who didn’t realize they had forgotten to pay. So in that I have concluded that my collection agency is either worthless (look for my article on them in March 2013), or I have a really bad client base.
The Actions I am taking in my practice
Effective immediately in my practice/firm:
Payment is due at time of service.
Bookkeeping clients where/that I dispatch an hourly bookkeeper to your location, a deposit is mandatory, then per your billing schedule, payment is due immediately when billed, if not, your bookkeeper will not be back next week.
Bookkeeping done in house – will be billed accordingly and a deposit is required, a balance of amount due will be required before you receive any reports or work that has been done.
Tax Pros that farm their returns to my office, a deposit is required before I will even look at your clients returns, payment of balance in full is required before I present you with finished work.
Tax preparation clients, payment is due at time of service. If you don’t have the money to pay until you get said refund, then I offer bank products at an extra fee, otherwise you can take your business elsewhere.
QuickBooks and QuickBooks for Mac training – I just closed a deal with a world renowned company that provides training, in this my plan is to assure, I am paid before conducting any training to anyone. For more information on this please visit – QuickBooks Answers
As for the Question of the 1099-C…. I have decided that I will be continuing my collection efforts.
© 2012, Bruce McFarland. All rights reserved.