Send a 1099-C to a Non-Paying Customer? Updated

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More than 2 years ago, I wrote a post about whether or not it was okay for a business to issue a Form 1099-C to a customer or client who failed to pay an invoice.

I researched the issue heavily at the time, and turned up almost no information. Based on what little I could find, I concluded that it was probably okay to send a 1099-C to a deadbeat customer, but that I thought it was a bad idea.

We now know a little more about the IRS’s view on this subject, at least as it relates to tax professionals sending deadbeat clients a 1099-C. The IRS addressed the issue in an alert from the Office of Professional Responsibility dated February 5, 2015.

The alert is worth reading in its entirety, but here’s the bottom line from the IRS:

It is difficult to conceive of a situation in which a tax professional, principally engaged in providing tax services will be an “applicable entity” justifying the use of Form 1099-C to attribute income to an arguably scofflaw client for the nonpayment.

This alert from the IRS specifically addresses tax pros, but I think the concept could apply to all businesses in general. As I wrote in my original post:

Personally, I wouldn’t issue a 1099-C to a deadbeat client. I realize there may be some satisfaction in threatening a deadbeat and seeing them sweat. But I think it would cause more harm than good to go down the 1099-C route …. I would just fire them, move on with my life and replace the deadbeat with a better client.