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We have a tenant that has been late with rent, penalties, utilities, etc since move in. They are moving out tomorrow, however, they are now arguing they made past payments that did not get recorded. (against their lease, they pay in cash...).  I KNOW I have recorded all deposits, the bank statements and income/expenses always balance. However, they are now demanding we complete a w-9.   We are not contractors, we are not their employees, we are not paying them, rent is not a tax deduction and we do not collect interest on deposits. Are we required to give them a W-9? What are the consequences of not doing so? If I do give them one, aren't they required to complete a 1099 for our LLC?

This sounds highly suspicious to me.  My best guess is that they are either attempting to obtain your social security number (or your tax identification number), or they are possibly trying to defraud you due to their confusion regarding the 1099-S or 1099-A -- for which a W-9 is required.  The 1099-S form is for proceeds from real estate transactions.  However, my understanding is that those "transactions" are when a property is sold and not rented.  The 1099-A for is for a lender or bank to acquire an abandoned property which was used as collateral to obtain the mortgage on that property.  I don't think you're required to provide a W-9 to them.  You can go to IRS.gov and use their search box to find out more specific information.  Good luck!

I don't like to take cash.  I give them an account number at my back and they are to pay through there whether they set-up a transfer, direct-deposit,  stop by and pay by check or cash.  That way there is a record of all the payments.

Get their forwarding address & send  them a copy/printout of all payments  for the  last tax year or lease year....documenting  each month's payments & dates & form  of payment. (Make a copy for yourself!) This shows you recorded all of their payments.  For yourself, copy any bank records of these cash deposits, checks, transfers, and  receipts you have...to show in court if needed. Also, keep detailed records of this tenant's late payments for rent, utilities, whatever.  In court  it  shows a judge  you  kept detailed records of your  rental agreement with these tenants.   Also, make sure you send a proper detailing & documentation letter for their security deposit return amount  they will receive, and in a timely manner.   A 1099 has nothing to do with your property or your lease agreement. They may be trying to use it to evade some taxes in some way, but do not get involved with that.....