Simply underreporting your business expenses will not get
you out of any potential trouble. If the IRS were to audit
you, they would be able to reconstruct your actual expenses
on the basis of your records (if nothing else, they could do
so using your bank records). You would end up being given a
refund for your understated expenses, but would still face
the prospect of penalties and interest for failure to file
the appropriate Form 1099s. I admit that this is not very
likely to happen as the IRS is generally not as hawkish
about understated expenses as it as about understated
income; however, it is a possibility and you may find
yourself getting dragged into an audit if the IRS audits one
of your competitors/vendors and then decides to audit the
people who did business with that person (e.g., if they
discover that this person received $2,000 from you for a
given year, and they then cross-check your return and find
that you only reported an expense of $599, then they'll be
suspicious of what's going on and may audit you as well).

Another possibility that, depending on your net income for
the year (and the amount of additional tax you would owe if
you understated your expenses) would be to simply eat the
28% withholding tax. In that case, when you make a payment,
you would pay the agreed amount; however, you would then
calculate a grossed-up amount so that 72% of that gross-up
amount equalled the amount you paid, and you would then
remit 28% of the grossed-up amount as withheld tax. At
year-end, you would send a Form 1099 to the person you paid
showing the grossed-up amount as the amount actually paid,
and 28% of that grossed-up amount as the tax withheld
because of the payee's failure to provide you with a TIN.
The IRS may disallow a deduction to you for the grossed-up
amount on the grounds that the withheld amount was a
"voluntary" payment and therefore not an ordinary and
necessary business expense. However, because you do have an
obligation to backup withhold on payees who do not provide
you with a TIN, and depending on how specific the terms of
your agreement with the payee are (i.e., is there any
legitimate means of recasting your agreement in such a way
that it can be read as providing that the amount you agree
to actually remit in cash to the payee is net of any
potential withholding taxes that might apply, in which case
the agreement could be construed to implicitly provide that
the contract price was in reality the grossed-up amount),
there is a legitimate argument to be made that you should be
allowed to claim the grossed-up amount as your business
expense deduction.

If this scheme were respected for tax purposes, it would
have the effect of (a) reducing your taxable income (as well
as your net cash profits) and (b) increasing your payee's
taxable income (as well as giving them a credit for the
withheld tax, which would effectively result in them not
having to pay any more tax solely because of your gross-up).
However, if it is the case that most of your vendors are
playing on the shady side of the tax street, they may still
be less than pleasantly surprised when they receive their
Form 1099s from you.

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kucariga[at]gmail.com wrote:
- quote -

That would be a big mistake. Claim all legitimate business
expenses even if you do not get a TIN from your vendors.

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Thanks again everyone.

My business is providing audio and lighting reinforcement
services. I'm usually hired by bands and venues who are
staging concerts, street dances and such. I'm a techno-nut
who loves what I do. Unfortunately, this industry does
attract people who operate on the fringes of business
society. I'm truely afraid to report them. After the stink
I've made about tax stuff they would know immediately who
was behind it setting myself up for retaliatory vandalism or
worse. One competitor is a corporation. I rarely rent from
him because he is expensive. I would imagine the rest are
schedule C, if they report anything at all.

I guess for 2006 I will claim as a business expense only
rentals totaling less than $600 for each leasor and pay the
extra tax on my (unfairly) inflated income. It feels
dishonest because it is not what really happened. But ...
As for future years, I will do more business with the
(expensive) corporation, try to limit my rentals to less
than $600 each from the others, attempt to afford to buy
more gear of my own, and maybe, if I'm feeling really bold,
try to pry a number out of them by pointing out the
withholding law.

Kucariga

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As most of the other commentators mentioned, and as I
overlooked in my last posting, if any of your
competitors/vendors are corporations, you are, in general,
not required to provide a Form 1099 with respect to your
payments to them. Make sure, however, that you keep in mind
the difference between a corporation and an LLC - an LLC is
not a corporation for federal tax purposes unless it has
elected to be treated as such, thus, if a vendor is an LLC,
you should assume that it is not a corporation unless you
get a properly completed Form W-9 from that vendor with the
"corporation" box checked.

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- quote -

I believe that you mean "non-corporate" entities - don't you?

Regards,

Mark Rigotti

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Unfortunately, the correct answer is: If you don't have the
payee's TIN, you have to do so-called "back-up" withholding
on the amount you pay. Typically, this means withholding 28%
of the amount you pay, reporting that withholding on the
Form 1099-MISC, and paying the withheld amounts over to the
Treasury. The 2006 Form 1099, General Instructions, p.
GEN-11, describes this result in general terms.

The obvious downside to this is that, if you comply with
your tax obligations, you are likely to lose business. On
the other hand, if you do not you face the following risks:
(a) if the person you pay does not properly report that
payment as income and pay tax on it, you may be liable for
the unpaid tax, plus penalties and interest, because you
failed to satisfy your withholding obligations, (b) even if
the payee does report your payment as income and pays the
right amount of tax on it, you may still be liable for a
small penalty for failing to properly report the payment.
If memory serves, I believe the penalty is $50 per missing
Form 1099.

Unfortunately, your business interests appear to directly
conflict with your tax interests, and there is no easy
compromise or alternative I can give you advice on; tax
reporting obligations and withholding requirements must be
complied with. I don't know the extent of your relationship
with your supplier/competitors, or their attitudes toward
federal taxes, but I might suggest that you try talking with
a local tax attorney who can give you a written opinion in
plain terms that makes it crystal clear that you (and they)
have information reporting requirements that require each of
you to give the others your TINs (if people don't want to
give their SSNs, they can instead get an EIN as a sole
proprietor, which they can then use for their tax
responsibilities). If that doesn't work, then I have to
advise you that you need to start withholding if you cannot
get TINs - perhaps a copy of the opinion I described above,
coupled with the actual loss of 28% of their payments, will
convince the weaker of your suppliers that you're not
kidding.

BTW, if you do withhold, there is nothing legal they can do
to you other than to stop doing business with you - they
cannot sue you to get the withheld money back; federal law
gives you complete immunity if you properly withhold.

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kucariga[at]gmail.com wrote:

- quote -

One thing you can do is try to determine which of them, if
any, or corporations. Since payments to corporations are
not normally reported via 1099=misc, there's an out there.

Otherwise, and I don't counsel this mind you, but to
preserve the status quo, do nothing for these. Chances are
no one will notice.

ChEAr$,
Harlan Lunsford, EA n LA

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kucariga[at]gmail.com wrote:

- quote -

Sound's like you are doing business with the mob :-) You
should find other vendors.

--
Vic Roberts
Replace xxx with vdr in e-mail address.

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kucariga[at]gmail.com wrote:

- quote -

You only provide 1099s to individuals. Unless these
"competitors" are sole proprietorships, you have no
obligation to issue a 1099. The same is true of your
landlords, by the way.

- quote -

Good. I wish everyone felt that way.

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kucariga[at]gmail.com wrote:

- quote -

Are those business competetors corporations? My
understanding is that a 1099 is not required when what you
pay is to a corporation.

Stu

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<kucariga[at]gmail.com> wrote:

- quote -

Sadly, this is textbook "between a rock and a hard place."
To comply with tax law:

1. Check out Form W-9. The instructions tell you what kinds
of payees you don't need TIN's for.

2. Check the "Backup Withholding" section of the general
1099 instructions.

3. Send them 1099's if you're required to do so.

--
Phil Marti
Clarksburg, MD

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<kucariga[at]gmail.com> wrote:

- quote -

Anonymous tip-offs to the IRS.

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This is a follow-up question about rents paid by
self-employed

Thank you Shyster1040 for your insight on the 1099-misc rent
question. Unfortunately, this has opened another can of
worms. My landlords gave me TIN's without question, but my
business competitors whom I rent equipment from basically
laughed at me, said I was naive, no one does this, and
wouldn't give their numbers. I suspect they aren't
reporting the income. But what can I do about that? I want
to do my taxes correctly. I absolutely must remain on good
relations with these people. They can quite literally drive
me out of business if they refuse to rent to me. After all,
they are competitors and my clients are worth much more to
them then my rental business. Now what do I do?

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