1099 Reporting and Trusts and Single-Member LLCs

Effective Date: 
Thursday, October 19, 2023 - 10:00am

There is a continuing problem with reporting sales and exchanges in which a trustee or single-member limited liability company (LLC) is the transferor/seller but the 1099 documents contain an individual’s taxpayer ID or Social Security Number. When Advocus reports these transactions to the IRS each year using this information, the transferor/seller name and taxpayer ID do not match the IRS records and Advocus incurs substantial penalties for misreporting the transaction.

Under the Internal Revenue Code, if a trust is established as a grantor trust, or an LLC is a single-member LLC that has not elected to be taxed as a corporation, then the income, profits, loss, and expenses are taxable to the individual taxpayer who created the trust (the grantor or settlor) or the sole member of the LLC, and not to the trustee or LLC under a separate Employer ID Number (EIN). (Once that grantor/settlor of the trust dies, then the income, profits, etc. are taxable and reportable to the trustee under the trust’s EIN).

Unfortunately, the typical closing documents offer no real clue that the trust is a grantor trust or that the LLC is a single-member LLC that is reportable to the individual grantor/settlor or LLC member. Adding to the problem is what has become nearly a standard practice in which the sellers execute the closing documents, including the 1099 documents, prior to closing and the sellers do not attend the closing, making it difficult, if not impossible, to correct the documents at closing. If the attorney for the seller or some other person is attending the closing and executing documents by means of a power of attorney, in order to correct the 1099 documents, the power of attorney form must specifically grant the agent the power to execute tax documents on behalf of the principal. Merely granting power to “do all things necessary to close the sale” or similar language is insufficient for granting the agent the power to execute tax documents.

In order to correct this problem, whenever an individual is acting as trustee of a trust or as the sole member of the LLC, duplicate sets of 1099 documents will need to be generated, one set naming the trustee of the trust, or the LLC, as transferor/seller, and one set naming the individual grantor/settlor or LLC member as transferor/seller. The sellers may then complete the set of documents appropriate to the tax status of the trust or LLC.

To accomplish this in the REsource and ResWare applications, follow these procedures:

  1. In REsource:
    1. In the seller tab of Order Entry, enter the trustee’s name and the name of the trust, or the name of the LLC, in the “Business name” textbox, complete the address, taxpayer ID, if known, and appropriate percentage allocation (100% if the trustee or LLC is the only seller), uncheck the “Do not generate 1099” checkbox, and then print the 1099 documents. After printing the documents, check the "Override Auto 1099" and change the allocation percentage to 0%, and check the “Do not generate 1099” checkbox.
    2. Create a separate seller with the individual’s name, address, and taxpayer ID/SSN, check the "Override the Auto 1099" checkbox and set the allocation to the appropriate percentage, uncheck the “Do not generate 1099” checkbox, and print the 1099 documents.
  2. In ResWare:
    1. In the Edit Seller dialog box, enter the trustee’s or LLC’s name, address, etc. and check the “Needs 1099” checkbox. Enter the appropriate “Allocated %” and enter the taxpayer ID in the “Primary SSN/TaxID” textbox or enter zeros if unknown. There must be an entry in this field in order to save the data. Save the data and close that dialog box, then print the 1099 package.
    2. Reopen the Edit Seller dialog box, enter the individual seller’s name in the “Name for 1099, if different” textbox, complete the appropriate percentage allocation, and enter the individual’s taxpayer ID/SSN in the “Primary SSN/TaxID” textbox. Save and close the dialog box and print the 1099 package.

Once the executed 1099 documents are returned, edit the trustee or LLC seller and the individual seller information as appropriate to match the executed documents.

It is our desire to report these transactions correctly not only to avoid these penalties, but also to prevent any problems for the taxpayers when reporting these sales on their tax returns.

If you have any questions, please contact underwriting at legal@advocustitle.com

Posted on: Tue, 10/17/2023 - 10:27am