The IRS Office of Chief Counsel recently issued a memorandum concerning the use of IRS Form 1099 (also known as “information returns”). This form is important to taxpayers especially if you are audited in connection with horse activities, ranching or farming.
Farmers, ranchers, owners and breeders regularly pay for services performed by vendors, veterinarians, and other nonemployees or independent contractors. These payments typically include wages. When payments are made, you are responsible for issuing a 1099 form to the extent the sum of the payments made to the payee amounts to $600 or more in the year. These forms are required to be sent to each payee by January 31 for the previous calendar year. The forms are designed to help the IRS keep track of income paid to self-employed workers and contractors. You must also send the forms to the IRS by February 28 of each year.
According to Terry Miller, CPA with Miller & Miller Associates of Fresno, Calif., IRS auditors will invariably fault taxpayers who fail to file 1099 forms. Failure to prepare and file these forms, he says, could work against you in an audit because it may suggest you are not keeping accurate and businesslike records.
The 1099 forms pertain only to payments made for business or trade purposes. So, for example, payments for veterinary services for horses used in the activity are subject to reporting on the form, but veterinary services to pet dogs or cats are not. A 1099 form is required for payments to land owners for rent and/or services. Payments to attorneys, accountants, mechanics and laborers also require issuance of the 1099 form if the services pertain to the farming, ranching or horse activity in question.
The recent IRS memo referred to above indicates that 1099 forms are required whether the veterinary service is rendered by a sole proprietor or an incorporated entity that provides veterinary services.
Some nonemployee income payments do not require issuance of the 1099 form. Generally, payments to corporations – except for veterinary or legal services – do not require a 1099. Payments for hauling livestock or grain do not require issuance of a 1099. Other farm or ranch-related costs, such as for feed, fertilizer, chemicals, fuel or other non-service items, do not require a 1099 form.
There seems to be an enhanced level of scrutiny in the IRS of taxpayers with a significant history of losses and deductions against other sources of income. Thus, it is more important than ever to keep appropriate records to monitor the progress of your business, to show whether it is improving, which items are selling, or what changes you need to make. Good records can help you make better decisions as well as help support your position in the event of an IRS examination.
