#206 - Everything 1099 w/ Steve Levine

You are listening to the Independent Dealer Podcast with hosts Luke Godwin and Jeff Watson.

Hello and welcome to the Independent Dealer Podcast brought to you by Buckeye Dealership Consulting. Today we speak with Steve from Ignite Dealership Consulting. He's going to talk to us all about the 1099, both from a 1099 with your vendor and a 1099 C if you have an RFC and you're supposed to be sending these out. So I know this is something that I think all dealers struggle with. It's compliance. It's not super sexy. But we need to make sure we have our house in order. So I hope you guys enjoy the episode. Before we get into it, Luke, we want to thank everybody for your reviews. Reviews are how we grow the podcast. It's how we rank higher on itunes and Spotify. So we're going to ask this. We want you to go out and leave us a review. Yeah. About how Luke is attractive and I sound like a Muppet, whatever it is. And what we're going to do for you. We've got one review so far in 2022. So Mike G. 63. Mike G 63. He left us a great review. Mike, if you will email us@infoindependentdealer.com or message us on Facebook, but preferably through email, we're going to get you on a zoom call. We'll do a 30 to 60 minute consulting call with you if you want. So anyone that leaves us a review, we'll do that for you.

Wow, that's pretty awesome.

Send us an email. We'll set up a time to get on a zoom call with you and you can ask Luke and I any questions you have about your dealership, about marketing, advertising, your structure, your employees, advice on cars, advice on anything. And we will do our best to help educate you. Obviously, we're not know it alls. We don't know it all, but we know a lot of people that know it all.

If we can't find the answer, we'll find somebody that does.

Yeah. So we will help you out and that's the value we'll give back. If you will just take 10 minutes and leave us an itunes review, you're going to get 30 minutes of our time to ask us any questions you have and hopefully help grow your dealership. So here we go. Today we have our good friend Steve from Ignite Consulting. He is going to talk to us all things 1099. This is the time. This is the time of year. This will be out airing. Maybe you know Third week of January, you should or you should very soon be sending out all those fun 1099 forms. Right, Steve?

So, yeah, you've got, what, 12 days left. If your house isn't in order, you've got 12 days to get it in order and send those out.

You know, Jeff, everybody loves talking compliance and the things we should be doing as dealers. I thought all we were supposed to be doing were buying and selling cars.

Yeah. You know what's so funny? The reason why I really, really wanted Steve on here is because I'm realizing there's so many things I'm not doing that I should be doing. And after 15 years in the industry, I just didn't know I was supposed to be doing some of these things. Right. And I won't admit to anything specifically.

Quietly, hypothetically, you're not doing them.

Hypothetically, there might be something that slipped through the cracks, and some of those are 1099. Right. So, Steve, first talk to us about. From a. From a retail dealership, we may have people that do work in or at our dealership or for us that they need to get a 1099 from us. Right. Is there anyone that would not get a 1099 from us?

So if you're using a contractor and you pay them 600 or more in a calendar year, then you should issue them a 1099C and you report that to the IRS.

And Steve, if that person is a corporation, you don't have to do that, Correct?

Correct. That's something else. This is for individuals.

Okay, so let's say I have a say I have a piece of building behind my shop, and a guy comes there and works on my cars. He does this every day. He details my cars, and I tell him what to do. Can I have him as a 1099 employee, or does he need to be our 1099 person, or should he be an employee of mine?

Well, like a lot of things in compliance, in law, the answer is it depends. The Internal Revenue Service has this checklist to help folks figure out whether somebody could be a contractor or an employee. Generally speaking, if you control when they work and what they do in your exhibiting control over that person, then they should be an employee that. There's also tests regarding how much they work, how often they work. Again, a lot of it comes down to control. If you're sporadically using somebody, then that's a contractor, and that's a candidate for 1099. But if you're having somebody show up week after week, and they pretty much work nine to five every day. And. And you pretty much tell them what to do and direct them, then that sounds more like an employee, not a contractor relationship.

And what if I'd been. If I've been doing this wrong forever, which I have not, I know the right way to do it, what are the consequences I could face? If for some reason, all of a sudden the IRS starts poking around and they say, well, this person should have been an employee, what can happen?

So the IRS is certainly a concern, but I'm actually in that situation. I'm more concerned at the state level. You have various workforce commissions at the given states, and they're going to be very interested in that because they take the attitude that, well, you shouldn't pay taxes and you're not. You should have been withholding and things like that. So it becomes a state issue as well as the IRS being interested. So basically, it's not the type of issue you want to get cued about. You want to understand that IRS test that I talked about. You want to evaluate it. You want to look at your people and make a determination. Am I getting too close to the line? And I think you error on the side of if you have to make an employee, you make an employee because it's just risky. If you ever get caught in one of those situations and somebody's pushing back saying, no, this is really an employee.

I've heard, and I don't know if this is true. Stephen, you may know of a real instance here that if I paid someone as a 1099 and it was deemed that they were my employee and they never filed or paid taxes, that I could be liable for their taxes owed. Is that correct?

You know, I have not run into that. Now, let me emphasize it's important that you, as the person paying, report this stuff and notify the irs. I'm not sure whether that gets you off the hook. If they don't pay, I believe it does. I've never seen a situation where you've done everything that you're supposed to do and you still get burnt.

Okay, so walk me through this just from the beginning again, and we can put a pin in this one. But if I as a dealer, have Bob Joe Schmo Headlight guy come on and start cleaning headlights for me every so often, right? He's got his own little trailer, his own little truck, his own little business. He comes on and do a headlight. He is a 1099. He's a 1099. He's just a contractor coming on. I need to collect from him the second I cut him his very first check over $600. I need to get a W4 signed.

Well, okay, back up. But, but before you even do that, I want to encourage everybody use independent contractor agreements that clear, clearly define the relationship. It's not going to help you with the irs, because just because you call somebody an independent contractor doesn't mean they are. IRS has been real clear about that. But you want to have protection in the relationship. You want to have confidentiality provisions, you want to have indemnity provisions. You know, if somebody has an accident, something happens on your premises, if they damage property, so you want to have that documentation. And part of that is you're going to get them to sign the W4, you're going to get their Social Security number, and you're going to enter them in your system of record and start things out on the right foot.

So when you said an independent contractor, we should have some sort of a legal form that if someone's going to be doing work for us definitely on our property, they. We have an insurance situation, too. I mean, do we ever need to be named on their policy or they need to be named on our policy? When do you. When I don't want to go down.

The insurance route, but yeah, yeah, it depends on what they're doing for you. But, but, but yeah, if it's a service where there's a degree of risk, you should ask them for proof of insurance. You know, just like you do with repo agents, you want to make sure if something happens that you're protected. Now, as a practical matter, if somebody's detailing or doing something like that, that's not going to be the type of situation where you need insurance. But if somebody's doing heavier lifting for you in terms of maybe they're working on your it or maybe that they're in your system. Yes. Then you want to protect yourself.

I think this is something that happens to probably every dealer out there. But I use central dispatch, and I ship my cars all across the country. And no doubt there's. There's truckers out there that I've spent way more than $600 with. And you're supposed to have your packet on central dispatch. Okay. So I'm supposed to click a button, download all the information I need to send you a 1099. But some of those don't. And then I can't get in touch with them, and I had to leave a checkout overnight. So all of a sudden they're gone, and I can't get that information, where does that put me legally, or, you know, where am I then?

So I'm not specifically familiar with Central Dispatch, which you just mentioned, but if you're dealing with a company, then that could be a different story. But if these are truly independent contractors and all dispatch is doing is putting the two of you together, and then the driver is your contractor, that's between you and them, and you should be collecting that information up front. Don't wait till after you issue the check to get the information. Getting the information is a condition of doing business with them. That's the way you need to think about it.

You know, what drives me insane, Steve, is that we're having to do all this work for the irs. That shouldn't be up to us. That should be up to. That should be up to the person filing their taxes, whether they pay taxes or not. Anyway.

Well, it's up to them, too. You know, your job is to report them, and your job is to issue the document to them. And then if they don't file, that's between the IRS and them. You know, unfortunately, this stuff gets really complicated, and that's why lawyers and accountants have jobs.

Hey, guys, bust in real quick on this enthralling compliance episode. I know I'm taking a lot of notes, and I mean that honestly.

Compliance is rough, but it's something nobody wants to hear. But everybody has to hear. Jeff and I. It's. And it's such great information.

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Get it going today. I know you may have put it off at the end of last year. January is a great time to get started. February is a great. Every day is a great time to get started. The other. The other great thing is you've got these DPG meetings, and we're going to one next week. Jeff's going to be there as our. As our media media technologist. And so anyway, Buckeye has it all, from consulting to reinsurance companies, and they teach you how to do it. And they have the compliance side of it, too, Jeff. So reach out to them. Buckeye Dealership Consulting. You won't be unsatisfied, that's for sure.

That's what she said. Let's talk about the other 1099. If you have an RFC and you have repos and bad debt, there's a point where a 1099 is triggered there as well, right?

Yeah. So that's called a 1099 C. And dealers without an RFC don't need to worry about this. This is just for RFC's, financial institutions. And your trigger event is when you determine that that account is uncollectible and you cease collection activity. So hypothetical, you repo the car, you charge it off, charge off as an accounting function, and they owe $4,000. If you're taking action to collect that, then there's no triggering event for the 1099C. And an action could be one action throughout the year. So you may get all your bad debt, all those accounts, and once a year you may do a letter blast or you may do a call campaign or something like that. That is action trying to collect that account. So you have not abandoned your claim. You still have a hope of collecting the 1099 C. Obligation only occurs when you give up. It's deemed uncollectible. You're not going to try anymore. And at that point, yes, you have to send that, that account holder, the 1099C, basically saying, you know, X dollars in the example I gave $4,000. That counts as income to you because we give up, we're not going to collect it anymore.

And Steve, I got a question. Does having their account in a credit bureau showing as a charge off with money due, does that act as a try to collect type situation?

I believe that there's case law on both sides of that issue for and against. I don't think it's enough. I think in the eyes of the irs, they want to see a proactive step that you take. You know, again, whether it's a letter, phone call, you know, something that you could point to in that account and say, we are trying to collect. I just think reporting month after month, that that's, that's a little weak to me.

Well, most of the time they're not at the same address, they don't have the same phone number. So, you know, that's the argument I would make. But, you know.

Yeah, at least you tried though.

If you're using your last known information for that customer and you're taking that action and you're marking that account that, then I would argue that the trigger hasn't occurred yet.

So when I do decide that they're uncollectible, say it's a maybe, I say I'm going to try to do Collections for three years, is that reasonable? Four years I'm going to try to chase this person. And after four years, if I haven't received a dollar or a response, I'm going to call them uncollectible. I'm going to send them a 1099 C and then do I need to change the way I'm reporting to their credit? Do I need to say it's a zero balance and it's done or can I still leave deficiency open?

Yeah, at that point. At that point it is done. But I want to be real clear about something. It's very important that you have a documented policy about this. It's not just kind of happy go lucky depending on what somebody thinks that month. You know, you make a determination as a company that after so many years this is what we're going to do. And when we stop trying to collect that, that's an event that requires a 1099C and you document that. And that way you're being objective, you're not just being knee jerk based on something that happens that week or month or particular year.

So to hear you right, yes, I would need to go into my credit reporting and say, hey, that guy owed me $4000 but now I've sent him a 1099 C, he owes me $0. It's a closed out account, zero balance, charge off.

I already charged it off actually. Yeah, there's actually codes that you could use because the repo still occurred and that could still be on their credit. So it's not like the line just disappears altogether. It's just a change in the status.

It's a charge off, zero balance.

Yeah. I would then adjust it to say it's a zero balance. Now does that change if I decide to have a policy of hey, I'm not going to chase anyone for deficiencies and I'm going to say that we have a mutual release and you don't owe me anything the day I repo it. But then I go and sell the car at auction and take a loss and write it off as a wholesale loss or something. Is that going around? The sounds like, is that illegal?

Is that going around Question. That one had a lot of parts to it. So you're Talking about Article 9, Uniform Commercial Code, strict foreclosure and taking the vehicle back in full satisfaction of the account. And if you do that, yes, if you are taking it back and you're foregoing any interest in that account after that, that's a 1099C event. So you would issue 1099C.

And that's called a strict foreclosure, correct, Steve?

Correct. Okay, now to muddy the waters a little bit. And I've actually debated this with some accountants and other lawyers. My position is if you're entering into a settlement agreement with somebody, you know, for instance, customers not happy, they didn't like the way the car run, they threatened to sue you and you settle and basically you agree everybody's going to walk away. There are some folks that argue that that's a 1099C event. My personal belief is at that point you're settling disputed claims, you're swapping releases. So I argue a little bit differently. I don't know whether there's any specific case law that decides that issue. So that's one that you're going to want to talk to your accountant about and see where they are on that issue.

Is that going to. So does that change if. I guess maybe this again comes down to kind of a separate compliance issue, but if I buy back my own repos at quote at fair market value, is that going to change that equation at all?

Strict foreclosure.

So if you've done strict foreclosure, then what you do next is between the dealership and the rfc, strict foreclosure has occurred. And as far as the customer is concerned that there is still no balance, everything's resolved in full. What you do between your two companies at that point is between the two of you. Now, if you're not in strict foreclosure, if you're using the usual Article 9 Notice of Intent to sell the car and you may be liable for deficiency, that's when you have to be careful about what happens between the RFC and the dealership and fair market value. And that whole discussion. That's why a lot of people use triple footer, because they want to be able to put the car back on their lot and sell it. And they don't want to have to prove that that sale is commercially reasonable. They don't want to have to prove fair market value. They don't want to have to argue about which guidebook is used. They just want it simple. It's a walk away deal. And that's really handy in states like where I am in Texas, where there's no garnishment ability and there's very little in terms of creditors rights after the fact. You're just better off taking the car back and going on down the road.

So Steve, I saw something come up on the Facebook page other day and this discussion was going on and somebody mentioned, and I can't remember who it was, that even though you send a customer a 1099C, if they don't make a certain amount of money, it really doesn't do anything to their tax refund or anything like that. Is that the case, or are you actually damaging someone's ability to, you know, to get a fair tax return?

No, I don't think you're damaging their ability. There is a threshold. I forget what the exact dollar amount is, but below a certain threshold, it's not going to be an event for them. And you may not even know that. In fact, you're probably not going to know that. That's between them and the irs, not you.

Okay. I've heard of it happening to, you know, back in. Back in 08 through 10, when people were having foreclosures on houses and things like this, it seems like I had a friend or two that got caught up in a mess of it. You know, they were supposed to get money back and they had to owe money. It was a bit of a mess. I don't remember exactly what caused that, though.

Well, I'll tell you what. One thing that you need to watch out for is you need to be transparent with your customers. Because I've seen folks cause a customer service issue and their phones blow up because customers think that, oh, this is a great deal, this is a settlement, I get to walk away. And then they get that 1099C in the mail and they go into panic mode and start, start calling every regulator there is and start blowing up your phones, start blasting you on social media. You really need to make sure that your people have the information and training to be able to answer questions correctly. Because a lot of times the customer, they know the tricks the customers will ask, and you don't want to misrepresent something to them.

Yeah, that's kind of scary. I think that would create a firestorm done improperly. I mean, if you don't think through this whole thing, I mean, should this be something disclosed at the time somebody purchases a car, or is this something that, you know, at the time of repo should be disclosed?

I don't think it's something that you disclose at the time you purchase the car. I mean, really, it's only applicable in certain situations. I think that if you're having dialogue with that customer, you need to make sure you're being transparent. And, you know, I've had conversations with lawyers back and forth. Some folks actually like to put it in the strict foreclosure letter and they say this may be a taxable event. Consult your accountants. And that right there, I think gives you pretty good protection. That. Look, we didn't give them guidance one way or the other. We told them you got to figure it out for yourself.

So it sounds to me, Steve, like dealers that might still have some uncertainty in this area, they need to decide, okay, are they going to keep the repo, are they going to dispose of their repos, what state are they in? Is it advantageous to try to do a collections and wage garnishments and do they want to go down the small claims court? So once dealers kind of start deciding what kind of dealership they want to run, they could reach out to someone like you and get more direction on the exact specific procedures they need to go through, what boxes they need to check what documents they need to have and send.

It sounds like absolutely. It's a very state specific conversation. Yeah, I've got clients in 20 groups and they get on me because they're like, well, you gave us contradictory advice. Like, you know, I gave you the right advice for your state and I gave them the right advice for their state. Some folks have great success collecting on deficiencies and they really recognize a lot of back end money because they know how to do it well. And then there's other places where it's really not an option. You have to know where you are and the best way to proceed.

Yeah, we went back and forth a couple of years on whether we sent people to collections aggressively or not. And just to put that to rest, I think too, Steve, if you are a buy here, pay here dealer and you are going to send people to small claims courts and try to collect, you have to send everybody or send nobody. Is that, is that truth? You can't pick and choose who you send to small claims court.

No, My guidance there is to have an objective policy or criteria. And that can have to do with whether somebody's a homeowner, whether somebody's employed, what, what the amount is. I mean, that there's a lot of objective criteria that you could consider. It doesn't have to be all for one or none. But let me say something about this issue. The mistake I see a lot of folks make is they think it's all going to be gravy. I'm going to do a little bit of work, I'm going to get a bunch of money. When you take somebody to court, you got to be aware of those counterclaims because the first thing, if these folks go see a bankruptcy lawyer or go see another lawyer, they're going to start looking for those counterclaims. And once they file a counterclaim against you, you can't drop the case anymore. You're stuck. And you may have to spend money, you may have to incur a bunch of fees. So you really want to be picky. I tell folks, before you ever send anything out for collections, you better look at your paperwork, you better look at your collection letters, your repossession letters, make sure your house is in order. Because over the years, I've seen plenty of people get stuck in really messy situations. They didn't even understand they had liability going in, that they were just trying to collect a little bit of money. So I always tell folks that if you want to do that, just make sure you reserve some money, because there will be counterclaims and you won't.

You won't be getting any money. And that's, that's the problem. I had the first couple of years, I sent all of my bad debt to a collections agency, right? And they keep 30 cents on the dollar or something, and they'd send everyone to small claims court. And it ended up being the only people that we got money from that we did wage garnishments on were the people that I felt bad for, because they were the ones that brought me the car back and said, hey, I'm sorry, this, this, this. And I started seeing a couple of these checks come through, and I was like, oh, man, I feel really bad that we're garnishing her wages. She was straightforward with us. And it was such peanuts. It was such a small fraction of it that I was like, this is, it's just not even worth it.

And folks need to make sure they understand the rules of garnishment in their state because they do differ from state to state. And for instance, some states, it's really easy to see the garnishment just by switching jobs, and then you got to start the process over again. Other states, you may be first in line to get money for car, couple of months, but. But after a while, you move to the back of the line. That's just the way they're functioning. So you just, you need to understand the rules of the road where you are.

Yeah, I'm glad I'm in a state it doesn't have garnishment. I. I don't have to worry about it. Yeah, I think it creates such a problem. I, I've always been one not to try to go after more Money after the fact. If I repossess car, repossess car, I walk on down the road, you know.

Anyway, so, Steve, if dealers want to learn more about being compliant, super sexy topic, but it is crucial they can go to upcoming convention. Right. Compliance unleashed is happening May 16th through the 18th. Where's it at and what are they going to learn?

That's right. This is our fourth annual Compliance Unleashed conference. This is in DFW, May 16th to 18th. It is immersive compliance. For those dealers that really want to understand how to protect their business. We bring in the best speakers on this subject. We do two full days of classes. We cover everything from advertising, sales, collections, you know, cradle to grave, tell you where the risk is, tell you what to look for. We do a special workshop where we take you through six different functions of your business and we tell you, here's how you could do self audit. Here's how you can identify your own problems. What we pretty much tell folks when we go in, this is our methodology, this is what we look for. If you want to do it yourself, here's how you do it. We give a lot of value, a lot of great information. And we know that the problem a lot of compliance folks have is that they've never gotten the training. They don't know other compliance people to bounce things off of. So it's just, it's a great opportunity to meet other people that are doing the same job, trying to protect the business, trying to stay compliance. And really there's no other event like it in auto finance. We're really proud that we've been able to help so many people with that.

Yeah, I'm sure dealers can go, office managers could go, compliance officers, if you're big enough to have one.

It's one of those things where collection.

Managers, you may, you may have been in the industry for 10 or 15 or 50 years. I guarantee you, some conventions you're like, I'm not going to learn anything. I'm not going to learn anything. I know it all. You go to a compliance convention, you're going to learn something for sure.

And our, I kind of say our secret recipe is we really work hard on our curriculum. This isn't lawyers talking to other lawyers. This is folks that roll up their sleeves and get the work done, talking to other folks that have to do the work.

Well, Steve, what you should have is a podcast out there and they could come out there and help you distribute this information a little better.

Anyway.

I've heard great things about your convention and I hope to make it out there at some point. The other convention you're involved with is Buy Here, Pay Here, United. Can you kind of talk about what it is, why you decide to get involved and what can dealers look for there?

Yeah, so buy here, PayHere United. I mean, this is an idea that many of us have talked about for years. You know, just a different way to deliver education to the dealers. Take away the exhibit hall, take away the sales pitches and just really come up with a robust curriculum that's all about making the dealers better. Keep giving them action items that they could go home and make an impact just as soon as they get back to work. So several of us got together, we decided to put together this summit. It's April 10th to 12th at the Bellagio in Las Vegas. It's going to be a very unique event. Again, it's two full days of learning that there are no sales pitches, that there's not a lot of distraction. It is just classes, general sessions and breakouts. It's kind of tailored to the dealer's expertise. So if you haven't been doing this very long and you kind of need a beginner track, we have that. If you have a particular interest in a subject, we go a lot deeper and we're covering things like succession planning, tax issues and how to tax plan, to compliance to sales, to collections, all the functions of the business. We're even doing things on the service departments because we know this is the information that, that dealers really crave. So, you know, go to, go to the website BHPH united.com check it out. I think it's going to be a really special event.

Well, I'm going to hit these things real quick. April 10th through the 12th of the Bellagio. It's 170 a night all in at the Bellagio, which is freaking awesome place. We hadn't been there. There's no expo hall. It's broken down in like for dealers. 101, 201, 301. So it's going to be different levels for everybody. And there's a dealer advisory board putting this, you know, putting the agenda together. So it's going to be really dealers kind of teaching dealers, which Jeff and I really like. It's 499 for the first attendee and 199 for each additional attendee. Jeff and I are going to be there. I hear that one of us, maybe both of us might be. Might be speaking there too. So anyway, be there or be square. I just like to talk a lot.

Jeff. Yeah, who doesn't like to go to Vegas in April, you know, it's not for me. I can be there, still sleep in my own bed at night, so. Definitely. But again, this is a great one because it is just education. You're, you're, you're. They have guaranteed in writing there will be no.

No sales pitching.

No pitching.

So we're serious about it. We actually have, like, we're going to look at all the presentations ahead of time. We're going to screen them. We're going to make sure all the speakers are sticking to the topics and not trying to sell. At the end of every day, we're going to have an hour Q and A section for the dealers. Dealers, talk with dealers. Anything you want to know. We've got really cool technology where people could submit questions throughout the event if something's on their mind and, you know, get it answered right away. We're really going to do some unique things.

Great. Well, we look forward to seeing everybody.

Yeah, yeah. And this episode. Steve, we appreciate your time. It's been very informative. Definitely. For me, I know what I need to do after this and I know how to get ahold of you to get a consultation call done off the air. Attorney client privilege. Who. How else would people get a hold of you, Steve, if they have questions and they want to enlist your service?

The easiest way to get a hold of me is our website, ignitecp.com you could schedule an appointment or just shoot me an email@infoignitecp.com and I'll answer you back personally and we'll set something up.

Awesome, Steve, thanks so much.

Thank you, Steve.

Thank you, guys. I love being on here. I love what you guys do to the dealer community. So thank you.

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