Let’s look at this collection tactic in its entirety with a step-by-step on how to employ it.
The concept behind a 1099 form is to report the miscellaneous payments to outside non-corporate vendors for non-merchandise related services in excess of $600 in a tax year. We hear some contractors claim that you can send a 1099 form to debtors because they received a service without paying for it, therefore it is income that must be reported.
The problem with this is it’s utterly false and doesn’t comply with the IRS rules. But when it comes to collecting monies owed by professional debtors, sometimes it’s the sizzle more than the substance. But a word of caution; check with legal counsel familiar with IRS rules before you go filing a 1099 form as a collection tactic.
With that caveat aside, here’s how to employ the technique if counsel give you a green light:
Start by sending a demand letter to your debtor. You can get an example of a quite heavy handed collection demand letter within this Forum.
If this demand letter fails, send a copy of a 1099 form listing the clients name along with a second letter:
"Dear Deadbeat Debtor,
As you recall, we sent you a demand letter dated XXX which has gone ignored. Because you have contracted and enjoyed the benefits of our services but have not paid for them, this potentially constitutes income subject to income reporting and taxation.
Enclosed please find a copy of the 1099 form. Unless you decide to provide us with your social security number which is your “recipient ID”, we will send the enclosed 1099 with the notation” taxpayer refused to give their S.S.N.
This form will be sent to the IRS and unless you reported the income, this may red flag your returns and trigger an audit.
"Enclosed find a letter to the IRS we will send along with the 1099. A copy of this letter will be cc’ed to the local IRS enforcement office.
If we receive funds in full per the lawful contract you entered into within the next 10 days, we will cancel the 1099 form and letter."
Now below is the letter you can enclose with the 1099 form:
"To Whom It May Concern,
Enclosed please find a 1099 form on Mr./Mrs. Deadbeat Debtor. We were unable to obtain from this taxpayer their social security identification number as they refused to provide it, but the taxpayers address and name are correct.
The income reported represents the value of the services we rendered that they refused to pay for, hence we are reporting this as income to the taxpayer under the miscellaneous rule.
Please verify with the taxpayers returns to ensure that they haven’t hidden this income from your agency.
Thank you.
Billy Bad-Ass, President
Take No Prisoners Plumbing
( Another One for you)
Beth
Remote Office
(am I through with the Hazing yet???)
