Tax Talk: 1099's with Jeffrey Cronin

Welcome to Accountants Law Pod, where accounting professionals and law firms converge, hosted by Lynda Artesani, Sarah Prevost, and Stephen Libhart.

Welcome back to the podcast, everyone, and this week we have a special guest, and it's Jeff Cronin. And he is— we're going to actually talk about the wonderful topic of 1099s. It's tax talk, 1099s, which Gosh only knows what we're going to walk down that path of such a happy topic. But you know what? It's the most repeated topic on the Law Lab. So it's one that we all struggle with. So it's actually a really good topic to talk about. So, Jeff, I'm going to toss it to you to give a little background on who you are and how we met, and then we can start to dive into 1099s.

Yeah, thanks, Lynda. Yeah, so I'm Jeff Cronin. I'm Chief Strategy Officer for Zenwork, where the product most people know us for is Tax 1099. We file 1099s for about a half a million, for a little over half a million EINs every year. Yeah, we, we do focus on working with CPA firms, but we do have a fair amount of direct corporate departments. And, you know, actually one of our largest customers is a company called DistroKid who does music streaming royalty processing for streaming for artists who collect royalties on behalf of artists. So they get Spotify's money and they hand it off to the artists and they give a 1099, they give them a 1099 through us.

Yeah.

Wow.

Wow.

And so, you know, there's a lot of little interesting bits and pieces in the business that we're in. Lynda and I met, she was kind enough to be on our podcast, and I'm really happy to be here talking with you guys.

Yeah.

You know, and we can spend some time talking about the exciting subject of 1099 processing.

And I say Sarah's our local resident expert on 1099s. Yeah.

I'm just thinking about the volume in which you I just discussed, I mean, all these little 1099s, you have to have a really good system where you are not getting your money unless you have that W-9 in hand. Essentially, that's part of the application, right?

Yeah, when you— we do offer it, right? So yeah, I mean, getting a W-9 and making sure you get all that recipient information up front. Yeah. Yeah, right. You're trying to avoid, you know, for the larger volume filers, right, possibly, you know, well into the 7 figures of penalties if you don't have the right name and TIN and have a W-9. 1099 to back that up if it's wrong. So yeah, that's a big, a big chunk of the risk associated for most people in 1099s is if you've got a, especially a one-off relationship with somebody and you're a withholding agent, you don't withhold on it, you don't have the right information, you're going to have a bad time.

Yeah.

So yeah, we, we actually see a kick up of interest in, in the fall when, when that the, the B notices come out and you get the CP2100 or 2100A in the mail from the IRS, a whole bunch of people come to us and say, what am I supposed to do? We're a processor. So a lot of times we point them back at you guys and say, you need to talk to your CPA because you need to do an abatement letter. We have the systems to help you fix these things, but you really need to work with your accountant.

Yeah. You know, it's interesting on those forms too. It's confusing because you'll look at the data and it's like, it's exactly the same. I'm lost, right? Like, and also gives you that kind of thing where it's like, if you have an out, like, you don't have to respond. I'm like, well, what is it? Some are blatant. Some make sense. Like, it's the wrong address. It's the wrong name used. A lot of people do that. They don't even know how to fill out the dang form to begin with. So I feel like it goes back on where I've always felt like that if there is a system that could improve upon, it's really— The education around that first form you fill out, how to— what are you? If you're not— if you don't know that, that, I mean, that's the hard part, um, for some. So, but yeah, it, it— the production of doing the work, uh, like you said, having the software in place, like what you offer, um, you make it easy for us. However, there's still mistakes within that, obviously, that can be done if you're not doing it right. So what's the worst mistake?

Is it— is the worst mistake the amount being wrong?

You can always file a correction, right? So the corrected amounts are pretty straightforward. I mean, the worst mistake you can make is intentionally not sending them. We've had people who came to us after an intentional disregard penalty and said, hey, you know, I need to do tax— I need to do 1099s from 2020.

Oh, wow.

We got a 2020 request for this year. And it was like, well, the IRS only takes them for 3 years. So that, that, that, you know, that ship has left. But yeah, you get situations like that. That's the thing you really, you know, you really don't want to do. And I'm not going to name any names. I had a conversation with an accounting department 2 weeks ago where they were saying, hey, you know, we don't have a TIN and we don't have a reasonable expectation to get a TIN. We want to file— they filed 80% of their 1099s with no TINs.

Oh.

The IRS rejects those if there's that proportion of being— if it's that wrong.

Wow.

But they were filing 80% of 1099s with no TINs. And I said, we call— you know, I got on a call with them and said, you need to get an attorney because the IRS will be here. You know, this is— it's clear, you know, you're— you know, you don't have a TIN. You know, you didn't get a TIN and you didn't withhold.

Right.

In that situation, you back up and withhold for sure. And so I said, you know, that's the kind of stuff you see.

That's—

You get contacted by people who say that their client is arguing with them about sending a 1099.

Yes.

And how do you— how do you handle those? I mean, dumb question, right? But how do you handle those?

I love that.

Yeah.

I mean, well, one, everybody gets a 1099 if you want one, even if it's not within threshold. I mean, we had those arguments all the time, but I only paid them $400. Like, if they sent you a 1099, it doesn't matter. The threshold is just a requirement.

Right.

You can send a 1099 for a 10-cent payment. Well, for a dollar payment, because the pennies get rounded off. You can, you can send a 1099 for a $1 payment if you want. It's not about the thresholds and the rules about, you know, why did you get me a 1099? Luckily, we usually are dealing with payers, not recipients too much, right? So the people sending the 1099s, not receiving them. When you deal with people receiving them, they're the ones who get really upset. They got, they have to report that income.

To me, it's like you got the money, you just, you report it. I mean, I don't care, like, if you received a piece of paper that states that you got it or not, you still report what you got.

You still report what you got. And in the case where they get bent out of shape about receiving a 1099, to your point, you're going to be reporting the income anyway. No harm, no foul. I mean, yeah. You know, when in doubt, send it out.

That's the—

that's the phrase.

But it's funny, we've had attorney— we had an attorney blanketly tell us, I'm not doing that. We asked him about 1099s. It wasn't part of the service. We went into the whole thing about what it's going to cost to do it because it's a lot of work on our side, especially if they didn't get the numbers. Now we've got our team calling and trying to get the numbers from people. We use Keeper, so we send out the request electronically because we don't want people sending their Social Security number over the internet, and it's just funny. Yeah, well, that happens a lot. And then the attorney's like, I'm not doing that. And we're like, put that in writing.

I would point them at the intentional disregard section of the statute and say, this is what you just did.

Yeah, right, exactly. That's a better way, maybe, Sarah, to go back at it.

I, I've— I'm just got me thinking here because there's a service in between. That feels like it's necessary of— it's, it's reeducating. It's less about, like you said, it's less about the questions and the amount. It's educating folks like us to how do we handle, like, how do we handle these conversations, or how do we dispel this mystery of, well, they're a former— I mean, this came up once. They're a former ex type of a person, and now they're doing mediation. Okay, well, that doesn't negate them. That precedent didn't negate them from receiving it.

So didn't negate them from the law. Yeah.

And, and it's just, I, I do feel that, and you probably see this uptick in, in probably in your, from your marketing department, the uptick on searches in these moments of you know, January through March and then again in the fall is this uptick of it. But then there's this compliance. It's almost like we need a reeducation on the compliance complexity. It seems so natural to some, but what gets complicated is all of the ifs and buts and the grays.

Yeah.

And that form and those instructions do not address it adequately. The IRS does not have a very clean, no surprise, Guidance on it. And it's left sort of sometimes up to interpretation. I mean, I've literally— you're paying for storage. It clearly states rent. You're paying for rent, right? And I've had a tax person say, oh, you don't need to send that.

Rents and royalties. Those were— yep.

I was like, wait, I'm sorry, what just happened in this box? Because this is weird. Like, I have it in writing, so I'm not going to— I mean, that's what you You wrote that. But I do feel like it needs an overhaul or a reeducation or some sort of outlet that helps rekindle training in this mode, because too many people are taking for granted and they're using the wrong forms too. That's the other problem I'm seeing. People are using quite outdated forms. If I see a form that's not in the current period, I am going to ask for a new form just for my own safety measure.

Well, and how about in our niche? Here's another one. Where we take retainers, trust retainers, and the lawyer, you know, family law or personal injury or what have you, will write a check out of the trust account for a medical professional to review the case or whatever. And then they don't want to send a 1099 because they say the client paid that. And it's like, no, you know, you, you, you're paying it out of their retainer funds.

Exactly.

You're performing this work on their behalf. You're, you're requesting this medical record. Yeah, it's a 1099 situation. And oh my gosh, every year we have—

Oh, you fight with them on that one.

You fight with them on it. Yeah. And then they're like, well, pull it back. And it's like, it doesn't matter. They have to report the income anyway. And it's, it's worse. To your point, Sarah, we're stuck in the middle. We're stuck in the middle because the IRS isn't clear.

You know, we— Well, Sarah and I have pulled up the rules. I can't tell you how many times, like, a weirdo scenario come up and then Sarah's like reading the The, the, what it says on the website out loud, trying to like, we're trying to interpret it to the use case. Yeah. Yeah. We have come up because it's, it's, some of it is, you know, and then we get in with our staff and they're like, well, they bought pencils. Is a pencil a human doing a service? You know, we end up answering them back with these questions because I actually built a tree, a decision tree.

Oh my gosh.

We had all these different scenarios and I'm like, here's a decision tree. Because Sarah and I were tired of answering the same question over and over again because they're trying to And we're trying to do it during the year and not at the end of the year so that every month it's one of the things we do. But, you know, when time gets busy, that's this one task that kind of gets kicked the can down the road. And then, has everybody been doing— Sarah will say in a meeting, everybody been doing their 1099 part for your clients? And then you hear like crickets.

And I'm like, it doesn't really need to happen until January, so it's easy to put it off.

So much so. But then you don't want to—

volume is just Exponential depending on the type of— like in our scenario that Steve brought up is we just meet all these different criteria. And I find it— I'd like to know your opinion because this is fascinating to me what keeps happening every year with the 1099-K.

Oh, the K payment intermediaries. Yeah, yeah, yeah.

Yes. So let's get into that.

Because it's not last year, but the year before, it had to be a fun time at your place because they didn't change that rule till like Well, they're still in flux.

It's not—

Yeah.

It's, we're, we'll, we'll go to $2,500 and then we'll go to all to the, to the low threshold. That's the current. So, I mean, yeah, that the K has been interesting since it came out, right? So when the K came out, yeah, I think it was like 2012 originally with the original thresholds. The, the first big foot fault on the K was they didn't exclude fees Or, or service charges on gross proceeds. So it was gross proceeds of payments. It was never an amount you were going to report as income anyway because it includes fees. So error number 1 happened on the first day.

Oh my gosh.

And when, when the Inflation Reduction Act part of, you know, when they changed the threshold as part of the Inflation Reduction Act to try to collect or capture more payment processes, Again, the timing wasn't good.

I don't—

I mean, I don't want to— I really don't want to blame the IRS for this.

Sure.

This is legislative.

Yeah, this is legislative for sure. Yeah.

Yeah. So, you know, Congress passed a law that then the IRS caught all the heat for trying to— for implementing the law and regulations. And the way the law was written, well, it was really not very taxpayer-friendly.

Yeah.

And when the IRS proposed their regs, you ended up in a situation where, you know, like PayPal sitting there saying, I don't know what these transactions are for, so I only have the option of reporting all of them to everyone.

Yeah.

And you sit, right? And you end up with people sitting around saying, yeah, my, my, my Venmo account's going to start reporting my income to the IRS.

Oh, you have hit— you have hit such a big nail on the head.

That's why I want to talk about this so badly, because I'm curious how we— I mean, this is the, this is the meat of where we're going to get to in the future for sure.

Yeah. Well, yeah. So starting next year, when it goes down to $2,500, we're going to have this problem. Now, what has to happen in the interim and frankly hasn't quite yet, is those payment processors, the payment intermediaries in IRS terminology, have to update their systems to track what the payment activities are actually for, right? So when I, when I send a Venmo and I put a little slice of pizza on it to my friend, the IRS is not going to accept the pizza, pizza emoji as a claim that it's a reimbursement for pizza. But there has to be some way for Venmo to collect what it was for, because if I'm just sharing a meal and I just That's how we're splitting the bill. That's not reportable.

Yeah, right.

And that's the stuff that's not happening yet.

Well, you know, Jeff, every year we run into the problem of what does each vendor do?

Yeah.

Does Venmo send it or do we send it? Is there Venmo personal, Venmo professional, PayPal? And how do we, how do we filter all that every year? How do we know what is the latest, greatest thing we should be doing?

Well, it's gonna— some of it, Steve, does have to come because of this, these new rules. Some of it's gonna have to come. It's that where I'm finding I get a little bit nervous is the part where he said this inner, inner between.

Yeah, yeah.

Because you're not— I mean, let's face it, we're in April. This, the software is gonna just like— there's gonna be something. I mean, what does this look like? Because we're all— face it, sharing a meal with you on a business moment versus paying you for subtenant rent out of an office.

Yep.

For a professional business. There's like a whole myriad of things that could be going on in behind it. So I was just curious because it— you— we saw that can get kicked every single, you know, the, the form wasn't right, then the form got changed. And so, Steve, what makes me most nervous is on our side, We're going to sit with a big pile of something. I just don't know what that looks like. And this next year is going to be tougher. And I, I don't know what things we could do, like the softwares that you have, Jeff. Like, what is the education going to be, or how can it get released, or what could— what can we be talking about to, to Steve's point, is better plan? As much as—

yeah, I mean, and to Stephen, your point, both point, right? What is this payment for is the fundamental legal question from a tax reporting standpoint, from a classification standpoint. And if you don't know what it's for, if you can't tell what it's for, when in doubt, report. And so what'll happen is all of these payment intermediary platforms will start reporting K volume for a whole bunch of things that are really not income, and it'll be left on us, you know, on your customers or on the recipients of those forms. to clarify what it was for in their tax returns.

So the client, the client gets the K, it's wrong in their eyes. It's their, their responsibility between them and the IRS, not with—

It's going to be the payment intermediary's responsibility. The payment intermediary is reporting the transfer of funds, not— but the payment intermediary is not telling you what they were for or whether it was reportable, right? From, from an income tax standpoint, I've got to split income tax reportable versus 1099 reportable.

And so does the IRS ever make sense of any of this?

I mean, I— yeah, the question is, what are they going to do with it when they get it? I don't know. Yeah, I don't know that the service really knows that answer either.

You know, when you think about like Airbnb, yeah, you can never tie that back. I've never had it be exact. It is like a cash accrual hybrid weirdo method. Good luck figuring it out, right?

Yeah.

So I— it's the same. I feel like it's in the same vein of this, but it's like cautioning now when we see the Venmo activities. Hey, did you know that you need to probably change how you're doing this?

Yeah.

Yeah.

I don't think they're kicking it down the curb, right? Is that kind of what I'm kind of most making sure of? Like, every year I feel like in December we're hearing, oh, it's not gonna happen, it's gonna be the next year. But really, it legitimately will be this 20.

Well, a couple years ago, remember? I can't remember the exact situation, but it was right at the end of December they changed. Do you remember that, Lynda? What was that?

Yes, I remember they were going to force that onto the threshold. I think it was pretty— it was higher than that. They were going to make the 1099-Ks, which actually was going to kind of alleviate what we had.

That's right, that's right.

And then at the last second, they were like, nope, we're not doing it because the payment processes couldn't They weren't ready to do it, so they gave them a few years to kind of set up their systems. It's just, to me, it's such a terrible season that we have such a short window between trying to get everybody's books done and then also doing that. And it's funny, I was talking to my daughter today. She did her taxes and she's like, I didn't realize when I added up— that's the reason for these 1099s, because I'm adding them all up and I'm like, I actually made quite a bit of money at the end of the day. Doing, driving the car to bring people their meals and all, it adds up, especially if they start doing that gig economy, which a lot of the younger kids are doing and working these little side jobs because they can make money doing it and it can add up pretty quickly. And, and then all of a sudden you got a lot of tax dollars you got to pay because you didn't pay anything. And that's the part that hurts for their side of it because if they didn't work, it wasn't being withheld. Yeah.

Yeah. They owe income tax on it. I think that we're up to a third of the US That's crazy.

A third?

That's something else.

Wow.

Wow. And so when you look at that, you know, in that kind of situation where, you know, they're all going to have taxes that they owe at the end of the year because they're collecting 1099 income, which is not typically withheld on.

And that's the kind of question— What's the statistic on ages? Like, I'm just thinking that under 30, is it a higher percentage of those people?

Because that's where they're, you know, people are bringing in money.

my groceries or those new jobs that weren't— didn't exist pre-COVID. And—

Yeah, the, um, that's a good question. I actually don't have the demographic breakout. When you look at the folks that we're paying today, we do have a bit of a saddle. You get people who are, you know, doing retirement jobs. You get people who are doing supplementary work as students or, you know, some other method of earning income. People who are in their prime earning years are typically not working 2 side gigs.

Well, like my daughter's— so a single mom, she was doing it to supplement the time that she dropped the kids off and she was doing— I forgot which one.

Well, like everybody needs that. You have your— you see it all the time, those stories. Jeff, I know we were talking about the Bay Area and I see it like, how much does it cost to live in the Bay Area? And if I have this type of job at the software company, but then there's a side gig to it. You always see this like little spinoff of things, and it's just my, my mind is kind of processing that amount of people.

Yeah, it's huge. We, when we saw, you know, we consistently see growth on, so most that's reported on the non-employee compensation form, the 1099-NAC, and IRS publishes stats every year on number of forms filed of each type or collect— they've collected for each type. The aggregate 1099 volume has been going up pretty consistently at 7% a year going back 15 years.

Wow.

But you see some jumps, right? They're forecasting the K to go up from, you know, 2.5 to 40 million forms when the regulations go live.

Holy cow.

Why not? Because it's easy to use this.

Yeah.

Right?

Like, this is the game.

No one carries cash. Yeah. Yeah.

Yeah.

So, so that, that's, that's the newest big jump. It's not quite as big as the jump we had when for the, for, for cost basis reporting on, on sales of securities going back to, you know, 2010, 2011. That one we saw billions of forms created by the cost basis regs. But yeah, I mean, little legal changes you don't think about. The DA form draft for digital asset reporting came out on Friday of last week, a week ago now. So that we have a draft form. We don't have instructions, but for all digital asset sales and trading—

Just do it. Yeah.

You'll figure it out.

You'll figure it out.

Yes.

We'll get instructions in a couple of weeks.

So you'll get the instructions on January 15th.

Yeah.

And when you look at the reg, what that form looks like, we're going to— it's going to be billions of forms again. They have date and timestamp on trade for every digital asset type.

It's so hard conceptually for me to even understand when you think about these robo things that are happening. And I'm looking back and I'm like, I'm supposed to remember this? You know what I mean? It's intimidating on top of XXXX.

So, yeah. Well, that's what happens with 1099s too. Not to diss them or anything, but January comes and then all of a sudden I'm like, oh, crap, when do we need ones for this? And when do we need it? What's the rule again? Because it's like something you don't put in your mind all year long. It's kind of why I made the stupid decision tree, because it was like, after we keep answering all the same questions, sorry, we have to write this down somehow for the staff so they can kind of carry it through the year and answer the questions, especially on the PI. The PI firms are the ones that are the most complicated because of the complexity of all the different stuff. The medical side.

The medical.

Is it a physician?

Is it a hospital? Is the hospital— Yeah.

Is it personal? Yeah. Physical therapy.

Or actual legal advice?

And the commission.

And a lot of times your PI firm will, in the final settlement, they'll discount the bill down to the providers as well.

Yes.

So, you know, it's just nuts.

Yeah, it's interesting what you're going to see. I don't know, as an average person just providing a simple service, I think it makes more sense now that we have disclaimers or separate engagements to support this body of work.

Agreed.

Complex.

Especially when you have to get down to like, they didn't— nobody in the law firm got a W-9 at all, like your client that had nothing.

Well, what Jeff just said, let's just issue them and just not collect the information. Is it that hard to collect the information?

It is sometimes though. We've had people hang up on our staff. They don't want to talk to you. That's why you got to get it before you pay them. If you don't do that step and get it before you hand off the money, you're really— I mean, I remember that from my old construction days of working with contractors, and they actually would just disappear like you could never find them again.

What about the form of currency, like you're saying? So the form of currency is changing and you're gonna see this uptick. I mean, cash.

Yeah, you'll have a target. You'll actually be able to get the money back if you had to, right? You know where it went. That money can be found.

Okay.

Unless they're sending it to, to a one-time payment card. So, so, right, Rob, you're seeing, you're seeing people using payment cards that are, that are not associated to a bank account.

No. Yeah, they're prepays.

They're prepays. And so that's the new way around a bunch of that activity is you're saying, hey, I'm just going to, I'm going to fund the money. I'm going to give you an account number to a prepaid card. That prepaid card, that money will land on the prepaid card. It's now not traceable anymore. Again.

Oh, boy.

Oh, my God. It's like a whole can of worms.

I know, right?

That's why this is fun.

I got to think, though, with the new rule last year, with you couldn't have more than— was it less than 10 forms or whatever the new rule? That had to help you because we still had clients who are like, do I go to Staples and get the package? I only need 5 forms. And they say, make you buy 50. I'm like, Why are you typing that? Why are you still typing forms?

Oh, those days were horrible. I remember those days.

Why are you even printing them out? Like, why is it even available to use the template for them? Really, they should not be allowed. I think, I honestly think if—

Yeah, there's a lot of, yeah. So, Lynda, to your point, right, the threshold went down to 10 forms for electronic filing this year. The number of small businesses that came after me and said, you, your lobbying team must be great to get this threshold pushed down this far. We had more than one person call us and, and claim that, that it's like, well, I'm sorry, we, we probably should have a lobbying team, but we don't.

Yeah.

But yeah, we saw on that sort of 10 to 200 to 10 to 250, it used to be 250. Now it went down to 10, that 10 to 250 bracket. Exploded this year.

Yeah.

Because a huge number of them were simply, you know, previously they were doing them on paper or not doing them at all. There was no way to really know if they didn't do them at all because they would otherwise just be on paper. And so, you know, and to be honest, the service a lot of times just didn't have the staff to process paper forms to begin with. So they didn't know what they didn't know.

Yeah. And so, you know, it includes like You have 5 employee W-2s, W-2s, and that's all—

it's additive.

And people were saying, well, I don't have that many people and I don't use that many forms. I'm like, well, you have 3 people you're giving a W-2 to. So now you start to add that. Why do I have to add that in? That has nothing to do with it. I'm like, but that's how they're counting.

That's where the IRS started. I mean, it makes sense, right?

Everything else electronically.

They're looking— that was— they've said this for a while now. They're looking to improve and make it easier and make it more electronic.

Okay.

Because, I mean, nothing's worse than getting a letter in passing from them and it's already been handled. Yeah.

Yeah.

Well, yeah. When you look at the IRS's— their tax gap— their annual report on the tax gap performance, you know, when there is third-party information reporting, Voluntary tax compliance goes up to 98%.

It's less— Voluntary.

Voluntary. We live in a voluntary tax system.

Yeah.

Doesn't feel like that.

Yeah. Voluntary. Yeah.

So there— but voluntary compliance goes up to 96%, most of the time.

Wow, that's pretty strong. Yeah.

And when you look at when there's not third-party information reporting included, the IRS estimates that voluntary compliance is 60%.

Wow, big difference.

That gap is what they're after with electronic compliance. That's what they're trying to automate.

Okay, Jeff, you're cracking me up because this— I didn't expect 1099s to be so damn funny. But what's your background? What got you started in this?

Yeah, how does one—

how does one go to college and end up doing this?

Yeah, it's worse.

I'm a physicist by training. Wow. So hard to tell.

Elaborate.

Yeah, to go completely left field on it. Actually, I got here back in the early '90s, to date myself a bit. We— I was involved in a business, an early-stage business that taught people to pass the CPA exam digitally on— we shipped floppy disks.

Oh, okay.

Wow, back then.

Back in those days, pre-internet, pre-CD-ROM, really even we were shipping floppy disks for CPA exam prep and we had a— when we did an entire CPE course set, we were actually, we then got a contract with the IRS to train their audit— the auditors on tax law.

Oh, cool.

I then, I wrote an enrolled agents exam prep course and we published that. Then we did bar exams and when we sold the business to What's— it's now part of West Publishing or Thomson Reuters. We sold the business. When we sold the business, we had been up to 13 bar exams, bar exam prep in 13 states and a CLE course catalog as well. And so I kind of— I started off as a— as working as a programmer, but ended up running the— I was running the editorial department, the content department for that business when we sold. And so that's how I kind of fell into accounting without actually having an accounting background.

I think that's what we all do.

Yeah, right. And, you know, a little bit on the legal side, my— I've had more than one person being shocked at how much I know about legal stuff. It's like, yeah, I had to edit bar exam prep courses for—

Wow.

Um, yeah, right. I never got a JD. I should have done— I should have taken the bar. I should have taken the, the bar in Wyoming back when it was still allowed, when you could take it without getting a a JD and practiced law. It was black letter law only too. It was, it would have been a, it would have been easy. The, but yeah, so that's, that's how I got started. And then I actually, you know, I ran through a business that's called Sophos Compliance. It's a company called, called Convey was the first one. And we focused on, on information reporting, 1099, predominantly for large financial services firms. So companies like JPMorgan Chase and Wells Fargo, you know, UnitedHealth Group for physician payments.

Oh, wow.

Yeah. Yeah.

Those are the kind of companies we did there. And then I made a detour through an HR and HCM platform company in the last, and then I came back to the tax reporting world again with Zenwork. And so, you know, the, I've been doing this Professionally, you know, for 20 years at this point, through the, you know, through the, through the 2008 financial crisis, uh, you know, through, and, you know, through COVID and everything else. It's been, uh, and I'll say again, it's a great, it's a great business from, from our standpoint because even in the financial crisis, you know, we were doing tax reporting on mortgages during the financial crisis. And guess what? It still went up.

Yeah, I believe it. Wow.

Cancellation of debt. And, you know, when you, when you, when you cancel a mortgage, when that cancel— you get a cancellation, cancellation of debt tax form, you get a 1099-C for that debt cancellation when your mortgage gets canceled.

What?

Yep.

Yeah.

You're— if you don't— if you get a debt canceled, you owe tax on it. And so, you know, that it's just an amazing—

So what about these people who go out to Those companies that help them reduce their credit card liabilities, are they 1099 on that write-off?

If they get a write-off, they're 1099 on it.

What about the kids that get their school debt wiped off? Same thing, right?

If it— oh yeah, if they received cash and that debt is canceled, it's unless the specific regulation that, that allows for cancellation of debt excludes it, it's reported as canceled, as a canceled debt, and it's taxable.

Yeah.

So you pick up—

you think about artists and grant money. People always think money.

Okay. Money's art. It's taxable.

Sorry, what happened here?

Yeah, we work with a whole bunch of nonprofits on grant distributions specifically where we work with them. We work with doing tax reporting for grant distribution or grant funds distribution because it's reportable to the IRS and taxable and withholdable if they don't have Proper documentation. If you don't have a W-9 in hand and you don't have it right, you should be—

Sarah is just like leaning over here going, I'm weak.

No, I just— it's just mind-boggling. Well, your journey actually is more—

Yeah.

I mean, that's the story. We should just make that the podcast.

I can just hear his parents going, you went to school for physics?

Yeah, that conversation got had. I started off— I also have a— so also electrical engineering.

Oh my God.

So far, I mean, it's getting worse.

I know.

The electrical engineering, because really in the end, I mean, it's your numbers and weight of things. Okay. I'm just, yeah, it's your journey is fascinating to me. Hilarious.

Thank you. Yeah.

And then now you have a podcast, which is talking about CPA technology.

Yeah.

Technology use in CPA firms. Yeah, I, you know, that's— I don't— we all have our journeys. It's one of those things you don't always know how you're gonna get there. I had— I never would have planned it this way. My kids don't understand what I do or why I do it.

That's a good thing.

Keep it—

keep some mystery there.

I wonder if I was your child, I'd be like, I'm sorry, what do you do exactly? How'd you—

But then you can't yell at your kid if they go to school to be an astronaut and then they decide to be some golf pro or something. You have nothing to say. You can't even say, You went to school for this?

That's so extreme.

Astronaut golf pro. They both happen in Florida. Yeah, yeah.

There you go. There's her common—

okay, there's your common denominator. Yeah, Florida.

That's where she got it because she lives in Florida. Yep.

I have a daughter that went to school— figure that out. Tammy went to school to be a teacher, then was going to be a pharmacist, and I was like, yay, great job. And then psychology. She got her degree in psychology. I'm like, We just went some crazy route to get to something that I said, what are you gonna make a year? And she's like, I know, I know. And then she doesn't even do that either. So, but it's hard. You know, Sarah's son's going through that now. I mean, it's hard when you're 17 years old. What do you want to be when you grow up? I don't know yet. You know, it's really hard.

So you— I was wrong.

Wrong.

That was what— that's the— that's what I tell my kids. I knew what I wanted to be. I was just wrong. It's okay to admit you don't know.

I love that the universe really pulled you in a way.

Yeah, you got there eventually.

In a very different way. You have a lot of skills.

Yeah, some of them can be useful. That's the biggest thing.

Are you becoming the accidental marketer quite by chance?

Well, I've run product marketing and marketing for businesses before. I've run sales teams for businesses before. I set up, I ran the IT department at a startup for a while. But it's the thing about working in relatively, I mean, I've stayed in smaller businesses for most of my career, you know, like, you know, a few hundred employees. And, you know, there, there is a lot of multiple hat wearing and that is part of what's, what I find it, I mean, you guys have this going too, right? You're, when you're, you're, you're ordering equipment for employees.

Yeah.

You know, stuff that part of what keeps me from being bored all the time and you guys too is, you know, that's part of the fun part about being in a, in a, in a more boutique kind of sized firm.

Well, I love the saying, variety is the spice of life. The more you can learn, the more you can broaden your horizons. How many of us know what we want to do when we're 20 years old? We don't.

Yeah.

There was that path. You had to go to college, get into debt, get out of college, go to work 9 to 5, all that sort of, and then suddenly have your midlife crisis. Well, I think that we've accelerated all of that nowadays. You know, it— and, and people are realizing that they don't have to get into debt to have a career to make a living, especially with the, the world the way it is now with the internet and everything.

So, yeah.

Well, I think, and Steve, he's the, um, poster child of you can— you just can learn anything. You can just set your mind to it and do it. Kind of the variety, like you're saying. And it's kind of neat to— I, I just, as a prime example, like, we're sitting down talking about 1099s. How is a physicist moving through this lifespan of time and doing all this. And but it's intertwined and you learn from each stage, it sounds like.

So do you put out a— speaking of courses and courses that you have, have done, do you put out a course every year for people like us who want to get caught up on how to do 1099s? What's supposed to happen when, where, how? You know, do you do that and charge for it? And, you know, is there— because there's a lot of deer in headlights people at the end of the year in our profession going, what am I going to do?

Yeah, so ZenWork does not. There is a specialist firm, there's— it's called— it's the Tax Information Reporting Conference in DC every fall. It's in October this year. And they go through— it's an entire event only talking about information reporting. And it covers all types of information reporting. So they'll cover individual business areas. So, you know, you may not care about, you know, that around distribution from multilevel marketing firms. That may not be part that you're— part of the information you want to know about, but you do want to know about payments to physicians or payments to, you know, legal, to law firms or, you know, whatever your specific area of interest is. So they will have something for you. Another thing is EEI does an event every year specifically on payments to non-US persons for 1042-S reporting.

Yeah.

And so that the payments to non-US persons have their own form, their own rules. Basically, they took all the 1099 form types and put them on one piece of paper, and it's called the 1042-S. It's for all types of payments to non-US persons, US source income to non-US persons. And in June of this year, EEI is running a conference in New York, and they've been— it disappeared for about a year or two. Cyrus Heftari is the guy who's— I've known for years on that, in that space. And Cyrus is the— in my experience, has been the expert on 1042-S reporting for a very long time. He's at KPMG now, I think, or he's at one of the Big 4, KPMG or Deloitte. I have to look it up.

Well, can we stop there for one second?

Yeah.

On the 1042-S.

Yeah.

Since so many of us are using overseas employees, Can we talk about that a little bit?

Sure.

You want to talk about not— you want to talk about U.S.-source income to non-U.S. persons?

Yes.

Yeah, this is huge in our industry.

Yeah.

Yeah.

So that's—

we all get silent.

Yeah. Well, I'm guessing so. There, there's not a lot of 1042-Ss that get filed with the IRS every year. So the, so the, the reason that form is a mess, and we could We can spend, I mean, literally there's going to be a 3-day conference talking only about 1042-S reporting.

Wow.

Because it is, not only is it, is it not always straightforward about how, what you have to report and when, but the mandatory withholding rules are, are governed by treaties. So there's an entire tax treaty section that covers what the withholding rates are for different income types for different people. On Form 1042-S. And withholding is mandatory for 1042-S payments in most cases, unless they're— unless you can prove an exemption. And so—

Well, when you're withholding on somebody up front, where is this money going?

The IRS.

To—

And then they have to file a tax return to get it refunded.

My head's going to explode, but go ahead.

Yeah, there's that big complexity to it, right?

Yeah.

Yeah.

So suddenly the recipient of that form has to file a tax return with the US government and they probably won't. Well, they look at you like your head fell off.

Yeah.

Because, you know, I'm not a US person.

Why are you—

why are you giving your tax authority my money?

Well, and then we're going to argue with our clients on it too. Why? They're overseas. We're not going to send them that. You know, well, you hired them. You found them and hired them.

If you can, the IRS publishes their audit manual regularly, and for a good solid decade, 1042-S compliance was on the— in the audit manual. Um, where, you know, because they knew far too many people didn't comply because they, one, either didn't know because they're not in the US, so why—

They don't know, right?

Um, or two, they kind of knew, but they, they, you know, their documentation was not what it needed to be. You know, there's— you get W-9s for, for vendors Or for people you're paying, recipients you're paying in the US, you need a W-8BEN or W-8BEN-E for non-US persons.

Yeah, yeah.

And so, and then, you know, that results of that form determines whether or not they're eligible for a treaty rate discount for reducing their withholding amount. And then that— but you're still—

Oh my gosh, how do you ever enforce that?

Well, it— some payroll processors You, you pay, you pay through that. They handle the international.

Yeah.

So I would opt to use a pay— a payment processor or a payroll processing entity that can handle that to take that off of you if it's a direct.

Yep. Um, how is that— that's a great answer, right? If you look at the— yeah, let's talk about the upside for 1099-K.

Yes.

If you do a 1099-K, you don't have to do a 1099 of any other form type.

Exactly.

And so if you, you can push this work off to the payment processor or the payment intermediary, if you do it electronically, if you, if you use one of them.

That's why the guidance, that's why I was kind of going back to that when I was asking earlier, because for what, you know, when it first was going to happen 2 years ago, it's like, oh, go ahead and use it. We were encouraging people for the hope that we wouldn't, the burden of this would be less and it would just automatically comply. Why not?

Yeah.

And then they pull the plug, change the form and change everything and allow leeway because it was a late last-minute change and they honored that. But then, so now it became muddy and then now it's back to what I feel muddy. But there's delineation, there's a business side on some of them and there is a personal side.

Mm-hmm.

But I, there's nothing that tells me what you're gonna do with that. data, like, and how you're going to construct it. So, and similar to the international offerings, we do have several clients that have international on a 1099, and we do it through the right payroll processing companies to allow to collect all that data on the front end to be able to process those. So, I mean, it's not uncommon, but what gets fuzzy to me is when you're not set up that way, how you navigate that, what does it look like? And having that pile of mess left over, it's like, well, you paid this person. Now this just— it just is messy.

Well, so what if you're paying— what if you're using the company in the Philippines who pays the employees out of the company and we just pay a fee to the company? Are we— are we 1042-Sing the company?

Yeah, as a business entity, depends on the business relationship and again, treat rates, but generally no, they're, they would get a BNE. They're an entity. As an entity, that payment for services performed to a business, right, are typically— yeah, exactly.

It's, it's ultimately to an entity. You have to, again, it goes back to that 1099 moment, Steve, where you have to look through the lens, right, what the questions are to support what you need. And then it's just like this whole— but I'm fascinated by the conference because I do feel— I don't know if Jeff is thinking this, but I'm like, can you put out a course?

That's why I asked that question.

I think a lot of money, because if it's coming from you, we know the data is correct. I've been on some. They're not that good.

Yeah.

And a help desk. Have a help desk that answers at 2 in the morning when we're sitting there going, do I do this one or not?

No. What I'm thinking, though, is when you see fellow colleagues, nothing wrong about it, they're answering from their space, whether it be the tax. But that deeper level, I mean, I've had straight sides of the, you know, tax side say, honestly, I really don't know.

Yeah.

I don't even understand because it is a complex side. And sadly, people try to make it, oh, it's super easy. I'm like, it's really not easy. Not when you say that.

The clients say that.

No, no, we get it within our industry. Okay, well, super easy. You just do it like this and then you just send them this letter. I'm like, yeah, it's not a Lego block thing. Like, you just don't plug and play and then take the color off. Right, right. You don't like the color. I mean, it is a serious frustration. And then the customer—

I remember the client we had, Sarah, that she's like, I'm gonna do it myself. She didn't wanna pay us to do it. I'm gonna do it myself in QuickBooks. Can you just turn it on and set it up? So I turned it on and I clicked all the Because it wasn't— you couldn't click, you had to individually click in QuickBooks. And I went through all of that. And then she's like, why are all these names on there? She's personal injury. I'm like, oh, they should get a 1099.

Get 1099.

And I'm not going to instruct you on it because you didn't want to pay us to do it. So there you go. And I don't know what— I don't know where that ever landed. I have no clue. Don't want to know. She specifically said, nope, you're not doing it. I'm going to do it myself. I did it myself last year. I'll do it this year, which is fine. But then when I clicked on all the trust account ones, she was like, oh, what is this? And that's— it does get confusing though, and it's a lot of work. And I think, I don't know, the best tip I can think of to give somebody on this is you've got to start getting planning for it now and do it so you don't have it on your lap in January. But the problem is we get clients that come to us January, February, those beginning of year ones, and nobody's even asked for a W-9. And then you've got this client and We had to this year, I think we had to just say, look, you're new, we will get there. You're going to miss the deadline. I mean, we had one that came to us on the 29th of January. We can't help you that fast.

Actually, you're reminding me, I did want to go back to Jeff and just get clarity.

Yeah.

You unintentionally, you honestly forgot or you weren't aware. It's still— some people are like, well, you didn't do it last year, so don't do it this year.

Kind of, right?

Oh yeah.

When do you, when, when do you let the IRS know that you haven't been doing it? Is that the, the question you're asking?

In a roundabout way.

I mean, that's one way. I mean, because once you file it for that tax year, you know, that's the warning, right? That's already going out like, hey, I didn't do it. I, I guess, what does it look like? I, I've not— I don't know what this is.

Um, yeah, so prior year penalties, uh, penalties for, uh, For failure, for late filing, let's start there, right?

There's—

IRS publishes a tier of penalty rates, starts at like $60-something adjusted for inflation. So never remember the exact number. It used to be easy because it was always one number. Now that's inflation indexed, it's always different.

Yeah.

So the penalty matrix lays out and, you know, it increases in brackets, right? Your first 60 days late is one, is one price. Your next 60 days late is another price. And then you're, you're really late, You know, anything after 120 days, you're paying the highest penalty rate. Penalties for noncompliance are capped if they are voluntarily disclosed.

Oh.

There is no maximum penalty for noncompliance if it's intentional disregard. So once there's any evidence that you know you should be doing it, do it. Because you're— that, that's the line When you now are in a situation where you're saying, I need to disclose, I'm going to disclose sometime. Do I, how much, how much risk do I want to put on my business? If you know about it and there's, I mean, I mean, right, speaking, you know, if you are, if there's any way the IRS can know that you knew about it, then you need to go, just, you need to intentionally disclose yourself. Much better off.

Yeah, just go do it and get it done with.

And yeah, so anyone listening to the podcast, And it says, well, I don't know, what is a 1099? And start to look it up and you go, oh, we haven't been doing any of this.

Do it.

It's still time for 2024.

You should do '24. Actually, you can do prior years. So, you know, like I said, the IRS has electronic transmissions, transmittals back 3 years. So you can do prior years. You can try to, you know, do as much as you can to disclose what's going on so that you can, you can really manage the risk to your business.

Yeah.

It's that reasonable effort phrase. Yeah.

Exactly right.

It's true. I mean, yeah. I mean, there are some genuinely, there have been like, am I supposed to be doing this? I'm like, oh, no, because you didn't engage my services. I wasn't, I'm not your babysitter on it. And to presume that accounting folks are the, the people that just are supposed to automatically do it. You're a business owner. Ultimately, you're the business owner. So hey, it's on you. Sorry.

This is a good conversation. We made 1099s fun.

We did. It was very humorous. This is the funniest one.

This is good. This is good stuff.

Thank you.

Well, thank you for coming, Jeff. We really appreciate it.

And thank you for having me.

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Well, that's good.

Thank you so much.

We really appreciated it. And we might be tapping into you again, and we'll be reaching out again going, Jeff, we have a contact. Oh, no, I'm kidding.

So there are specialists in information reporting on the accounting and legal side, and I do know a bunch of them.

Oh, okay.

Right. They typically, you typically don't tap them unless it's complicated. But yeah, there are some, there are folks, there's, it's a relatively small universe, right? We all, I run into them periodically at other places where they're advising somebody and they're on a call and it's like, oh, Cronin, you're here. Okay.

You might want to buy Sarah an extra seat at that conference that you're going to. She's, I just saw her eyes perk up. I'm like, she wants to go to that conference on 1099s in the other one.

I just want clarity. I want better clarity. Yeah, it's really what it is because it is so frustrating. But thank you again and thanks for joining us today, everyone. Bye-bye.

Bye-bye.