Current tax law permit the reporting of unpaid debts as unearned income via the 1099 form. The implication is that the customer has increased their worth without incurring an offsetting expense. A failure by the customer to report unearned income could be justification for an IRS audit.
To use this method of collection, prepare a 1099 form for the customer, include your collection costs. Mail a prepared copy of the 1099 to the customer with an explanation of what it is and the possible ramifications. Explain in your communication that the customer must respond within 14 days to arrange payment. Advise the customer that if a response is not received in the time allowed, you will send the 1099 to the IRS, which could trigger an audit and a fine. Click here to view a Sample Letter Reporting 1099.
Results will vary, but the larger the amount owed, the greater the fear of an IRS audit. Consult your tax accountant with questions concerning the 1099 form or its uses.