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ASK THE EDD ATTORNEY – TAX PRACTITIONERS SHOULD AVOID THE USE OF FORM 1099-C FOR NON PAYING CLIENTS

By Robert S. Schriebman
February 19, 2015

In early February 2015, the IRS Director of Practice (Director) issued a news release warning tax professionals to avoid entirely or limit issuing Form 1099-C as a collection technique for delinquent/ non-paying clients. The Director was responding to a letter from an accounting firm who wanted advice on giving deadbeat clients a Form 1099-C to “persuade” them to pay their bills.

The accounting firm took the position that when the firm writes off a deadbeat client that is the equivalent to the cancellation of indebtedness. Pursuant to IRC §61(a) cancellation of indebtedness can be a form of taxable income requiring the client to include the amount of cancelled debt as additional income on a tax return.

The IRS Office of Professional Responsibility (OPR) refused to take a position that the Form 1099-C was the right way to go. In fact, the OPR stated that the issuance of a bogus Form 1099-C could subject the tax professional to sanctions pursuant to §10.22(a) of Circular 230, which requires a tax professional to use due diligence in determining the correctness of oral or written representations made to both the Treasury Department and to clients. The issuance of a Form 1099-C constitutes a communication to the Treasury Department as well as the client. Circular 230 §10.51(a)(4) of discusses disreputable conduct in giving false and misleading information.

Before a Form 1099-C should be issued tax professionals should be very clear that the “cancelled debt” is in fact a legal debt and not merely a disputed bill or involves a situation where a client has not had an opportunity to determine the legality of the charges sought to be discharged.

In order to avoid future problems with both clients and OPR caution should be used before sending that client Form 1099-C. It is perhaps better to obtain a legal judgment against the client in a court of law before determining the judgment not to be collectible. At that point in time the Form 1099-C may be appropriate.

Tax professionals should obtain a copy of News Release 2015-02 (2015ARD 026-1) February 5, 2015.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.

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