Avoid IRS Audits: Fix the 1099 Prepaid Rent Mis-Match

Three questions:


  1. Are you a commercial landlord?
  2. Did you receive prepaid 2019 rent so that your tenant can have a big 2018 tax deduction?
  3. How do you reconcile monies put on your IRS Form 1099-MISC for the business rent payments received from your tenant?


Let’s say the tenant wrote a $55,000 check to landlord on December 31 and mailed it that day. The landlord received the check on January 3. Here’s how your Form 1099-MISC can create a tax problem:


  • The Form 1099-MISC to the landlord shows rent paid of $105,000 ($50,000 paid during the year and then the $55,000 prepayment on December 31).
  • The landlord’s 2018 federal income tax return shows $50,000 in rent received (he received the $55,000 in 2019).
  • IRS computers note the difference and start an inquiry.


An incorrect 1099 that overstates the landlord’s income is a problem that can lead to a tax audit.


IRS Reg. Section 1.6041-1(f) says:


The amount to be reported as paid to a payee is the amount includible in the gross income of the payee . . .


Note. As you will see below, this amount does not necessarily equal the tax deduction claimed by the payor.


Reg. Section 1.6041-1(h) says:


For purposes of a return of information, an amount is deemed to have been paid when it is credited or set apart to a person without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and is made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition.


The 1099-MISC is a “return of information.”


The landlord did not have control of the money until he or she had possession of the check in 2019.


In Cheryl Mayfield Therapy Center, the court stated:


A “payment” is made for purposes of section 6041 information returns when an amount is made available to a person “so that it may be drawn at any time, and its receipt brought within his own control and disposition.”


As we were doing the research for this article, we were a little surprised that the 1099 could contain a taxable amount to the payee that is different from the deduction amount of the payor.


For example, in this case, the correct 1099-MISC amount is $50,000. That’s the amount that should put on the 1099-MISC that the tenant should send to the landlord for 2018 even though the tenant is going to deduct $105,000 as a cash-basis taxpayer.


Bottom line:  If this is a situation that you find yourself in:  MAKE THE TENANT CORRECT THE 1099!