Every year, funeral homes face the dilemma of sending out Form 1099s to suppliers of cash advance items.

Typically, questions arise because the funeral home’s accountant instructs the funeral home to issue a Form 1099 to each minister, hairdresser, musician or florist who has received cash advance payments in aggregate amount of $600 or more from the funeral home during the tax year.

The purpose of the Form 1099 is to report to the IRS that payments have been made, who received the payments and how much the payments were.

Obviously, the issuance of the Form 1099 places an onerous paperwork burden on the funeral home and often triggers questions as to whether funeral homes are legally required to issue a Form 1099 to each recipient of cash advance payments.

The answer in most cases is no. Section 1.6041-1 of the IRS Regulations governs the issuance of Form 1099s. Subsection (e) addresses the situation where a business serves as a middleman in the payment process. The regulation requires the business that makes a payment as a middleman to issue a Form 1099 to the payee only if the business:

1. Performs management or oversight functions in connection with the payment; and
2. Has a significant economic interest in the payment.

Several years ago, the IRS was asked whether a funeral home was responsible for issuing a Form 1099 with regard to cash advance payments. Relying upon Regulation 1.6041-1(e), the IRS issued a private ruling letter that found, generally, funeral homes do not perform management or oversight functions with regard to services performed by cash advance payees. In that regard, the IRS noted that the funeral home “neither directs or inspects the quality of the work provided.” It also does not select the providers, negotiate the price for services or have the discretion to withhold payment for unsatisfactory performances. As such, the IRS found that the funeral home was not obligated to issue Form 1099 to third-party providers who receive cash advance payments from the funeral home.

When issuing private letter rulings, the IRS always notes that the ruling does not serve as precedent in other cases; however, they do provide an indication to taxpayers on how the IRS interprets its own regulations. Since Regulation 1.6041-1(e) has not changed since the private ruling letter on cash advances was issued, it appears that the interpretation is still applicable to the question of whether funeral homes have to issue Form 1099 to cash advance payees. As long as the funeral home is not exercising supervisory control over the third-party service provider, the IRS private ruling letter would indicate that a funeral home does not have to issue a Form 1099 to a cash advance payee.

by T. Scott Gilligan