On one hand I want to end this drawn out issue, but the fault clearly lies with the tenants and out of principle it’s hard to walk away...

@Andrew Johnson I think the answer to the 3 years question lies in the new tax laws.

In your post you didn't give enough information for anyone to be able to tell you where the problem lies.

There are ALWAYS exceptions.That being said we have converted a one car garage into two more bedrooms on several occasions.So you answer lies in where do you see this property in ten years.

The market doesn't lie.

I am not saying they are lying, I have just found this to be true.

However, the people that pay cash are going to receive fresh eggs from my wife’s chickens.

I determined that managing a property myself was not where my strengths lie, and have had higher income since hiring this out. 

You don't give them a 1099 but having the W9 is proof of what they are claiming in case they are lying.

My instincts point to your tenants lying to you.